Is Dubai building too much property?

The rejoinder is that property prices and local rentals will therefore continue upwards, with the possibility of an extension of the 15 per cent cap on rentals for 2007.

With all the manifest delays to real estate projects and the flow of new expatriates through the Dubai International Airport, it is clear that supply is not keeping up with demand. If this were not true then market forces would be driving rents and house prices down, and the reverse is the case.

However, the long-term view of supply and demand is a more controversial area of debate. What we shall term the optimistic scenario was explained well in the 'Out to Lunch' column of the Gulf Business magazine's latest issue by Deyaar CEO Zack Shahin.

300,000 units

He noted that the Dubai real estate market is set to deliver around 300,000 upscale units over the next two-and-a-half to four years.

His estimate was that 60-70,000 new people arrive in Dubai a month of which 10 per cent want upscale accommodation. This equated to 216,000 needing such units but he argued that allowance had to be made for an increase in the monthly figure over the next four years.

But how much new accommodation has Dubai absorbed over the past two years? Well, Emaar tells us it has delivered 14,000 units to date; Nakheel has delivered around 2,000 Jumeirah Lakes villas and Damac several hundred units.

Agents are now keenly watching to see how the release of the 6,000 units of the Jumeirah Beach Residence and the delivery of villas on The Palm Jumeriah will be received over the next six months. And given the current strong demand situation it looks a no-brainer, this will work out just fine.

But the total numbers of units delivered by then will still be a mere fraction of the 300,000 units mentioned above. To put this into some perspective, 300,000 units would be enough to house everybody working in The City of London and their dependents.

Long-term thinking

Perhaps the CEO of Deyaar will be right. Deyaar is part of the Dubai Islamic Bank and has been active in the local property market a lot longer than many players. But these numbers do not leave much room for error in demand forecasting, and are dependent on a continuation of the Dubai boom for another four years.

On the other hand, property should always be seen as a long-term investment, and rental money is money thrown away that could have been invested in a property. Indeed, within the typical 15-25 year property finance time-horizon markets are bound to have periods of weakness and you just have to ride them out.

But there is a property cycle in all markets and investors should take this into their calculations, particularly if they are borrowing heavily in the anticipation of short-term capital again. Amlak Finance introduced a 1.5 per cent early redemption penalty for early mortgage repayments in May which ought to remind some buyers of the long-term nature of their commitment.