Standards: Quality control

02 February 2006

Confidence is the key to business success - and real estate is no exception. It is particularly important in the Gulf, where developers used marketing campaigns based on their strong reputations to sell large volumes of property off-plan before construction has even started. With many of these projects now coming on stream, the danger is that trust could be lost.

After five years of breakneck development, the region would almost be unrecognisable without its unbridled belief in real estate. Many of the major projects now being developed would never have become reality without the funds generated by these early sales. The Gulf is not unique - this is a global trend. Real estate in all major markets across Europe, North America and Australia, together with emerging markets such as China, have all posted strong, even unprecedented, growth over recent years.

To a certain degree the confidence in the Gulf stems from the global perception that property is a good investment. But that is only half the story. The Gulf is starting from a much lower base than other markets: until relatively recently, real estate ownership was restricted to nationals. In some cases, including Abu Dhabi, all property freeholds remained with the ruler. When these restrictions began to be eased in 2002, a surge of latent demand was released. The result was that the first project to allow foreign ownership, Dubai's Palm Jumeirah, sold out in minutes rather than days. Subsequent property developments boasted similar achievements. With the global real estate sector performing well, and relaxed ownership rules, some even tipped property as the new oil.

Although the market remains confident, the outlook today is less optimistic. The consensus is that property prices in Europe, North America and Australia are levelling, and supply and demand are beginning to balance out in the Gulf.

Although demand may no longer be insatiable, it does still exist. Populations around the region continue to grow, which means more housing will be needed, especially in the low-to-medium-cost bracket. This suggests property development will continue to be sustainable in the long run, as middle-income investors and first-time buyers enter the market in increasing numbers.

But the market will be more fragile. Only the most bullish of investors would buy a villa off-plan on an island that has yet to be built. The faltering sales performance of Palm Deira, the third such development, indicates these investors are now the exception. Growing trade volumes on local bourses indicate that stocks are now seen as the quickest route to exceptional returns.

Quality may not be a concern when a property doubles in price over six months, but it is of paramount importance when an investor is looking for a long-term asset that will hold its value. Issues like those at Nakheel's Garden View Villas in Dubai - where properties developed severe structural cracks - dent confidence and scare off cautious investors. 'High-end developments often look more like low-cost housing during construction, but this is masked over with finishing items that look expensive,' says one UK-based supplier working in Dubai.

Controlling variablesSuch problems are avoidable. Project management involves taming three key variables: time, cost and quality. If one is skimped, the others will suffer. The two most common scenarios in the Gulf occur when developers cut time and costs. Favourite cost-cutting measures include the use of cheap fixtures and fittings, and not conducting soil investigations. 'One local developer I was working with decided to skip a soil investigation and just use the results of an investigation from the adjacent plot,' says one Dubai-based consultant.

For investors the problem is compounded because there are few options available for seeking compensation. 'The disputes over residential service charges reflect the strong position that develope

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