Reforms drive Gulf property boom

25 September 2008
MEED’s 2008 survey of the region’s real estate developers reveals a thriving sector, with $1 trillion worth of projects being carried out and UAE companies maintaining their dominance.

The Gulf real estate sector today is unrecognisable from 10 years ago. In the late 1990s, land was either government or locally owned, and real estate projects were little more than individual buildings for wealthy locals seeking to earn an income from the rental market.

Today, the sector is highly diversified, with some of the most ambitious projects in the world. Gulf real estate attracts hundreds of billions of dollars in investment each year.

MEED’s survey of the GCC’s top 100 real estate developers in 2008 shows more than $1 trillion worth of projects are being carried out by regional developers in total, with Dubai-based Nakheel topping the pile with more than $110bn worth of projects under development. Seven com-panies have portfolios of projects under development worth more than $10bn.

Although the reasons for the sector’s success are varied, its growth would not have been possible without a radical change in the way the region’s leaders deal with the issue of land ownership.

Ruler of Dubai Sheikh Mohammed bin Rashid al-Maktoum is largely responsible for the change. As crown prince, he introduced freehold ownership on Dubai’s offshore island development, Palm Jumeirah, in 2002. Since then, the emirate’s real estate market has grown exponentially, driving economic development to new heights.

Tall towers

Dubai may have led the charge, but other governments, such as Abu Dhabi, Doha and, most importantly, Riyadh followed. Today, each of the six GCC states has its own sprawling real estate developments and reclaimed islands. Cities in Bahrain, Qatar, Saudi Arabia and the UAE have tower projects that are competing to be the tallest in the world.

Not surprisingly, MEED’s 2008 rankings reflect Dubai’s place as the main real estate destination for developers in the region. Thanks to the 2002 freehold ownership law, and a series of completed mega-projects, it is the region’s most mature market and remains the largest, with two Dubai-based companies in the top three of the MEED rankings.

Nakheel, at the top of the list, began to make a name for itself internationally in 2002 when it started reclaiming offshore islands to create coastal areas for luxury hotels, villas and apartment buildings. Today, projects such as the Palm islands, Dubai Waterfront and The World are making headlines worldwide.

Dubai Properties is ranked third, with $95bn worth of projects on its books. The company’s growth has been more low-key than Nakheel’s, but over the past five years it has begun developing three of the region’s largest masterplan projects - Business Bay, Mudon and Mohammed bin Rashid Gardens - in response to Dubai’s need for more commercial space and housing.

Nakheel and Dubai Properties are not the only Dubai companies on the list. They are the largest development companies from a stable of real estate organisations that form part of Dubai’s two government-controlled holding companies: Dubai World and Dubai Holding. Sister companies with significant portfolios include Limitless, Tatweer, Mizin, Bawadi, and Sama Dubai.

But it is no longer just a Dubai story in the UAE. In second place on the list is Abu Dhabi-based Aldar Properties. Its ranking reflects the importance that real estate now plays in the Abu Dhabi economy.

Before 2005, the emirate’s economy was dominated by the energy sector, but in recent years there has been a drive to diversify. In part, that has been prompted by the real estate successes of neighbouring Dubai, with the government structuring companies to oversee the building of a new Abu Dhabi. With $99bn worth of projects under way, Aldar is the largest of these companies, and its projects are among the most important to Abu Dhabi.

Tourism developments

Yas island, an Aldar project, will next year host the inaugural Abu Dhabi Grand Prix. The company is also building Al-Raha Beach, Abu Dhabi’s answer to Dubai Marina, and redeveloping areas of Abu Dhabi island such as the central market. Once operations at the old port of Mina Zayed are transferred to Abu Dhabi’s new port at Taweelah, it will develop a commercial hub in the existing port area.

Aldar is not the only Abu Dhabi developer that appears high in the rankings. Sorouh Real Estate, Tamouh, Abu Dhabi Future Energy Company (Masdar), Mubadala Development Company and International Capital Trading (ICT) all have projects totalling more than $10bn.

In fourth position is Kuwait’s Tamdeen, which is working on the region’s most ambitious and expensive real estate project: the City of Silk. Totalling $77bn, the project involves building an entirely new city on the Subiya peninsula north of Kuwait Bay, which will include the world’s tallest building.

In fifth place on the list, Dubai-based Emaar Properties, with $76.7bn worth of projects, is the company that arguably sowed the seeds of the real estate boom back in 1998 when it began work on Dubai Marina. Since then, it has consolidated its position as a homebuilder in Dubai, with projects such as Arabian Ranches, the Springs, Meadows, Lakes and Emirates Hills.

The company launched the Burj Dubai Downtown project in 2003, which includes the world’s tallest building. The project is now approaching completion, but Emaar’s ambitions do not stop there. It has aggressively pursued a policy of international expansion and now has projects across the broader Middle East region and beyond.

Much of Emaar’s success comes from its work in Saudi Arabia, carried out through Emaar, The Economic City, a consortium led by Emaar and several high-profile investors. The kingdom has the potential to become the dominant real estate market in the region, thanks to a rapidly growing population coupled with a housing stock shortage.

In recognition of this, Emaar launched King Abdullah Economic City (KAEC) in 2006, at Rabigh, close to Jeddah. Like Kuwait’s City of Silk, it will create a new city together with a large port, aluminium smelter, and other industrial facilities.

KAEC is just one of six economic cities planned for the kingdom, with others being built at Medina, Jizan and Hail, and two more planned at Tabuk and Ras al-Zour. Each city will target a different industry or business sector.

Interest in KAEC has been positive, with developer Emaar, The Economic City announcing in July that sales had reached SR1bn. However, Saudi Arabia has found it harder to generate interest in its remaining three cities. A rushed release and indifference to the locations of some cities, especially in Hail, have prompted investors to become more circumspect.

In late September, Kuwaiti firm Al-Mal Investment Company signed with the Saudi Arabian General Investment Authority (Sagia) to work on the struggling Prince Abdulaziz bin Mosaed Economic City at Hail, which has failed to generate any real momentum or interest.

Housing shortages

Unlike the rest of the Gulf, where local popu-lations are small and markets are heavily dependant on expatriates, the Saudi real estate sector is a local affair. The kingdom has a population of 24 million and it is growing rapidly. So unless developers build homes quickly, there will be housing shortages in future.

Not surprisingly, other Dubai-based developers have been keen to follow Emaar’s lead and capitalise on the domestic demand in Saudi Arabia. Sama Dubai is developing Jeddah Towers, and Limitless is working on the Al-Wasl project outside Riyadh.

In Qatar, two government-controlled dev-elopers rank highly: Barwa Real Estate Company and Qatari Diar Real Estate Investment Company. Both have significant domestic project portfolios, which include schemes such as Lusail, the new Qatari city, but also have interests overseas.

In Bahrain and Oman, the market is more fragmented and the leading companies tend to have just one or two projects on their books. In Bahrain, the highest ranking developer is the company behind the Durrat Marina project, Durrat Khaleej al-Bahrain Company, and in Oman the market is led by the special-purpose vehicle developing the Madinat al-Zarqa (Blue City), the Sultanate’s largest real estate development.

Although building projects remains the core business of the region’s developers, many now have divisions, sister companies and joint ventures that provide facilities management, construction services, finance, retail, hospitality, education and healthcare.

These interests supplement the core development business and help to ensure that projects are built, sold and, once completed, managed efficiently, with all the necessary community services.

Across the Gulf, real estate remains a local business, but the majority of the larger developers now have international interests. Although this is not taken into account in the survey, which focuses solely on projects in the Gulf, it is important to remember that Gulf developers have been keen to explore real estate opportunities outside the immediate region.

North Africa and the rest of the Middle East have been the most popular destinations for outward investment, but some have reached out even further, acquiring properties and land in established markets such as London, New York and Paris.

Nakheel’s merger with Istithmar’s real estate assets in October 2007 gave it completed assets in London and New York, together with projects in the Far East and Africa. Other developers have joined in the international adventure. Emaar Properties has projects in India and Pakistan, as does Limitless. Aldar is working on the Abu Dhabi Plaza project in Astana, Kazakhstan, with fellow Abu Dhabi-based developers Al-Qudra, Sorouh and Reem Investments, Qatari Diar is building resorts in Cuba, and Abu Dhabi-based Hydra Properties has a tower development in Mexico.

With property companies suffering in North America, Europe and Australia, regional developers are also beginning to acquire assets overseas. One of the first deals was Emaar Properties’ acquisition of John Laing Homes, the second-largest private residential developer in the US. More recently, Nakheel has taken a 12.5 per cent stake in Australia’s Mirvac, and Limitless tabled a bid for UK-based property group Minerva in July.

International interest

Similarly, international development companies are seeking growth in the Gulf at a time when achieving positive returns in other markets is becoming increasingly difficult.

To date, the preferred option for inter-national companies to enter the market has been in joint venture on projects in Abu Dhabi, where the market is still at the early stages of development and investors sense the potential for strong returns.

The John Buck Company of the US, Singapore’s Capitaland and US-based MGM Mirage all have joint venture projects with Abu Dhabi government-controlled Mubadala Development Company, while US-based Hines has been in discussions with the Tourism Development & Investment Corporation for involvement in its projects.

The volumes of investment both into and out of the Gulf are expected to remain strong as long as the market does. The prognosis is good. The Gulf real estate sector has so far avoided the credit crunch, sub-prime crisis and other pitfalls that have affected other regions, but the market is showing signs that the days of rampant growth with almost guaranteed returns are over.

Some fear that after 2008 and 2009, the good times may draw to a close. Analysts predict that Dubai’s real estate market is heading for a correction, and although developers claim otherwise, it is just a matter of time before the same conclusions are made for other Gulf cities.

However, according to developers, the economic fundamentals for development in the Gulf remain strong, as populations continue to grow at a faster pace than the construction industry can build homes

Key Fact

$1 trillion - total value of the top 100 developers’ Gulf projects

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