Interviews

Making owners pay service charges a major challenge

A lack of transparency over the cost of maintaining a building, low quality standards and services and confusion over what is covered by service charges have angered owners and led to many refusing to pay the charges, say industry sources.

Adrian Quinn, Chairman of Dubai-based strata management firm Essential Community Management, said that if a building has service fee arrears of 40 per cent, it would not be possible to continue maintaining it internally or externally.

The available funds would have to be used to make payments to the Dubai Electricity and Water Authority, insurance companies, master developers and district cooling suppliers.

Essential Community provide strata management services to more than 40 developers in Dubai and has worked with master developers Emaar and Nakheel.

Quinn said the major challenge for the strata sector in Dubai is making owners pay the building service fees.

“The delay in the enforcement of the strata law is allowing many owners to avoid paying their strata service fees,” he added. “This is due to many developers not wanting to – or not knowing how to – recover the outstanding service fees via the terms and conditions of their contracts of sale.

“Most contracts allow for the developer to sell the apartment or villa in the event of non-payment and also recover all the legal costs and penalties.”

According to a recent survey by Dubai-based real estate broker Harbor Real Estate, the average annual service charges for buildings across Dubai are Dh16 per square foot.

“The highest service charges recorded were in and around Downtown Burj Dubai at about Dh22 per sq ft, while the lowest were in the Greens at Dh11 per sq ft,” said Harbor Managing Director, Mohanad Alwadiya.

“Consumers are no longer able to ignore the pinch of the economic downturn and investors and owner-occupiers alike are starting to evaluate very carefully the impact of service charges on the financial performance of their property and their own personal wealth.”

The survey, shared exclusively with Emirate Business, reveals that the overall average charge for villa communities is Dh2.5 per sq ft calculated on the overall plot size. Charges for villas are highest on The Palm Jumeirah, where the highest are between Dh4 and Dh5 per sq ft. “The lowest price is about Dh1.16 per sq ft for some of the villas in the Meadows community. This is broken down into Dh1.03 per sq ft for the general fund, Dh0.05 per sq ft for the capital reserve fund and Dh0.08 per sq ft for the master community levy,” said Alwadiya.

He said many developers who sold off-plan properties had not calculated the service charges at the time of sale, leaving many investors not knowing what the fees would be until the buildings were handed over.

“This makes it difficult for investors to determine the yield estimates on potential investments and adds a further element of uncertainty in an already uncertain environment. When buyers are considering purchasing properties, a unit that is complete with fees already apparent is more appealing than an off-plan transaction,” said Alwadiya.

“The majority of developers of projects that are still under construction do not provide service charge figures until the building is completed. On the other hand, most buyers and sellers, and even brokers, will not mention this important subject until the final stages of the negotiation process.”

Walid Jaafar, a partner at the Dubai-based Fichte & Co Legal Consultancy, said the official gazette announcement of Law No27 of 2007 on Ownership of Jointly Owned Properties in Dubai – the strata law – was published on December 31, 2007. Article 33 of the law says the legislation will come into effect within three months of the date of publication – ie on April 1, 2008.

“However, the law has still to be implemented,” said Jaafar. “The law does not address the issue of tenants. The law is intended to regularise the relationship between the owners of units in a specific development.

“This matter is usually left to the owner and the tenant to agree on. However, in practice, unless agreed otherwise between the parties in a tenancy agreement, the service fees should be covered by the owner.”

Fichte & Co has not yet seen any cases involving disputes over unpaid service fees, but does not exclude the possibility that a few are being reviewed by courts.

“In the absence of a regulatory law and the absence of any owners’ associations, the only possibility to file such cases lies in the hands of the master-developers or the sub-developers,” said Jaafar. “The claims in such a case would be based on the sale and purchase agreements and the master declarations attached to them.”

Quinn said that, once implemented, the strata law would create more transparency within owners’ associations. “If a building does not use all the budgeted funds in a year, the owners at the annual general assembly would have the right to decrease the next year’s budget or transfer the funds into the sinking fund,” he added.

The law makes it mandatory for every strata to have a 10-year sinking fund to ensure that money is set aside to pay for long-term capital expenditure.

“We at Essential Community automatically create a 20- or 25-year sinking fund to ensure all major plant and equipment are properly budgeted for on normal lifecycle cost structures.”

A strata general manager is appointed by the landlords of the building to create a draft budget, which is then reviewed by a board.

“After it has been approved by the board it is sent to all owners before the annual general assembly and is then approved there,” said Quinn. “After the meeting has approved all the agenda items it is then up to the strata general manager to enact all the motions and ensure they are carried out.”

Quinn said the most important duties of a strata manager are to oversee the facilities management companies to ensure they and their sub-contractors carry out the jobs they are contracted to do.

“There is a major conflict of interest if a strata management company has its own facilities management company,” he added.

Landlords will control what the owners’ association does and how it spends funds through the elected board.

“This means that the individual landlords will have some power in what the service fees will be and be able to rectify things. The enforcement of the strata law will make it possible to split buildings into multiple cost structures,” said Quinn.

“The first is the master cost structure, which would pay the master community service fees, buildings insurance, essential service costs, the managers’ fees, the facilities managers’ fees, district cooling charges, etc.

“The second cost structure would be the residential component of the building, so it would pay all the costs for the specifically residential component, for example lifts, foyers, gyms, pools and car parks. The third cost structure could be then the commercial portion of the building and cover all the commercial areas.”

Jaafar said: “When the owners have control of their buildings they will, through their board, review complaints of tenants and issues to ensure a good relationship is maintained.

“At present a tenant may have problems and issues with the building he is in, but the developer does not want to know about it or does not understand what they need to do to rectify them. There are some developers that are doing a good job in running their buildings, but everyone still has problems with conflicts of interest issues on maintenance items.”

Jaafar said according to Article 25 (2) of the strata law, if a unit owner fails to pay the service fees, the manager of the owner’s association would take action against the owner three months after notifying him through the notary public, enforceable by the execution judge in any competent court.

“However, the unit owner may object to this decision within the three-month period. In such a case, the execution shall be withheld until a decision in the subject of the objection has been reached.” Meanwhile, analysts called for the strata law to be enforced as soon as possible.

Nicole Betts, Senior Manager of Asteco Association Management, said that while Dubai awaited the regulations that supported the jointly-owned property law, Asteco had been working for several years with a number of high-profile clients well ahead of the implementation of the law.

“We have been helping companies establish informal owner associations, set up service charge and budgeting models, set community rules as well as facility management and service provider selection procedures based on best international practices,” she said.

“Some companies are actively encouraging owners to take control for themselves – albeit at this stage this has to be done under the developer’s name.

“A good example is the MAG Group which is dedicated to transparency. We have worked with them from conception of their MAG 214 Jumeirah Lakes Towers project through to delivering onsite management services to an informal owners’ association. Our team works closely with the owners’ management board to assist them to preserve, maintain and enhance the tower.”

Mohammed Nimer, Chief Executive Officer of MAG Group Property Development, said: “We have always operated in an environment of transparency, so it was natural for our company to introduce best practice in property management to enable owners to truly run their own buildings.”

Asteco has also been working with another developer for the V3 Tower, also located at Jumeirah Lakes, where handover to owners commenced recently.

“Our role is to administer day-to-day operations and assist in the formation of an informal owners’ association and a management board,” added Betts.

Burj Dubai units to see stable long-term growth

Long-term prospects for investors in the Burj Dubai tower are relatively solid if they have paid a fair price, with expected appreciation of 10 to 15 per cent per annum over the time, believe realty experts.

In a survey conducted by Emirates Business, Mike Atwell, Head of Middle East Operations, Cushman & Wakefield; Matthew Green, Associate Director, CB Richard Ellis (CBRE), Middle East; Adel Hamaizia, Sales and Marketing Director, RE/MAX Abu Dhabi, Mohanad Alwadiya, Managing Director, Harbor Real Estate; Chet Riley, Equity Research, Middle East, Nomura International, and Venkateshwaran Ramadoss, Senior Research Analyst, Real Estate Department, Kuwait Financial Centre, said iconic buildings are attractive to both investors and occupiers, but the building’s success depends on the supply and demand dynamics in the market.

Emaar Chairman Mohammed Alabbar has said Burj Dubai will open on January 4, 2010 to coincide with the four-year anniversary of accession to power by His Highness Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai.

Experts said returns on quality assets have always been there. However, investors have to take a long-term view on property and move away from the speculative model that has evolved in Dubai.

Is buying commercial or residential units in Burj Dubai a wise choice today since prices have bottomed out?

Atwell: Although the property market within Dubai has witnessed a significant price correction this year, we believe it is still too early to say whether prices have bottomed out. A degree of uncertainty remains in the market, caused by a number of factors including lack of available debt financing, potential over-supply and quantifying end-user demand.

Green: If we look in isolation at current prices over 2008 levels, then it certainly looks an attractive investment. However, we must remember that the market has changed significantly over the last 12 months and investors can no longer assume double-digit annual growth rates. During the period demand has weakened substantially, pushing vacancy rates higher and adding to the risk of unit voids. Investment decisions within the current market climate will thus vary, dependant on the overriding driver. Those looking for buy-to-let properties are likely to be more cautious considering weaker demand levels, while those looking at owner occupier assets are likely to be more bullish.

Hamaizia: Yes, as the saying goes “what goes up must come down”, and in this context vice-versa. Major cities of the world (mostly now mature) have all seen cycles of which crazy, semi or mini booms witnessed crazy prices that came down substantially. For example, half or less/50 per cent down –London in the early 90s, Singapore more recently… but subsequently observed a stable recovery, typically reaching at least 75-85 per cent of peak times.

Alwadiya: Investment recommendations are unique for each client and are directly linked to the structure of returns that an investor is seeking in a project. In reality, those clients who paid extremely high prices for Burj properties in 2008 will not enjoy initial healthy return on investment (RoI) per annum – as rental prices continue to drop as a result of the global economic crisis. Some may receive as little as two per cent return on investment in their first year or two. However, those investors who are instead seeking the benefits of long-term capital appreciation and are able to wait for 10 years, enduring lower RoI per annum, will be handsomely rewarded for their patience. I personally believe the price of the Burj will continue to grow at a promising rate over the next 10 years making it an extremely worthwhile investment over other projects.

We were against the investment in the Burj last year due to the rapid price escalation that was seen in the project in 2008 but we will definitely recommend investing currently to capitalise on the excellent prices that are currently on offer and the expected capital appreciation that will be generated as soon as the tower is launched.

Riley: The Burj Dubai is already, and will remain, an iconic building and the focal point for the downtown area. As such residential space should normally have additional intrinsic value and demand but we still believe any investment in real estate should be undertaken for the long term. The choice to buy (or lease) commercial space has to be made considering a number of different variables depending on use. For example, rental levels and potential yields, service charges, tenant demand and expected occupancy, which all ultimately drive capital values. We believe in the long-term prospects of Dubai considering the positioning and infrastructure spend to date. This gives the emirate a lead over regional counterparts, so we believe there will always be a long-term demand for high quality property.

Ramadoss: An analysis of Colliers International’s Q3 2009 foreign ownership house price index suggests prices for properties under construction in Downtown Burj Dubai increased by 15 per cent, while excluding this, the index contracts. This is essentially the premium assigned to the development approaching completion which got captured. While prices appeared to have bottomed out in general, these are not clear signals of a complete turnaround as prices could track down should there be a market- wide contraction. Hence, it would be appropriate to buy if the intention is to have a stable income potential or to bet on the extent of premium that is still left to be priced.

Do you believe the tower offers a good investment proposition for long-term inventors?

Atwell: The Burj Dubai is well located, being within close proximity of the existing and future key CBD areas – DIFC, Sheikh Zayed Road and Business Bay. It is also well serviced by other amenities, including surrounding hotels, Souk Al Bahar and Dubai Mall. The Burj Dubai is an iconic building and will be the tallest man-made structure ever built. It is in a prime location and forms the centrepiece of Downtown Dubai, a large-scale masterplan development that will include more than 30,000 residential units, Dubai Mall, nine hotels and commercial space. The building itself will contain 175-key Armani hotel plus Armani Apartments, an additional 700 apartments and office space, although how much remains unclear. Iconic buildings are attractive to both investors and occupiers. However, the building’s success will ultimately depend on the supply and demand dynamics in the market, pricing and the underlying property fundamentals. Other key factors will include the operational efficiency of the building, which is dependent on but not limited to the building management system, lifts, parking, accessibility, public transport and how the strata management company is run.

Green: Returns on quality assets are there to be had, but investors need to start taking a more long-term view on property and move away from the speculative model that has evolved in Dubai. When choosing an asset to invest in, it is important to select a product that has a genuine lasting prospect for returns. The Burj Dubai will offer a prestigious address within the world’s tallest tower, a superior product quality, world-class facilities, and, importantly, it should also be well managed. All these factors would suggest the long-term prospects for investors are relatively solid, assuming a fair price is paid.

Hamaizia: Prices of property situated in proximity to, or that are a part of any signature or world famous building tend to hold value (long term) or are semi-immune to economics or exogenous shocks… be it London, Paris, New York or Dubai for that matter (due to views, footfall/tourism, shopping or financial districts or interest in that structure from an arts or architectural perspective).

Alwadiya: The Burj Dubai tower has all the factors that will set it for success: iconic design, excellent location, exceptional finishes, first-rate facilities, fantastic mix of assets. Any investment in a tower of this calibre is viable now and will continue to be well into the future.

Riley: Investors with long-term investment horizons have generally done well from property across most international markets, but as we have recently seen both residential and commercial property markets are subject to cycles, which can have some large swings. As the market becomes more established in Dubai, cycles should start to stretch longer and become less volatile. Previously speculative gains were driving the market, but we expect to see investment returns at much lower levels than those seen during the construction phase. One of the core tenets of property investment is its lower risk nature, but ultimately this equates to lower returns. Good quality property should deliver stable investment income with some capital appreciation, which is what long-term investors are generally looking for.

Ramadoss: Such towers often get a prestige value attached to them and would be a low-risk/low-return investment option as they tend to be pricey. The advantage is in its lower volatility as prices tend to contract at a smaller multiple relative to the market, as is the case with a typical ultra high-end developments. However, one needs to assess the extent of premium by comparing it with peer developments across the globe as in the current scenario, it could attract speculative interests as well.

What kind of appreciation can one expect in the long term, say five to 10 years?

Atwell: Capital growth is dependent on both rents and yields, which are in turn affected by numerous other factors. We cannot forecast anticipated appreciation over the long term. However, we would anticipate yields will sharpen from the double digit expected returns that we see today.

Green: If we consider the rapid change in Dubai over the last five years, then you can see the pitfalls of predicting the future in such an un-transparent environment. The Dubai market needs a period of stability so that investors can start to regain some of the confidence lost as a result of the downturn. Only after this is achieved can we really start to look for any level of price growth.

Hamaizia: As aforementioned, real estate history of the New Yorks, Singapores and Londons of this world, have always seen a stable recovery (back to at least 75-85 per cent of peak times within five years), when infrastructure, employment, investment and other city value-adding activities are taking place, supporting or present.

Alwadiya: The Burj is by far one of the best investments currently available for those investors who are able to wait for capital growth as opposed to initial return on investment per annum. It is likely that we will see a significant increase in the amount of unit trading following the tower launch in January. The Burj will continue to retain its value after its launch, and will increase its financial value/appreciate over time with an estimated rate of 10-15 per cent per annum. If you compare its price to the different towers around the world that once held the title of “the tallest”, you will see that they still today command an average price of over Dh10,000 per square foot. This is a far cry from what we are experiencing in today’s market where we are seeing the Burj command a price of less than half that amount.

Riley: We expect the level of capital appreciation to be relatively moderate in the short term. Over a five to 10 year horizon, we would normally expect moderate capital appreciation of perhaps five per cent per annum for this type of property, but this also depends on economic factors and conditions such as inflation. Generally speaking, Dubai’s residential and commercial properties are both linked to the economic cycle, perhaps more so than established markets, because the population base is more transitory. So this is a consideration for investors. Ultimately the ‘buy to let’ investor group will determine the market value so rents should establish the valuation floor.

Ramadoss: Longer-term price appreciation would tend to reflect the market level price appreciation. However, the price behaviour would be similar to the performance of a low beta stock comparedto the market average price change.

Property Buyers Dissatisfied with Realty Brokers

Some 61 per cent of property buyers in the UAE are dissatisfied with the services provided by real estate agents in the market, according to a new study.

The research was conducted across the UAE with a focus on Dubai by real estate broker firm Harbor Real Estate, which talked with 178 property owners over a four-month period in a series of face-to-face interviews.

The research revealed consumers who bought properties in the past two years remained dissatisfied with the performance of real estate agents. “It all boils down to the servicing style of real estate agents, which has not been up to the satisfaction levels of the property buyers in UAE,” said Mohanad Alwadiya, Managing Director, Harbor Real Estate.

“Currently, it is still a buyer’s market and services from realty agents need to be of high quality,” he said.

Alwadiya said the Real Estate Regulatory Agency (Rera) had been proactive to ensure that real estate agents deliver quality service, but the real estate broker market continues to be immature.

The study said Harbor intended to serve as a barometre on service levels in the local real estate market.

“Participants evaluated property brokers according to knowledge and skills, ethics and behaviour, consultative ability, and empathy. The respondents were asked to rate their individual experiences on a five-point scale ranging from excellent to very poor. Of those interviewed, 61 per cent of respondents rated their brokers as either poor or very poor,” said the report.

Of those interviewed, 73 per cent had purchased their property prior to the recession – set as October 2008 – while the remainder had purchased their property after October 2008 (post-recession). About 23 per cent of those interviewed purchased within the last four months.

About 12 per cent of consumers who made their purchase prior to the recession stated that their experience was excellent or good.

In the post-recession period, that number fell to about 11 per cent, although satisfactory ratings improved from 25 per cent pre-recession to 31 per cent post-recession.

In the post-recession market, 58 per cent of respondents rated their experience as poor or very poor, bringing the two-year average of dissatisfied customers to 61 per cent. The buyers objected to the lack of agents’ knowledge, consultative ability and empathy.

Alwadiya said: “What we have here is an indicator of an industry which is still relatively immature. The level of proficiency in effective consultancy, based on sound knowledge of the market and an understanding of the buyer’s requirements, appears to be the main shortcoming. Buyers today have choice and are more knowledgeable about the market, and they seek advice from professionals that they feel they can trust. Unfortunately, in the majority of cases, consumers are left feeling disappointed.”

Harbor Real Estate is also monitoring its service-level performance against those of its affiliates.

“What we are seeing globally is a race for improvement. Realty has been under huge pressure due to the recession, and those who wish to thrive in the market will only do so by identifying and responding to the needs of clients,” it said.

Dubai Real Estate Recovery? V, W, U, L or √?

Interview with Mohanad Al Wadiya, Managing Director of Harbor Real Estate Brokerage

Mohanad Alwadiya is the Managing Director of Harbor Real Estate Brokerage, a real estate service provider in Dubai. As Managing Director of Harbor Real Estate Brokerage, Alwadiya is responsible for setting business direction and focus, directing all external and internal sales and marketing strategies for Harbor and its clients and producing the Harbor Report.

Alwadiya has over 12 years of strategic marketing and sales experience servicing global corporate clients. Formerly, Alwadiya was the Managing Director of Residencia Property Consultants, the Head of the Projects Marketing and Sales division for the global real estate arm of Dubai Holding and the Communications Director at Leo Burnett, Dubai. Alwadiya shared some of his thoughts on the recovery of the Dubai real estate market.

There are a lot of conflicting stories in the news about the likelihood of a recovery in the Dubai real estate industry. Where are we really?

You are right. There had been a lot of frenzied reporting … some may say speculation … as to the actual state of the Dubai property scene and where it is situated in terms of recovery. This has led to a lot of nervousness and confusion.

Reports vary, with some analysts claiming the industry has “bottomed out” and others stating that no real improvement can be expected for 18 months or more. The variance in opinion is so wide that now some analysts are critiquing and publicly disagreeing with other analysts’ suggestions as to where the industry is now and where it is heading! I believe that the market is in a phase of fragile stabilisation. The long-anticipated recovery cannot be claimed as yet despite indications through the second quarter of 2009 suggesting that the market had bottomed and that early signs of recovery may be evident.

The problem with many analysts’ views is that the breadth of considerations as to what will initiate and drive the recovery is too narrow in scope. Many observers tend to look at the real estate industry in isolation and not consider the effects of the global, regional and domestic economic performance on the Dubai real estate industry. We need to understand that the Dubai economy, and logically the Dubai real estate scene, is strongly linked to world economic events.

The pace and magnitude of Dubai’s economic recovery and its real estate industry will be largely dependent upon the global economic recovery. To gauge the primary driver of a Dubai economic recovery, we must take a global or macro view first. Consider the following schematic, which highlights the dependency of the UAE and Dubai’s economy on world economic health.

Much has changed over the last three months. We have seen the prevailing sentiment move from doom and dread to hope and optimism. This shift in sentiment has been fuelled by what some people see as being the early signs of a global economic recovery.

So, is the world economic situation improving?

Well, in some areas of the global economy, things have been looking a lot better, indicating the imminent start of a recovery.

There was a strong rebound in most financial markets during the second quarter; however, the beginning of July saw investor nervousness halt the growth on the back of poor news emanating in the US regarding unemployment.

Globally, governments have responded quickly and expansively in implementing monetary and fiscal policies to arrest the global economic decline. The positive effects of these actions implemented in the last quarter of 2008 and first quarter of 2009 started to be felt in the second quarter of 2009.

Economists in Japan, China, the US and even Europe had begun to talk about “green shoots”, or early signs that growth in those economies will start sometime early in the new year. The broad consensus is that these major economies will bottom out in the late third to early fourth quarters of 2009, despite investor nervousness being evident in early July.

Many of the actions and restructuring measures taken by companies to improve their cost structures and balance sheets in order to survive the recession have already been undertaken. In addition, the stronger companies in a wide variety of industries are looking towards strategic mergers or acquisitions which will result in entities which can weather the recessionary storm and be well-poised to take advantage of the imminent recovery. This form of industry rationalisation is healthy, as long as monopolies are not created.

In addition, the various business confidence indices which measure business sentiment around the world have also been on the rise, auguring well for the future.

As a result, stock markets around the world have risen significantly in the second quarter of this year. The generally held view is that movements in the stock market pre-empt economic growth by six to nine months, and therein lies one foundation for hope for many observers.

If you look at US markets, the Dow Jones Industrial Average has gained 27% since its March low. In China, the story is similar, with the Shanghai Composite Index showing a 47% gain since March 2 and the London FTSE gaining 19% since March 3.

The local bourse was also performing extremely well during that period. The Dubai Financial Market had risen 40% since its March low; however, the first week of July saw a sharp drop to pull gains back to a disappointing 15%. Overall, despite the volatility, which will be a feature of markets for the ensuing quarter, the overall improvement in all these financial indices indicates an improvement in confidence of those who are looking for investment growth opportunities, suggesting that a bottom to the world economic woes is somewhere in sight.

Meanwhile, the rise in oil prices had definitely stirred the hopes of many in the region. With oil prices on the rise and reaching around $70, governments around the region were looking much better placed to implement infrastructural spending in order to fuel economic growth. Oil slipped to around $66 in early July, however. If this price level is sustained, the budgeted infrastructural spending proposed by the regions’ governments should continue unhindered.

Of course, the downside to excessively high oil prices is that they may hinder global recovery and drive energy costs onto those economies that are heavily reliant on imported oil.

When will we see real recovery, not just the “green shoots” that everybody is talking about?

This is very hard to predict. You would have heard about different types of recoveries, specifically, V, W, U, L and square-root-shaped recoveries.

In his article of June 2, Will Swarts of The Wall Street Journal provided an excellent explanation of the different types of recoveries, using examples from US and Japanese historical economic performance.

So, what type of recovery would be most likely for the world and Dubai economies?

I believe that either a W-shaped or square-root-shaped recovery is the most likely candidate, but I am leaning towards the latter.

If one considers that the current “green shoots” of the recovery are being fuelled by the enormous amounts of stimulus money that governments around the world have pumped into economies, and that the positive effects of the stimulus packages will naturally be exhausted, then there is a strong likelihood that underlying fundamentals of major global economies will not have improved enough to ensure that the growth fuelled by the stimulus packages can be maintained. Put simply, the effect of the stimulus packages, while effective in arresting the slide of world economies and sparking some “green shoots”, is not sustainable. The fundamentals of economies must provide the impetus for future growth.

An example of this would be the effect of US unemployment and its implications for domestic US consumption. With an unemployment rate rising to 9% or 10%, the US economy will be deprived of one of its principal drivers, which is domestic consumption. If the effect of the stimulus packages introduced by the government wears off while domestic consumption is low due to high unemployment, economic growth would stall, causing a square-root-shaped recovery or even decline, resulting in a W-shaped recovery. Of course, this is just one example of an economic fundamental being depressed, but there are many others.

In addition, the world is likely to be a different place even after the recovery begins in earnest. The attitude towards debt financing is likely to be far more conservative by both investors and lenders. This recession has taught many players in the investment and finance space a painful lesson with regards to risk management.

I believe that the square-root-shaped recovery is more likely given the extent of co-operation, sharing and commitment to address the recession on a global scale. Never before have major industrialised nations combined forces, ideas and stood resolute to address what, at one stage, was shaping up to be a depression. In consideration of this unprecedented co-operation, I have confidence that once the economy begins to recover, that same shared resolve will not allow it to deteriorate into a W-shaped recovery.

So, what does the recovery shape mean for the Dubai real estate industry?

Obviously, everybody wants to see a V-shaped recovery. For the real estate industry, that would result in a rapid increase in the demand for all types of property. But it’s not going to happen. The previous real estate boom in Dubai was driven to a large extent by a rapidly expanding population, made up of speculators, genuine long-term investors and owner-occupiers. Overseas investment, some of it speculative, which was fuelled by favourable exchange rates and changes to property ownership rights, fuelled the growth further. This activity was supported by unhealthy levels of credit availability.

The recovery phase will need to be driven by fundamental and solid economic drivers, not speculation. Population growth, driven by an increase in commercial activity, will be the primary determinant of a real estate recovery as Dubai attracts new business entities, investors and owner-occupiers who have a long-term outlook to their participation in Dubai’s economy. The days of growth driven by speculation supported by questionable levels of credit availability will not be repeated. We are witnessing a major and much-needed step in the maturation of Dubai’s real estate industry and economy as a whole.

So, what type of recovery will the Dubai real estate industry see?

Well, once again, it is likely to be a W or a square root type of recovery. A lot depends on the recovery of the economy as a whole, but there are some factors within the industry itself which may inhibit its recovery regardless of the economy.

The issue of oversupply has received a lot of attention, with some commentators suggesting that property vacancy rates, currently estimated to be around 15%, could double in the industry by the end of 2010. While I don’t subscribe to that view, there is no doubt that the number of properties predicted to be released into the market over the next two years is a concern, as there are an estimated 70,000 new units being released in 2009 and 2010. If demand cannot be generated quickly enough as part of an overall stimulus strategy, then a W-shaped recovery becomes more likely.

We need to look at the supply situation in tandem with demand. It’s impossible to comment on one without considering the other.

The effect and magnitude of the oversupply issue on the performance of the market will be determined by a number of factors which will help generate demand for property going forward. These factors are as follows:

1. Population Growth Derived From Commerce

As stated above, Dubai’s population growth rate needs to increase. Estimates of population decline due to the recession have ranged from 8% to 20% spanning the years 2009 and 2010. Needless to say, whichever prediction proves to be the most accurate, the slide in population must be arrested.

The prime driver of population growth going forward will be commercial activity. Dubai needs to ensure that as the world economy starts to recover, it has positioned itself competitively as a place to do business. It is encouraging to see the government implement a number of initiatives to achieve this end. The first set of initiatives involves the freeze or reduction in the cost of fees and charges on business entities in Dubai. This is a positive step in ensuring that Dubai is a cost-competitive place to conduct business when compared to other regional centres.

The second initiative involves the Dubai Chamber of Commerce proposing an end to the current sponsorship system for foreign companies wishing to set up business in Dubai. The vision of having free entry for companies with few or no barriers is a grand one and, if approved by the Executive Council, will provide a major boost towards establishing Dubai as an accessible and cost-competitive place to do business.

2. Lifestyle Values

The cost of living in Dubai has been a concern for some time. With double-digit inflation in the period leading up to the recession along with spiralling rent costs, many expatriates or companies importing talent from overseas found living costs prohibitive.

While real estate sales prices and rents have fallen, much to the chagrin of investors, and inflation is less than half of what it was eight months ago, this phenomenon will be important in attracting renewed interest in the emirate and stimulating a higher level of activity in the real estate market. Already we are seeing people from neighbouring Sharjah and Abu Dhabi taking advantage of the current low prices to move to Dubai.

3. Real Estate Industry Management and Regulation

Dubai has come a long way with regards to regulating the real estate industry. While the efforts to protect rights, lift standards of professionalism and establish a transparent, credible and functional framework are to be applauded, there is still a long way to go before the industry can be said to be in the final stages of maturation. The Real Estate Regulatory Authority has been considering the viability of a number of projects and reports state that at least 27 projects will be cancelled. This form of oversight is a positive sign, as any rationalisation of developments which are currently being planned can only help alleviate any oversupply situation. It is hoped that a full, robust and decisive review will be completed and the necessary actions continue to be taken, as marginal or non-viable projects can only be considered as “toxic assets” to the industry and the overall economy.

In addition, the ongoing pursuit of transparency is paramount. One of the reasons for such diverse opinions regarding the true state of the industry is the dearth of reliable information and data. While some progress has been made, the industry is a long way from having centrally stored, accessible, reliable, upto- date and relevant information on which to base decisions.

4. Liquidity and Exchange Rates

Liquidity is starting to flow back into the market, but it needs to flow faster. With the Eibor at around 2.4% and many banks successfully increasing deposits, lenders are now in the best position in over eight months to start lending again. There has been some easing of LTV ratios by some banks and the longawaited Amlak/Tamweel merger is reportedly just around the corner. The resumption of business by this entity will help alleviate the shortage of credit available to many potential buyers who are in the market now. While many have focused on liquidity in the local market, Dubai can benefit greatly as the credit markets overseas also start to loosen up.

During times of economic hardship, investors typically seek shelter in a select number of commodities or currencies. The US dollar, despite the US economic financial meltdown, is one such currency. During the early part of the recession, this phenomenon drove the value of the US dollar, and therefore the UAE dirham, higher versus other global currencies. This made foreign investment in Dubai more expensive.

As the global economies gradually show signs of improvement, investors will convert their US dollars into other currencies to avail themselves of investment opportunities around the world. The resulting devaluation of the US dollar and, by association, the UAE dirham, increases the value available to investors from investing in the Dubai real estate scene.

5. Confidence

It was not long ago that Dubai was capturing the admiration and awe of the world. Unfortunately, the world view on Dubai has taken a turn for the worse and needs to be rebuilt.

There has been a disproportionate amount of negative press regarding Dubai since the economic crisis began and this will have damaged investor confidence in the emirate. The recent initiative to address the issue of “Brand Dubai” through the development and implementation of a global communications strategy to address incorrect or misleading assertions regarding Dubai is tremendously important. The success of this initiative will play a major role in accelerating the pace of Dubai’s recovery.

However, confidence needs to be developed in other areas as well. The visa issue is one that has placed a lot of pressure on recently retrenched expatriates when trying to find alternative employment or heading home. This will not be forgotten quickly and will certainly be a consideration of those who might consider making Dubai their long-term home.

From an investor point of view, the Department of Naturalization and Residency has implemented a law which will grant a six-month renewable visa to those who invest in freehold property in the UAE. While this is a positive move to instil confidence in potential investors, the six-month period is considered to be too limited in duration to be meaningful to many investors. It is thought that the federal law should match the Dubai law whereby investors were eligible for a three-year residency visa, provided they visited the emirate at least once every six months. This approach would appear to be far more appealing and enticing.

6. Tourism

A large part of Dubai’s success has been driven by an incredibly successful tourism industry. If one considers Dubai to be primarily a trade/commerce, services and tourism hub, the influx of tourists is vital to the overall health of the economy.

The tourism industry has been a beacon of success in the Dubai economy and plays an important role in introducing the emirate to potential investors and entrepreneurs as well as sun seekers.

7. Oil Prices

It will come as no surprise that the price of oil will help determine the health of the Gulf economies. Despite not being reliant on oil as such, Dubai, being part of the UAE federation, has and will continue to benefit from the massive revenues derived from oil. With oil prices expected to fluctuate in the range of $70 to $75 a barrel going forward, the Gulf economies can continue to acquire healthy levels of revenues to enable government investment in infrastructure without generating huge budgets deficits or accumulating debt. Also, at this level, it is not expected that oil would place undue pressure on recovering economies.

However, there is a catch. It would be disastrous if the price of oil should reach the unimaginable levels of 2008. If this were to happen, those economies which are reliant upon imported oil for their energy requirements would find economic recovery difficult to sustain. This could result in a W-shaped recovery for some of the largest economies in the world and likely effect the recovery of the world economy as a whole.

Dubai would suffer as a result of this, as its reliance on the economic activity of other economies would make it vulnerable to any downturns in trade or global commercial activity and, as we have already discussed, the Dubai real estate industry recovery would stall.

So, in summary, you are predicting a square-root-shaped recovery?

Yes. I believe that the world economy is on the road to a square-root-shaped recovery. I also believe that Dubai has the potential to benefit handsomely from that recovery.

The IMF has stated that the Gulf economies are best placed to surface from this recession. This should come as no surprise, as one thing the Gulf economies have done successfully over the last decade is to accumulate huge reserves of wealth which would serve them well during a recession. This has proven to be the case, as evidenced from the continued infrastructure spending by government authorities.

With regards to the Dubai real estate industry, there is lots of work to be done. In all likelihood, its recovery will lag the recovery of the overall economy; however, in consideration of the rampant, unsustainable growth which was being witnessed in 2008, this should come as no surprise.

It’s important to understand that the industry is not terminally ill. The industry is experiencing some serious growth pains, but will recover. I believe we will see a much improved level of activity in the later part of this year as the world economy strengthens, credit becomes more accessible and Dubai relaunches itself as a preferred place to do commerce and trade.

The current pent-up demand will flow into the market once lending starts again. Many people want to take the opportunity to own a family home or take advantage of the investment opportunities in the market today. The demand is there; it just needs some liquidity to enable the conversion of intention into transaction.

However, a word of caution. While I believe now is a good time to buy into Dubai, we cannot expect the monumental premiums of the past. Real estate is for the long-term thinker and, despite being subject to economic cycles, will always generate wealth as long as it’s considered and managed as a long-term investment.

To think any other way would be to ignore the hard lessons of the last 10 months.

Dubai Home Prices Fall 24pc in Q2: Report

17 August 2009
DUBAI – Dubai residential property prices fell by 24 per cent in the second quarter compared to the first three months of the year.

However, the number of sales and rental transactions has remained steady over the two quarters, signalling a renewed confidence in the emirate’s battered real estate market, property consultancy Jones Lang LaSalle said on Sunday.

Property prices are falling more slowly, and the gap between the prices that owners are asking and buyers are offering has narrowed, LaSalle said in a statement.

A separate report by the Harbor real estate brokerage said that its sales transactions doubled in number in the second quarter compared to the first, underscoring the idea that Dubai’s over-built market might have hit bottom.

“The narrowing gap between asking prices and achieved prices is an indication that the market is beginning to stabilise, albeit at significantly lower levels of pricing than those seen earlier in the year,” said Craig Plumb, Head of Research at Jones Lang LaSalle MENA.

The Dubai property sector collapsed in the aftermath of the global credit crunch. LaSalle expects that 22,400 new residential units will be handed over this year, even though developers have cancelled or put on hold more than $24 billion worth of  residential projects.

The downturn in Dubai’s once-booming construction industry has created a backlog of legal claims totalling almost £3 billion, The Times newspaper of London reported on Sunday. More than 180 claims have been filed this year, mostly by international  contractors. British firms are estimated to be owed at least £400 million on contracts in the UAE, the newspaper said, citing an article in Building magazine, a British trade publication.

According to LaSalle, the volume of sales and rental deals were stable between the first and second quarters of this year. By contrast, transactions decreased in number by 58 per in the second quarter from the same period a year ago.

“The stabilisation of transactional volumes is an important indicator, which reflects improved confidence among investors,” Plumb said.

Meanwhile, the Harbor brokrage confirmed that activity in the second quarter improved significantly over the previous three months, as more properties have become affordable for more people. Harbor noted that sales transactions, especially in the latter part of the second quarter, increased when compared with rental transactions, with middle to middle-lower income earners taking advantage of the new levels of affordability to buy.

“We look at factors that are likely to drive the recovery and the influence of the global economic recovery as it impacts the local scene here in Dubai,” said Mohanad Alwadiya, the Managing Director of Harbor Real Estate Brokerage.

“Harbor’s results for the second quarter were promising. Not only did we see a 55 per cent increase in the number of viewings but we also saw sales transaction double.”

Property expert Mohanad Alwadiya tackles your property questions

Q: We’re looking to buy a villa in Dubai in the coming year. How do you rate Jumeirah Village as an area to buy property in? What are the pros and cons?

A: Phase two of Jumeirah Village has just been handed over and this has created a buzz in the market, especially in the rental market for affordable two-bedroom villas. According to Nakheel, they are very confident and looking forward to completing all of the 2,200 villas by the end of this year, which is exciting news for the owners of house there. The pros are the affordable prices, a well-planned villa community, a good mix of planned retail and community facilities and the well designed villas and townhouses.

Although Jumeirah Village is strategically located, access is perceived to be inconvenient and it is in close proximity to high voltage power lines. The section that Nakheel is developing is progressing as planned. However, the Jumeirah Village Circle part, which is developed by private developers, is really behind schedule and is creating a lot of negative word of mouth in the marketplace and hence affecting the overall reputation of the Jumeirah Village development.
I would recommend buying a villa there because of the attractive prices and because the supply of villas is much lower than apartments and hence it offers a safer investment. If you are buying a villa to live in, Jumeirah Village offers an excellent community lifestyle.

Q: My wife and I have been looking at possibly buying a two-bedroom apartment at Burj Views in Downtown Burj Dubai as a buy-to-let property. Do you think this would be a reasonable option?

A: The Burj Dubai area is becoming popular with end-users because of the enjoyable living experience it offers. Having said that, and given the popularity of this area, the selling prices of units there have been inflated by the secondary market and resale activities. This has put a lot of pressure on rental yields. The rental return increase could not keep pace with sale prices as potential tenants would compare prices with other competitive areas in Dubai. High quality property consistently generates higher average yields over the long term. Affordable housing is expected to generate higher yields over the short-term before the lower quality of the establishment begins to be reflected in potential tenant valuations.

Q: There have been reports about rental increases in some areas of Dubai. In which areas do you think renters can still get good value for money?

A: Tenants can still expect to get bargain rental deals across the majority of the freehold zones in Dubai. I would recommend Jumeirah Lakes Towers as it remains very much underrated overall.
This development enjoys a very strategic location and has a fantastic master plan yet its true potential is still to be recognised. JLT has a good balance between office space and residential offerings.
The prices are at least 15% cheaper than Dubai Marina and Jumeirah Lakes Towers has the potential to achieve the same status as Dubai Marina, and in a very short time.
Do you have a property question that needs answering? Email fm@alnisrmedia.com along with your contact details

Real Estate market to start recovery in early 2010

Dubai, July 21 2009: According to the quarterly Harbor Report, which will be issued at the end of July, the real estate industry will start to pick up in early 2010. The report which is issued by the Harbor Real Estate Brokerage Company, an integrated real estate service provider in Dubai, predicts that even though the market appears to have bottomed out, it will still take several more months until we see an improvement in the market.

”I believe that the market is in a phase of fragile stabilization,” said Mohanad Al Wadiya, Managing Director of Harbor Real Estate Brokerage and Editor in Chief of the Harbor Report. It is hard to say exactly when we will see an improvement but the general consensus is that this will be in 2010, although the pace and magnitude of Dubai’s economic recovery and its real estate industry will be largely dependent upon the global economic recovery and world economic events,” he added.

The report suggests that even though there have been many positive changes, with governments implementing monetary and fiscal policies, companies restructuring and improving their balance sheets and larger corporations considering mergers or acquisitions, it will still take several more months until we see solid and sustainable improvements.

”When the first Harbor Report was issued in Q1, the general mood was very somber, today, it is evident that even though the market is stressed, it is certainly not getting any worse, and that in itself is good news. We are starting to see signs that the changes made by governments and corporate institutions to combat the recession are slowly but steadily taking effect. With economists in Japan, China, USA and even Europe talking about “green shoots” or early signs that a return to economic growth is now on the horizon, it looks promising that we will see things pick up in early 2010 ,” said Mr. Al Wadiya
Whilst the broad consensus is that these major economies will bottom out in the 3rd quarter of 2009, Stock markets and consumer confidence indices around the world have risen significantly in the first 6 months of the year.
“This performance of stock markets around the world, even despite the recent dip, suggests the worst is behind us and we are more or less at rock bottom. The million dollar question is how long will remain at the bottom before we see real signs of sustainable recovery,” concluded Mr. Al Wadiya.
The Harbor report is a quarterly report that was first issued in April 2009. The second report will be issued at the end of July and will contain an in-depth analysis, insider views and trends of the real estate industry. The report has already received positive feedback from industry professionals in the region. For more information and to download the report please visit www.harbordubai.com.

-Ends-

About Harbor Real Estate Brokerage:

Harbor Real Estate Brokerage is a fully integrated real estate service provider based in Dubai and part of an established world class group of real estate companies since 2001. With a strong reputation and a veteran team with over 15 years of experience in the industry, Harbor Real Estate provides Real Estate Research Services, Integrated Sales & Marketing Services, Sales and Lead Conversion Management Services and Real Estate Investment Portfolio Management Services.

Having served over 5,000 satisfied customers, Harbor has an extensive clientele base that consists of public and private entities, major developers, private and institutional investors and owner-occupiers..

Harbor Real Estate brokerage has a dedicated team of realtors and consultants who are renowned for their expertise, high level of professionalism and insight into local and international markets. The company is committed to providing its customers world class service and innovative real estate solutions
In 2009, Harbor Real Estate Brokerage established a quarterly real estate report “The Harbor Report”. This candid report covers the latest news, developments and trends in the real estate industry with an in-depth analysis of the latest topics and current affairs.

Road to Recovery

Mohanad Alwadiya, managing director of Harbor Real Estate, ponders what is needed to hasten the recovery of Dubai’s property market. words: Muby Asgher
Although the return of affordable home finance is likely to kickstart the revival of Dubai’s real estate sector, this is only one of many factors affecting the emirate’s property market, says Mohanad Alwadiya, managing director of Harbor Real Estate. “The recovery process is far more complex than just taking the first step,” he says. “To view the revival of real estate in isolation from the overall economic recovery of Dubai, UAE and the rest of the world, would be incorrect. On the macro-economic
level, a recovery in the world economy is fundamental to any recovery in the real estate sector, as virtually all of Dubai’s industries are exposed and vulnerable to
world economic events. The real estate industry is no different.” Mohanad, however, notes that the problems facing the emirate are not unique. “In virtually every economy in the world, credit has tightened, consumption is down, governments are scrambling to shore up the financial sector and people are losing their jobs due to companies restructuring.” Based on the number of transactions, property sales have dropped from around 60% to 75%, says Mohanad, while stressing that demand varies according to property type. “While the government has taken multiple and significant steps to minimise the symptoms of the recession, its actions can only soften the impact. Make no mistake, Dubai is well placed to weather the storm, but no economy can escape its effects,” he says. As many economies start to rebound, so too will Dubai’s, he predicts. “Just as Dubai’s growth was negatively impacted by the global downturn, so too will it benefit from the global recovery, particularly as world trade, tourism and economic development accelerates.