Population growth key to property market success

Dubai demonstrates strong growth in population compared to other economies around the world

The fact that the property industry is typically and notoriously cyclical is widely known yet quite often forgotten as viewpoints become blinkered due to current market performance, whether positive or negative. While some embrace cycles and their sometimes-associated market volatility that enables the opportunistic investor to profit from market fluctuations as they occur, other investors, those with a clear strategy and long-term plan, simply accept, foresee and plan for cycles in the industry. They are looking for longer-term sustainable growth rather than taking additional risks by trying to accumulate wealth by taking advantage of shorter-term spikes or dips. They are true managers of their property portfolios and have a much greater chance to succeed

A growing population is the fuel of any property industry, and it will be Dubai’s population growth that will enable the market to regain its equilibrium within the next three years

Investing in property has a very simple purpose: to create wealth over the long term. However, your property investment portfolio needs to be nurtured, maintained and managed to ensure its wealth-creating potential and capabilities are achieved as it rides the inevitable cycles that will occur in the industry. This, of course, is no different to managing a share portfolio, business venture or any other type of investments. Adopting a short-term vision and narrow perspective will engender reacting unreasonably to inevitable industry slowdowns which will lead to underperformance in the longer term.

The Dubai market is, having seen a period of falling values, rapidly approaching the bottom of its contraction phase, making 2018 a pivotal year for the industry. This contraction has been brought about by increased nervousness and uncertainty about global and regional geopolitical and economic events, the imposition of VAT, the distraction of alternative “new world” investments such as crypto currencies, along with the burgeoning oversupply in the highly competitive and lower margin per unit affordable segment. Developers, requiring greater sales volumes to achieve financial viability, needed to get financially creative to make their affordable offerings even more affordable and accessible for end-users and financially more attractive for investors

So, as we enter 2018, we are faced with a familiar situation. The market, despite lower than-promised delivery rates by developers, is in disequilibrium, particularly in the affordable segment. But this is no reason for excessive concern as the market is simply exhibiting the characteristics typical of its current cyclical phase. And while many of the issues that faced the world in 2017 remain, there are positive signs ahead: a growing world economy, rising oil prices and what appears to be an easing of some of the conflicts that have dogged the world in the last five years.

As for Dubai’s property market, its current predicament would be expected to last for quite some time, primarily as supply absorption rates are hindered by weak population growth, delaying the market’s emergence from the current phase. But Dubai has one string to its bow compared to a few other economies as the emirate has consistently demonstrated strong population growth, something many countries around the world have tried and failed to achieve.

A growing population is the fuel of any property industry, and it will be Dubai’s population growth that will enable the market to regain its equilibrium within the next three years, particularly as a spike in population growth is expected as the Expo creates an estimated 277,000 jobs.

It may come as a surprise to some that Dubai’s population is likely to exceed 3 million by end of 2018. This is up almost 331 per cent since the turn of this century. This amazing growth has been consistent during this period and is expected to continue at a rate of between 6.5 and 9 per cent over the next 10 years. This is fantastic news for Dubai’s property industry and the economy overall especially when other nations are facing stagnating population growth or, in the case of countries like Japan, falling populations.

The composition of the growth is also impressive as it will continue to be predominantly driven by people seeking to immediately benefit from and contribute to an economy that is expected to grow by a healthy and sustained 3.5 per cent in 2018 and beyond, as those who are seeking to progress and improve their economic well-being take advantage of the superior opportunities that Dubai will continue to offer going forward, courtesy of such major initiatives as the Expo 2020, in addition to the time-proven economic pillars of trade, finance and tourism.

So, the opportunities are there to capitalise on this population growth and resurgence in demand for property this year. The current situation is reminiscent of 2012 when the market started to emerge from the global financial crisis to foster a strong recovery peaking in 2014. The market has shown it has the capability to respond to favourable economic conditions, and as the absorption rates of properties start to build momentum with new aspirants entering the market, the positive effect on value and prices will see handsome returns being made by those who understood the market’s cyclical position and positioned themselves to capitalise on the imminent growth phase of the cycle.

Expert Eye, Gulf News, Dated: 19-04-2018 by Mohanad Alwadiya

Equilibrium now further away for Dubai market

Developers in Dubai will be happy with their 2017 results, with over 70% of all transactions in Dubai in 2017 being in the off-plan space, their efforts have been well rewarded.

In a year where over 69,000 real estate transactions were recorded, with a total value exceeding Dh285 billion, real estate transactions in 2017 eclipsed the 41,776 deals achieved in 2016 which represented a total value of Dh259 billion.

Winning the hearts and minds of real estate investors has never been easy. In recent years, certainly post 2008, buying off-plan would have been viewed with more circumspection as the prospect of buying finished property that would able to yield cash flow in the form of rental income virtually immediately would have been considered a less risky prospect than relying on developer platitudes regarding construction timelines.

In addition, attracting the buyers in the affordable segment has always been challenging as the purchaser tends to be more pragmatic, governed more by fiscal realities than emotion or ego. Developers needed to broaden and deepen their customer understandings and develop greater empathy for a segment that had really been neglected in the past.

So, the foray by developers into the affordable segment was accompanied by an increasingly attractive array of successfully marketed financing offers which were designed to garner an increasing proportion of available investor capital into the off-plan property space. After all, new customers have different needs requiring new strategies and tactics.

While these new tactics may have been treated with suspicion in the past, the industry has matured from the heady days of flipping, speculation, false promises and minimal accountability with the regulatory changes imposed on developers to ensure the rights of investors are protected making offerings in the off-plan space appear less risky in nature.

So, faced with a market nervous about global and regional geo-political and economic events, the imposition of a VAT, the distraction of alternative “new world” investments such as cryptocurrencies, along with burgeoning oversupply in the highly competitive and lower margin per unit affordable segment, developers, requiring greater sales volumes to achieve financial viability, needed to get financially creative to make their affordable offerings even more affordable and accessible for end users and financially more attractive for investors.

Inevitably, the amount of capital shifting from the traditional secondary market to the off-plan market created in a capital allocation imbalance, resulting in declining demand for finished properties. Interestingly, capital allocation was really the issue, as supply was quite healthy in 2017, with mortgages financing over 50% of transactions. It wasn’t that long ago that mortgages made up less than 30% of total transactions, extremely low by global standards.

So, as we enter 2018, we are faced with a familiar situation. The market is, once again, is moving further away from the equilibrium that we are all seeking.

The focus of developers to satisfy the requirements of an emerging affordable segment has been overdone, putting pressure on prices, yields and growth in across the industry.

To suggest a reversal or redirection of capital to the more expansive segments is likely in the short term is mere wishful thinking. The only way to address the issues facing todays market is to ensure that the long awaited and much speculated upon Expo inspired surge in demand transpires or to find other ways to expand the capital pool.

One initiative to do just that is in its final stages of planning. Looking to attract an even greater number of overseas investors, a series of roadshows will be held targeting key overseas markets such as India, China, Russia and the USA with the sole purpose of making investors in these countries to understand the benefits of investing in Dubai.

The schedule for the events is close to completion with events in Amman and Kuwait scheduled for late March to be followed by Cairo in April, Beijing in May, and Moscow in July before visiting London in September, Chicago and Dallas in October and wrapping up the tour in Mumbai does in December.

The importance of initiatives such as these cannot be overstated and The Dubai Land Department, realising the importance of increasing industry demand is pushing hard with this initiative.

Despite UAE investors leading the 2017 nationality rankings of investors in Dubai real estate, Indian investors continue hold second place and remain extremely important to the industry. Saudis came in third place followed by the British, who have dropped down the rankings in recent years due to uncertainty around Brexit and a decline in value of the British Pound. The Chinese are emerging rapidly as active investors in Dubai and still hold the greatest potential for foreign investment.

Foreign investors, almost 23,000 in number made approximately 30,000 transactions worth Dh56 billion in 2017. The local market’s reliance on foreign investment continues and, outside the Gulf region, there are huge opportunities to increase the awareness of what benefits the Dubai market continues to offer, not least of which, is the potential yields of 7-11 percent which are unheard of in much of the developed world.

So, the race continues … to win the hearts and minds of the global investment community.

Factors to Consider in 2018

With the advent of globalization, the number of factors that can affect local economies and the industries and markets that operate within those economies has increased dramatically in both number and complexity. Here are some of the more salient influential factors that we at Harbor Real Estate have been considering as we advise our Dubai focused clients in 2018.

Oil. Despite the amount of diversification that has occurred in the Dubai economy and the small proportion of Dubai’s GDP that oil represents, the price of oil still affects liquidity levels throughout the UAE and investor confidence, both essential elements for property market growth.
In December, prices averaged $64/barrel, the highest monthly average since 2014 following an OPEC meeting where members agreed to keep production cuts through 2018 and there is no doubt that maintaining oil at or above the $60/barrel for the duration of 2018 will assist in creating market stability and that is what is being predicted by the U.S. Energy Information Administration in its Short-Term Energy Outlook.

Currency rates. With anywhere between 40% and 50% of investment in Dubai property coming from investors who usually deal in currencies that are not pegged to the US dollar, any strengthening of the US dollar makes it more difficult to invest in Dubai. The USD is likely to strengthen in 2018 as we see the first signs of inflation appear in the US economy.

However, a strengthening dollar is actually a double-edged sword. For the UAE economies overall, it just makes every barrel of oil more valuable and, for those investors who have invested or intend to invest in currencies pegged to the US dollar, a strengthening of the currency increases the value of the investment and any resulting cashflows in terms of other currencies that aren’t pegged to the USD.
Mortgages and market regulations. Historically, mortgages have represented no more than 30%-35% of property sales in the emirate. This ratio has now climbed to well over 50% during 2017 and, in some months, levels of 60+% were achieved. This is great news for several reasons.

First, this trend highlights both confidence of lenders and consumers, mostly owner occupiers, in the market. Most of these new buyers were taking advantage of the abundance of affordable properties on offer that, in addition to the onslaught of attractive payment plans, offered by developers, defined the market in 2017.

The second reason why this is such good news is because we have witnessed, in real time, the market adapting to legislative changes regarding mortgages that were made in early 2014. There is no doubt that the implementation of the mortgage caps earlier in 2014 had affected the demand for many first home buyers who were relying on a mortgage to acquire their dream home, but the dream remained and, for many in 2017, became a reality.

Political instability: The levels of political instability in the world in 2017 seemed unprecedented and is likely to continue through 2018. From Middle East conflicts, North Korean nuclear ambitions, US distrust and threats towards Iran, continuing angst over Brexit a seemingly dysfunctional and increasingly partisan US government certainly portrays a world that is very unsettled place which leads to investor nervousness. Unfortunately, there are no signs that political instability is going to ease any time soon.

Demand and supply: As always, economic fundamental will always play a role in any industry performance. 2018 will commence with a market that moving further away from the equilibrium that we are all seeking.
The focus of developers to satisfy the legitimate and long forgotten requirements of an emerging affordable segment has been overdone during 2016 and 2017, putting pressure on prices, yields and growth across the industry.

The amount of capital shifting from the traditional secondary market to the off-plan market created in a capital allocation imbalance, resulting in declining demand for finished properties. Interestingly, capital allocation was really the issue, as supply was quite healthy in 2017, with mortgages financing over 50% of transactions. It wasn’t that long ago that mortgages made up less than 30% of total transactions, extremely low by global standards.

To suggest a reversal or redirection of capital to the more expansive segments is likely in the short term is mere wishful thinking. The only way to address the issues facing today’s market is to ensure that the long awaited and much speculated upon Expo inspired surge in demand transpires so as to increase absorption, that the predicted 15,000 units expected to be delivered during 2018 is not exceeded or to find other ways to expand the capital pool.

One initiative to do just that is in its final stages of planning: Looking to attract an even greater number of overseas investors, a series of roadshows will be held targeting key overseas markets such as India, China, Russia and the USA with the sole purpose of making investors in these countries to understand the benefits of investing in Dubai.

Infrastructure development / government spending. Dubai’s infrastructural spending continues with a total budget of Dh56.6 billion being announced for 2018. Heavily focused on infrastructure projects led by Expo 2020 the budget comes in line with Dubai Strategic Plan 2021’s targets and future commitments. The budget features a rise in infrastructure spending, which makes up 21 per cent of the total government expenditure. This reflects the directives of Sheikh Mohammed to raise infrastructure efficiency in Dubai for the emirate to become the preferred destination for living, tourism, and businesses across all sectors. The budget’s overall spending represents a 19.5 per cent increase over 2017.

Taxes and transaction costs (registration and transfer fees, commissions, NOC fees): The UAE implemented VAT at the rate of five percent in January 2018. VAT is not a new phenomenon. It has been implemented in many economies around the world and is considered an efficient and equitable way for governments to collect tax revenue to invest, innovate, develop infrastructure and provide services that are required for sustainable economic growth. The IMF has predicted that the UAE may improve GDP by as much as 1.5% by implementing a 5% VAT. Some countries have applied 20% VAT’s to generate the revenues required by their governments without detriment to their property Industries. Yet. Some investors remained concerned and, as has been shown in other economies that have introduced VAT, those concerns will prove baseless with time.