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Signs of cracks for Dubai’s property sector in 2020, before a 2021 reprieve

The tell-tell signs of stress are present in Dubai’s building and construction sector affecting property sales and inflating material prices, prompting the largest developed Emaar to halt supply

Emaar Properties faces a quandary heading into 2021, according to Morgan Stanley Home prices in Dubai slumped by 30% in the last six years Building material prices in the local market are up by 10-20%

The tell-tell signs of stress are present in Dubai’s building and construction sector affecting property sales and inflating material prices, prompting the largest developed Emaar to halt supply. 

But the Emirate’s built-in elasticity is already pointing to a recovery in 2021 with a good end of November for the sector.  

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Property glut

Property prices in Dubai are reasonably priced and demand is picking up, according to Mohamed Alabbar, founder of Emaar Properties, Dubai’s largest listed developer.

“Real estate business is a cyclical business. We have an oversupply, [but] Dubai is reasonably priced. We are also going through what the world is experiencing. Good demand continues from India, Saudi Arabia, Russia, and China,” Alabbar said during the Future Digital Economy Summit at Gitex Technology Week.

“We as a group have stopped supply,” he said during the conference, adding that demand was improving but the market remained oversupplied.

Alabbar said pre-Covid-19 sales were about $15 million a day and it crashed during the pandemic. But sales have now recovered to $12 million a day.

Emaar Properties faces a quandary heading into 2021, according to Morgan Stanley.

The developer can stop new projects to relieve property over-supply but risk the company losing market share. Resuming means strengthening market share while saturating the market even more.

Home prices in Dubai slumped by 30% in the last six years.

Rental rates reached an all-time low in Dubai last quarter, while construction activity picked up, according to Jones Lang Lasalle.

Dubai has recorded a total of $789.5 mn in real estate and property transactions during the first week of November 2020, ending 5 November.

The total number of transactions reached 1,241 in the first week of November 2020, according to figures released by the Department of Land and Property in Dubai.

ResearchAndMarkets.com says that on the back of an already struggling market and the COVID-19 outbreak, coupled with low oil prices, construction output in the UAE is expected to contract by 4.8% in 2020, but rebound 3.1% in 2021. 

“New project opportunities are expected to be minimal in the coming quarters, as the government is consolidating its widening fiscal debt, and dealing with COVID-19-related repercussions,” the research said. 

Read: Property investing and home buying interest in UAE rising

Construction costs rising 

UAE’s construction costs are rising.  

Building material prices in the local market are up by 10-20%, including on steel, market sources told GulfNews. Cement prices are unaffected because production capacity within the UAE is high. 

Industry sources worry that the coming weeks will only add to their costs if the shipping situation does not improve. “From China, freight has gone from $1,000 to $4,000 on a 40-foot container, and for India, rates have gone from $300 to $1,200 – that’s nearly 400% since September,” Anis Sajan, Managing Director at building material supplier Danube, told the daily.

“Rates from Europe are now 2,000 Euros from originally 1,200 as shipping companies want to make up for the huge loses they had borne earlier this year because of the COVID-19 disruptions,” Sajan added.

Until August, imports into the UAE were available at $1,000 for a 40-foot container. It shot up to $2,000 during August and went up to $3,000 during September-October. Recently, transactions were at or around the $4,000 mark.  

Construction disputes also rising

The Dubai International Finance Centre Arbitration Institute and the London Court of International Arbitration’s Arbitration Centre saw cases rise for the fifth year in a row as construction-related disputes continue to predominate.

The DIFC-LCIA Arbitration Centre posted an 18% increase in cases in 2019 to 80, according to its annual report. The value of claims also increased, doubling to $1.25 bn from $600 m in 2018.

The majority of disputes (36%) were focused on the construction and infrastructure sector, which has driven law firm lateral hire activity across the UAE, including in Dubai. Property disputes made up almost 15% of the total.

A look at 2019 Dubai performance

According to the “Real Estate Sector Performance 2020” report issued by the Dubai Land Department, DLD, the value of Dubai’s GDP reached $111 bn in 2019 as compared to $106 bn in 2018.

The contribution of the real estate sector to Dubai’s GDP reached 7.2% in 2019, and the sector achieved an added value of more than $8 bn, a 3.3% increase over 2018.

The number of real estate transactions grew 8% in 2019 with over 57,000 real estate transactions, compared to over 52,000 in 2018.

The value of real estate transactions reached approximately $61.6 bn, 2.1% more than 2018.

The value of sales reached $22 bn in 2019, compared to $21 bn in 2018  (+5%).  

The number of real estate investments in 2019 exceeded 47,000 investments, with a growth rate of 18% while the number of real estate investors in 2019 exceeded 34,000 real estate investors, 14% more than 2018. 

Dubai Marina ranked first in terms of real estate investment quantity in 2019 with 3,920 investments, followed by Business Bay with 3,508.

Investors from India topped the list in terms of nationalities with 5,426, followed by the UAE with 5,172, and then KSA with 2,198.

Over 17,000 housing units were added to the real estate sector in 2019 varying between units, villas, complexes, buildings and residential lands with a total area of approximately 4 million sqms, compared to 10,996 residential properties in 2018 with a total area of approximately 1 million sqms. 

2019 also witnessed the addition of 871 new commercial establishments to the real estate market with a total area of 243,529 sqms, whereas 2018 witnessed the addition of 238 commercial establishments with a total area of 39,262 sqms.