Nearly 10,200 units will be released in Dubai Marina and Jumeirah Lakes Towers alone in the next two years, according to Harbor Real Estate.
“In 2010, oversupply will be an issue in the market. An estimated 60,000 residential units and 30 million square foot of office space are coming on stream by the end of 2011,” the real estate consultancy said in a report.
“The property scene is facing some significant oversupply challenges. With prices in Dubai for residential properties climbing five per cent from the previous quarter, the perception of the effect of looming oversupply, common knowledge to most people, suggests that for certain investors seeking certain property types, the price is just about right. The first quarter results will bear testimony as to whether this is the beginning of a sustainable recovery trend or a minor blip in the stabilisation process.”
However, the satisfaction of demand has been hindered throughout 2009 by the lack of available credit, tightening of lending policies and the inability of potential consumers to comply with such policies, the report said.
In 2010, the increase in the flow of credit into the market place will be gradual at best. In addition to not having sufficient funds on hand for lending, mortgage providers and investment financiers are still not in a position to fully and confidently assess the level of risk they can prudently assume, mainly due to uncertainty, which surrounds the risk inherent in their current loan portfolios. One of the consequences of a recession is that industries are rationalised.
In 2010, consumers and investors will be extremely cautious, the report said.
“Gone are the days of the easy sale to the investor. Simply put, many people have been hurt by the real estate price correction. In effect, they have developed a risk aversion which will take some time to overcome.”
Confidence in overall investment opportunities will only be achieved this year with increasing levels of transparency. Industry data and laws and regulations regarding developer disclosure and developer communicaons are the bare minimum. In addition, economic data, released in a timely fashion will assist investors assess the feasibility of their intended investment activity by gaining an appreciation of the economic strategies being deployed.
“The legal framework which surrounds and supports the commercialisation of real estate in Dubai has come a long way. The challenge has been to keep pace with the rapid development of the industry. Investors, especially those from overseas need to feel that their rights will be protected and, in case a dispute arises, resolution will be equitable, accessible and timely. There has been significant progress but there is still a way to go.”
Rera has been inundated with disputes arising from project delays, cancellations and investor dissatisfaction with alterations to payment plans and has been successful in providing the facility for dispute resolution. The efficient settling of cases will be critical to restoring confidence looking forward.
The balance of power within Dubai’s real estate scene will have dramatically tipped towards the buyer, probably for a long time.
“Buyers, particularly those with cash are the new kings. This year, real estate professionals will need to serve the customer and serve them well. The main drivers of buyer dissatisfaction have been in the areas of knowledge, consultative ability and empathy. This responsibility does not only lie with brokers but also with developers who must ensure that end-consumer needs are understood,” the report said.
“In addition, they will need to be creative with regards to how they ‘package’ their product to potential consumers because, in the vast number of instances, the consumer now has a myriad of alternatives. And alternatives for investors will not just be located within the local market or even regionally.”
China, for example, is experiencing a real estate recovery of significant proportions, while other nations such as Australia are also recovering well. In the competition for the global dollar, developers need to understand where they stand in the value comparison and ensure that the mistakes made over the past five years where lack of planning, customer focus and attention to market fundamentals are not repeated, the report said.
Meanwhile, landlords and sellers of existing properties will have a role to play as well. The initial presentation of a property is the key to gaining buyer interest. They will have to understand that every potential customer who is dissatisfied results in less revenue for a landlord or seller. In 2010, the professional relationship between a broker and seller is an important one and if both parties actively contribute and collaborate in successfully selling a property, greater returns can be realised, Harbor said.
Last year has been quite challenging for anyone wanting to obtain a mortgage in Dubai. In response to the global financial turmoil, banks tightened their credit policies, reduced lending ratios and increased interest rates.
“It appers the worst may now be behind us and lenders are once again opening up their credit policies. While obtaining a mortgage is still not simple and may not be so for a while, lenders are now more willing to consider applications. Interest rates are also on the way down. The average rate is now approximately 7.5 per cent, down from about 8.5 per cent a few months ago. As the property market stabilises and banks improve their liquidity, we should see further improvements in the mortgage market,” said the report.
In 2010, Harbor expects to see further industry rationalisation and additional considerations being given to mergers and acquisitions similar to the recently abandoned venture between Emaar and Dubai Holding’s real estate subsidiaries.
“The decision not to go ahead with the merger is an interesting one as it still leaves the question as to what degree of rationalisation and restructuring is still to be undertaken within these entities and throughout the industry as a whole. Clearly, a lot of work is still to be done.
“One benefit that the merger would have provided would have been an increased ability to control supply coming into the Dubai market. It is estimated that once the merger was completed, the new entity would have controlled more than 50 per cent of the supply currently in the pipeline causing anti-monopolists to shake their head in disapproval. But the issue remains as supply in the short term will remain as a prime determinant of any progress made to restoring confidence in Dubai’s real estate industry,” said the report.
The year 2010 will be a challenging one for everybody associated with the Dubai real estate industry. The only exceptions are those who have sufficient cash to buy or invest because they will be in an enviable position to exploit the considerable opportunities arising from recession.
World economies in 2010 will emerge from the recession at different levels. And so will Dubai’s economy. Globally, competition will be intense as every country in the world will be looking to grab a lion’s share of the world’s capital as the recovery gathers momentum. Singapore, Shanghai and Hong Kong spring to mind.
However, competition within the Middle East will be just as fierce. In 2010, infrastructural spending will continue to drive the economy funded by an oil price that will annualise at a price of between $75 (Dh275.25) and $85 per barrel.
The real estate industry in Dubai will continue to be stressed as more projects are completed. The Dubai economy will be reliant upon other forms of revenue-generating activities as the economic model of the emirate is re-configured in response to the new realities. Dubai will need population growth, and fast, Harbor said.
It will be the key to economic prosperity and will be determined by the success of growth strategies in its commercial, trade and tourism sectors. With a population declining anywhere between five per cent and eight per cent in 2009, population growth is the primary factor in generating the demand needed to kick start the industry again, the report said.
CREDIT NOTES POSITIVE FOR REAL ESTATE MARKET
The introduction of property consolidations and credit notes last year by developers has been positive for the real estate market as it has helped many investors gain ownership of a property more quickly than if they had continued to remain invested in a deferred project, Harbor said.
The practice of credit notes and property consolidations has allowed developers to either cancel or delay projects without totally dissolving the investor’s capital. It has allowed investors to realise returns on their investment a lot earlier than if they had continued to remain invested in a deferred project. Even if some investors lost out on some of their investment, taking the bigger picture in view reveals that more projects are likely to be put on hold or cancelled in Dubai.
In such a scenario, property consolidations and credit notes are helping investors to remain invested in Dubai and start to gain a return on their investment. “We will need to wait and see as Rera is assessing which projects are unviable and should be cancelled,” said the report.