DCCI population figures highlight demand shortfall

The Dubai Chamber of Commerce's estimate is that the population of Dubai will rise from 1,413,000 to 1,845,000 between 2006 and 2010. This results in the need to house 432,000 more residents.

However, income data gathered by the Dubai Statistics Department points to a population profile that requires mainly labor camp or low-income accommodation. Indeed, it is conservative to take the generally accepted level of a 70:30 division between the working class and mid-to-higher income segment.

If we then take these 129,600 expected new higher income residents - a spectacular increase in this section of the population by any global standard - and divide by 2.5 per housing unit, we arrive with an annual demand for 13,000 units.

Supply forecasts

Now this demand estimate compares with the EFG Hermes forecast that 69,000 units are to be delivered in 2007 and 139,000 in 2008. One local building materials company has its own private forecast of 50,000 units in each year with around half destined to be second homes.

Even taking this most pessimistic forecast of the supply chain it does look as though Dubai is overbuilding for the likely future demand. And it has to be said that the DCCI population forecast is a projection of current growth and gives no room for a slowdown.

So it would appear that the people who say Dubai has got carried away and is building too much real estate may well be proved right.

The acid test comes this summer with the delivery of major developments like the Jumeirah Beach Residence, The Palm Jumeirah and the International City. If it is shown that these developments are sufficient to take up much of the excess demand in the marketplace, then many developers will have to go back to their calculators and re-examine their business plans.

Demand essential

For demand is fundamental to the supply of real estate. Developments require a large upfront investment and will only earn a return if a buyer or tenant can be found. If supply exceeds demand then the market mechanism will lower prices for property and rents until it becomes uneconomic to add to the supply.

Lower property prices and rentals, for both residential and commercial property would be bad news for owners, landlords and developers. But lower property prices would be a major boost to the development of Dubai as a regional business hub, attracting new companies to a lower cost location.

Indeed, having a property cycle with a downside as well as an upside is a part of a maturing economy, and may provide some interesting opportunities for those brave enough to invest when the going looks toughest.