Cluttons in Dubai notes surge in requests for feasibility studies

As a reflection of Dubai's gradually improving real estate market, Cluttons has witnessed a noticeable pick up in feasibility activity and due diligence being undertaken by developers and investors into projects currently on hold or previously cancelled, with the numbers being under close scrutiny once more.

Jonathan Fothergill, director of UAE valuations at Cluttons, says, "Clients are requesting everything from considering the feasibility of the refurbishment of a residential apartment building in Deira to looking at the feasibility of substantially expanding or refurbishing an existing shopping mall."

In recent months, the pick-up in developer activity has been particularly noticeable in Dubai. For example, Nakheel has commenced development works on apartments, villas and retail on the Palm Jumeirah as well as initiating expansion of both Dragonmart and Ibn Battuta malls and the development of community malls.

Other examples include Emaar commencing a new residential project in the Greens whilst considering the expansion of Dubai Mall. Grand Habtoor is also starting work on a major hospitality project on the site of the former Metropolitan Hotel on the Sheikh Zayed Road.

Market feasibility studies typically involve testing geographic locations for a real estate development project, and usually focus on parcels of vacant real estate land or existing properties in need of change of use or refurbishment. Developers often conduct feasibility studies to determine the best location within a jurisdiction and to test alternative land uses for given parcels.

City authorities and financiers often require developers to complete feasibility studies before they will approve a permit application for retail, commercial, industrial, manufacturing, housing, office or mixed-use project. Market feasibility takes into account the importance of the business in the selected area.

Feasibility studies aim to objectively and rationally uncover the strengths and weaknesses of an existing or proposed real estate project, opportunities and threats as presented by the environment, the resources required to ensure completion and ultimately the prospects for success. In its simplest terms, the two criteria to judge feasibility are cost required and value to be attained.

There are a number of parameters for judging the financial viability of a new project: total estimated cost of the project; financing of the project in terms of its capital structure, debt equity ratio and promoter's share of total cost; existing investment by the promoter in any other business; projected cash flow and profitability; analysis in terms of net present value, internal rate of return, profit on cost and payback time.

Steve Morgan, head of Cluttons in Dubai, comments, "Feasibility studies are key to successful investment and development in a maturing property market. Like valuations, consistent and reliable feasibility studies are essential for sound financial decision making, performance analysis, transactions and providing proper development advice."

Morgan goes on to note, "On-going problems in the local real estate market have highlighted that an inability to understand the market value and feasibility of real estate projects can have negative consequences. In particular, we see severe impacts on the market when loans are offered to developers based on credit rating as opposed to market value and feasibility."

Fothergill adds, "In Dubai in particular, we have a legacy of developers and financiers clinging to the misguided belief that supply will generate demand, which has severely impacted the residential and commercial markets. Also evident is that a number of unnecessary projects would never have come to fruition if reliable feasibility studies were undertaken prior to financing. In this manner, feasibility studies play an important role in minimising risk through informing financiers of viability factors. Cluttons in the Middle East encourages international best practice and therefore prudent lending practices."