Key fact

Dubai was among the fastest-falling markets for office space during 2010, dropping an average of 27 per cent

Source: DTZ

Property consultants, developers and estate agents are reporting increased interest in Dubai’s real estate, particularly in the high-end residential market. “Everyone is actually quite busy right now. It reminds us of the days of old,” says Tom Bunker, an investment sales consultant at UAE-based property consultant Better Homes.

“Over the last three to four weeks it has really taken off again and the popularity is across the board. People are buying and it is encouraging.”

Palm Jumeirah sales prices
5,000-square-foot garden villas (AED m)
Villa type 2008 peak 2009 2010 to present
1 7-9 6.5-7 7.5-8
2 9-10 7-7.5 8-9
3 10-14 5-8.5 9-11
7,000-square-foot garden villas (AED m)
Villa type 2008 peak 2009 2010 to present
1 15-16 12-13 13-15
2 16-18 13-15 15-18
3 18-25 15-18 18-25
Source: Better Homes. Note: Villa type reflects the design and size, with the most expensive having more features 

The reasons for the upturn are varied. The most obvious is that regional unrest is making Dubai more attractive, particularly among people seeking new homes outside Bahrain, Egypt and Syria. “We are seeing interest from people in Bahrain and Syria who are starting to buy properties as their families are out here,” says Bunker. “There is also a lot of interest from Europe right now, and we are starting to get more interest from the US,”

Heightened interest in the Dubai property market

Other property experts agree there has been more interest in the Dubai residential market over the past month or two, but say Asian investors are more prevalent.

“We understand the main interest for high-end residential units comes from central Asian republics, such as Kazakstan and Turkmenistan, and a little bit of interest from Bahraini nationals,” says David Le Bail, head of consultancy for the UAE at international property consultant DTZ. He says restrictions on transferring money out of Tunisia and Morocco are limiting interest from other parts of the region.

Residential investors now looking at Dubai have particular requirements and interest is limited to small sections of the residential market, such as Palm Jumeirah, Emirates Hills, the Meadows and Downtown Burj Khalifa.

“We have seen increased interest in residential units in very specific areas and niche sectors of the market in Dubai. For example, in Palm Jumierah the high-end villas have had increased interest from overseas buyers,” says Le Bail.

Bunker says this could put upward pressure on prices. “You are going to see prices at the high-end going up shortly – they already are in some communities,” he says. “Prices on the Palm have gone back to where they were before the crisis. But for the lower-end product, it is going to be a long time, if ever – you are going to see depreciation there.”

Dubai office supply
(Million square foot)
2010 56
2011e 60
2012f 70
2013f 81
e=Estimate; f=Forecast. Source: Jones Lang Lasalle

According to data from Better Homes, prices on the Palm for high-quality 7,000-square-foot signature villas have returned to peak values of AED18m-AED25m ($4.9m-$6.8m) seen before 2008. These dropped to AED15m-AED18m a unit in 2009. Other large luxury villas have also risen, but not quite to 2008 values.

However, despite the rising demand for luxury villas in key locations, the rest of the Dubai market remains oversupplied with commercial and residential space. According to US-based real-estate consultant, CB Richard Ellis, office stock in Dubai has been increasing by an average of 17 per cent a year taking the total supply to 5.7 million square metres.

Dubai residential supply
(thousand units)
2010 309
2011 317
2012 341
2013 362
e=Estimate; f=Forecast. Source: Jones Lang Lasalle

The new supply has been a key factor in the decline in rental rates, with DTZ finding Dubai to be among the fastest-falling markets for offices in 2010, dropping by an average of 27 per cent.

As a result, competition is fierce and tenants are taking advantage of the lower prices and new supply. They are securing better-quality space at lower costs and taking advantage of incentives from landlords.“It is very common to have 13 or 14 months for the first year, but priced at 12 months,” says Le Bail.

Capital property situation

Historically, there has been much less commercial space in Abu Dhabi and the continued lack of prime ‘Grade A’ space has supported prices for the best buildings, although, overall, average rents have fallen since their 2008 peak.

CB Richard Ellis estimates supply will reach 3 million square metres by the end of 2011, representing 35 per cent growth in just 12 months. Much of this is not expected to be of international standard and property firms say those that are, such as Sowwah Square, Aldar HQ and International Tower, will be able to command much higher rents than average.

Abu Dhabi’s residential property sector is expected to see the first freehold deliveries from Reem Island, Marina Square. Property firms report strong interest in this area, along with Al-Raha Beach. “Abu Dhabi is a less mature market, but the island is facing new competition from properties on the other islands. The de facto monopoly of existing buildings is going to disappear, so landlords will have to review their facilities, better maintain their buildings and improve the overall offering of residential and commercial units,” says Le Bail.

He forecasts downward pressure on rents will continue as new supply comes online.

Project managers agree quality is playing a much greater role in construction and say the emphasis has shifted from quick builds to better quality and value construction.

“In the heyday, the main driver was time, there was less emphasis on value engineering. Today, it is much more cost-driven,” says Karim Yazbek, a vice-president at US consultant Hill International. Construction costs have fallen with lease rates.

“Costs to construct are cheap today and clients are expecting that demand will return in a couple of years when their assets will be worth more,” says Yazbek.

Downward trend for residential properties

For now, the downward trend is continuing, albeit at a slower rate than in 2009 and 2010.

Average prices for residential property in Dubai fell 4 per cent during the first quarter of 2011, although property firms report prices have held in the best areas. At the start of the year, analysts were predicting this would continue throughout 2011, but the recent boost in interest is arresting the downward spiral. “We have seen a slowdown in the decreases over the last 6-8 weeks and we are hopeful this will continue over the next quarters,” says Le Bail.

Another reason behind the new optimism in the UAE is that bank appetite for mortgage lending is returning. “A lot of our clients are getting emails about financing packages. Banks out there are becoming more aggressive. It was just a matter of time before banks started issuing mortgages,” says Bunker.

According to the UAE Central Bank, the value of deposits increased 14 per cent between March 2010 and March 2011 to AED1.1 trillion, but at the same time overall lending increased by 8.7 per cent to AED1 trillion in March 2011. Mortgages, however, account for less than 10 per cent of this.

“There is huge potential for growth in home financing and we believe it is vital for banks to play an important role in re-energising this sector,” said Saif al-Mansoori, deputy head –group marketing at the UAE’s Emirates NBD, speaking at the launch of a new pricing structure for the bank’s mortgage loans in May.

Other banks are also returning to the mortgage market with new products, however, eligibility criteria are strict.

“You typically need a significant amount of equity and a long track record of income in Dubai from a company that is usually not related to real estate. A lot of buyers are, therefore, cash buyers,” says Le Bail.

Northern emirates

Beyond Dubai and Abu Dhabi, activity has been slow in the northern emirates. Residential tenants in Sharjah, in particular, have been taking advantage of the lower cost of living in Dubai and migration has been a key side effect of the downturn. However, Fujairah is earmarked as a key market in the medium term.

“I am very confident the strategic location of Fujairah is ideal for oil and gas-related industries. It is a way to bypass the Strait of Hormuz, which is essential for oil and gas exports, so there is a good potential for a port, light and heavy industrial and logistics. That will bring in some need for additional residential and support facilities,” says Le Bail.

Fujairah may be the next big geographic growth market, but sectorally hospitality and warehousing are tipped as new growth areas. The hotels sector is considered to offer good opportunities in the three and four-star market.

“People are still interested in buying nice hotels, but we don’t have a lot of those available for sale,” says Bunker. Good quality warehousing, particularly in Abu Dhabi, is also considered a sound investment as transport links between the emirates and beyond improve.

Despite these pockets of opportunity and the renewed interest in Dubai’s high-end residential property, it will be some time before the word recovery can be used with confidence. Optimism is returning, albeit slowly.