Understanding the Dubai real estate boom

IIR's well-attended CityScape 2003 conference in Dubai this week not unnaturally focused part of its attention on the formidable real estate boom in its host emirate. Speakers pointed to the lack of market data for analysis from official sources, but several offered some interesting data from their own companies.

Elaine Jones of Asteco property produced the astounding figure that some 85,000 housing units are either planned or under construction in the New Dubai. Meanwhile, Prince Alwaleed's Hotel Investment Group's CEO Sarmad Zok said that Dubai was set to expand its hotel room count from 15,000 to 75,000.

Can this new capacity be absorbed? Mr. Zok had a clear answer, 'Yes, the Dubai market has a dynamic of its own. The way the Government is creating new knowledge-based cities is creating the demand for this supply.

'In the hospitality sector Dubai has been in the same phase of the business cycle - the growth phase - for the past 10 years, and I do not see that changing'.

Ms. Jones was also very optimistic about the outlook, and noted a shortage of property that was actually built at the moment. She highlighted the successful sell-out of the Hattan villas next to the Emirates Golf Course, and the recent payment of a $136,000 premium on a re-sale.

So is Dubai real estate feeding off a special 'dynamic' that will allow what one speaker called a 'fantastic oversupply' of property to be speedily absorbed by the local market? It is certainly possible that the expected rise in population will take up the new property.

There is another reason to be optimistic, which has to do with the supply of money. At present the Dubai mortgage market is in its infancy, although this is set to change. HSBC, for example, has just entered the mortgage market for Nakheel property with an interest of 5%, compared with 6.5% on offer from Amlak, the mortgage finance arm of Emaar Properties.

Cheaper mortgages make homes more affordable, although the net effect is usually to increase property prices to compensate. Now if property prices start to rise then more people will want to buy because they will be afraid of missing the chance to buy at lower prices, and the people who bought will feel very happy and go out and buy more property.

This is called an upward spiral. As Dubai property is already very reasonably priced by any international standard, and offers a rental yield of 8-9%, the entry level today may well prove to have been the low point in the property cycle.

The important point here is that the Dubai property market is going through a systemic transformation with the liberalization of the market and sale to foreigners. Provided that rapid population expansion continues - and the city has seen its population grow by 24% in the past four years and was the fastest growing city in the world along with Las Vegas and Dublin in the 1990s - then the 'fantastic oversupply' of property can be absorbed.

Indeed, with a greater supply of mortgage finance it would be logical for property prices to rise and rental yields to fall to more normal international levels. That would be another way for the market to calm down and mature into a highly efficient, liquid real estate market that would enrich residents and become another great business asset for Dubai.

Thus contrary to some expectations the New Dubai property market may prove surprisingly resilient and deliver capital returns to investors more quickly than even the most optimistic might imagine.