Oversupply in Dubai real estate to 'take years' to be absorbed
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Oversupply in Dubai real estate to 'take years' to be absorbed

Oversupply in Dubai real estate to 'take years' to be absorbed

Dubai's real estate sector has taken a high-profile battering since the credit crunch hit the emirate. Prices continue to crumble as more supply comes online, and with 25,000 new residential units alone likely to be released onto the Dubai property market in 2011, how long will it be before the oversupply problem is solved?

    According to a report published this week by real estate consultancy Jones Lang LaSalle (JLL), the supply of new units in Dubai in 2011 is likely to drop 32% from 2010 figures. In an effort to manage the emirate's oversaturated property market, developers will limit the supply of residential and retail space, as well as new hotels.

    JLL said that some 25,000 residential units are likely to be released onto the Dubai property market in 2011, down 31% from new supply in 2010. Meanwhile, new retail space will reach 140,000 sq m – down 31.7% on the previous year – and 3,400 new hotel rooms will become available, around 55% less than the 7,700 delivered in 2010.

    "The oversupply problem varies across the different sectors of the market, from office space where it is a significant issue, down to industrial space where there is actually no oversupply," says Craig Plumb, Head of Research at JLL Mena.

    "The office market will not see its oversupply absorbed in the near future. It's a situation that we expect will go on for another four or five years at least, and there will be some office buildings that will perhaps never achieve satisfactory levels of occupancy."

    Continued drop in Dubai residential rents

    At the same time, residential rents in some of Dubai's most popular areas have dropped by around 30% in the past 12 months, according to data published this week by Dubai's Real Estate Regulatory Agency (Rera). The authority measures rental prices across the emirate, compiling a Rental Index designed to help landlords and tenants to negotiate fair contracts. In its latest report, it confirmed that apartment rents in Dubai Marina, Palm Jumeirah, Discovery Gardens, and Jumeirah Beach Residences had all seen significant declines over the last 12 months.

    Moreover, these declines look set to continue for a while yet - industry experts have long warned that Dubai faces a long wait before its surplus real estate stock is absorbed. Mohamed Alabbar, chairman of Burj Khalifa developer Emaar Properties, said in November 2010 that it would take at least 20 months for the city to absorb its surplus stock; a month later Nakheel CEO Chris O'Donnell said the process could take as long as five years.

    "In the residential market there is an increasing amount of new supply entering the market, and while that's a good thing for tenants and is pushing down rents, you're probably looking at 20% to 25% of the residential supply being vacant at the moment," says Plumb.

    "You would expect the residential oversupply to be absorbed over the medium term, between two to three years. It won't be absorbed over the next six months, but it won't sit there vacant forever, like the office market will."

    The drop in supply of new office and residential space can be attributed to a number of factors, including tighter government control, the cancellation of projects, and decreasing liquidity. It is also a result of developers rephrasing project delivery schedules, in a bid to keep a lid on bills for half-empty buildings.

    Developers rephase delivery estimates

    "There are set payments that don't need to be made until developers get final approvals: connecting to power, connecting to sewerage, and so on," explains Plumb. "So by avoiding finishing the building, they avoid having to make utility payments and things like that. By keeping finished properties from the market, they are keeping their own costs down.

    "What you'll find is that where there is a big project, a multi-tower project, the developers aren't releasing all the towers at once, but staggering the release dates."

    A significant portion of the units still due to come onstream in 2011 and 2012, are in buildings where construction began before the crisis and continued because it proved cheaper for the developer to go on, than cancel and be forced to repay money to investors. Nevertheless, according to Jad Abbas, a construction analyst at investment bank EFG-Hermes, those same developers won't be able to delay delivery forever, as at some point they will be forced to come to market.

    "The yield will be less than the developer might have budgeted for when it came up with the project, but with developers seeking to get the final cash payment on delivery while also avoiding giving money back to investors, I think that a lot of that supply will be coming online within the next 12 to 18 months," he says.

    Abu Dhabi sees ongoing development pipeline

    Just down the road in Abu Dhabi, the opposite is occurring as developers rush to satisfy the UAE capital's undersupplied residential market. According to JLL, the emirate will witness a 108% surge in the number of new units delivered in 2011, compared to 2010. Some 25,000 new villas and apartments are due to come online, up from the 5,600 units released last year, while the retail market will see 331,000 sq m of new space made available. Around 3,000 new hotel rooms will be made available, the report said.

    However at EFG-Hermes, while Abbas does admit that contractors are benefitting from the ongoing project pipeline in Abu Dhabi, not to mention greater liquidity due in part to government money trickling down into the economy, he takes a more bearish view on the prospects for developers in the UAE capital.

    "There may be a fundamental undersupply in some segments but I'd exclude the luxury segment from that," he says. "A lot of high-end properties are coming on the market with the demand for other segments being replacement demand – people moving out of partitioned villas into proper apartments.

    "Rather than any fundamental demand to support the oncoming supply, a lot of it is replacement demand and so we could see oversupply in some segments of the real estate market, namely the higher end," he continues. "We have seen capital yields decrease in the last 12 months and I think we will continue to see that slide; sales appetite is still very weak and I don't expect it to develop any time soon."
    AMEinfo Staff

    AMEinfo staff members report business news and views from across the Middle East and North Africa region, and analyse global events impacting the region today.

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