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UAE's property sector headed for a soft landing

Babu Das Augustine (Assistant Editor)
Filed on January 27, 2007

DUBAI — Recent assessments based on market research, economic forecast and analysis of trends in population dynamics of the UAE by organisations such as Deutsche Bank, Shuaa Capital, Colliers International and EFG-Hermes, suggest that the UAE's property sector is headed for a correction.

However most analysts agree that the market will experience a soft landing rather than a crash or a severe correction that happened in the case of equity market last year.

The UAE real estate market witnessed extraordinary growth in investments and consequently in property supply over the past five years. It all began with Dubai initiating a drive to invest and encourage private participation in the development of its real estate sector. To date, the supply of properties whether in the residential, commercial, hospitality or retail segments of Dubai and Abu Dhabi alike, has yet to catch up with the growing demand. The result has been spiralling prices and rental rates for properties on the market and those in the pipeline.

With a large number of deliveries lined up during the next two years, the market fears a price correction. “We expect a minimum of 125,000 units to hit the Dubai market alone between 2007 and 2009, of which the majority is due in 2007 and 2008,” said a recent Shuaa Capital report.

According to estimates by Colliers International and Shuaa, Dubai will see a staggering 71,800 new units ready for hand-over in 2007 and a further 43,000 units in 2008. Analysts from EFG-Hermes agree. The bulk of units to be delivered in the UAE property market will come on stream in 2007. As a result (of the crowding of deliveries), the large number of off-plan buyers who may face funding challenges are more likely to sell their properties than to risk owning empty housing units in a soft market.

Analysts believe that the impact’s level of intensity on the various individual residential segments will be distinct. According to Shuaa's estimates the segment to be most severely affected will be that of high-end apartment units targeting the high-income population. “By 2009, we estimate there will be a total of 77,000 units targeting high-income occupants, while the projected total demand for these units is just 36,100 for the same year. On that basis, we expect the occupancy level in the high-end apartment segment to fall below 50 per cent and thus make investor objectives increasingly difficult to achieve, as they typically require average annual occupancy levels in excess of 75 per cent.” In contrast, the mid-end apartment segment is expected to maintain attractive occupancy levels, exceeding 85 per cent in 2009. Looking forward, many of the stronger investment properties will continue to enjoy occupier demand and healthy investment returns. However, the repercussions are evident; there is a considerable risk of oversupply within the high-end apartment unit segment.

While there is a consensus that Dubai is likely to face oversupply in the near future, Abu Dhabi is expected to continue suffering from a supply shortage at least up to 2009. The current occupancy levels in Abu Dhabi city are extremely high. Rents in Abu Dhabi city, have increased by an estimated 25 per cent annually since 2004. The first large scale deliveries in Abu Dhabi are expected to take place in 2008 when 11,000 units are expected to be handed over. In 2009 supply is estimated to be a remarkable 150,000 units assuming no delays in construction. As such demand for them is likely to be high, yet analysts expect that these units are predominantly targeting the high income bracket and hence may lead to a situation of over supply in that particular segment, while the mid and lower income clientele will remain under-supplied.

Although a softening of the market is inevitable, asset values are likely to resist an initial downward correction, as cash-rich landlords may simply rebuff market forces, however downward price pressure is prone to ultimately conquer this resistance.

A recent report by Deutsche Bank also does not subscribe to the crash theory. According to the report, the supply of new residential space in 2007 is clearly in excess of the natural level of demand generated by population growth, which they expect to average 4,500 units per quarter. This is accentuated further in 2008, during which an average excess of 20,000 units find their way to the market per quarter. Analysts said this isn't sufficient evidence for arguing in favour of a property market crash (or even a sever correction).

Deutsche Bank analysts believe that despite the magnitude of new supply in 2007 and 2008, latent demand is sufficient to absorb new supply, given necessary price adjustments and legal developments.

Residential unit price adjustments are attributable to two factors; capital gains, and inflation. According to the Economist Intelligence Unit, the UAE inflation rate was around 12.5 per cent in 2005 and 10 per cent in 2006. The surge in aggregate demand has placed upward pressure on prices, particularly in real estate. Given the current supply and demand dynamics, in the event that inflationary pressures cool off over the medium term, analysts expect the supply-demand gap would narrow substantially, reducing oversupply fears. However, current property purchases remain subject to the constraints of an underdeveloped mortgage industry. The domestic mortgage finance industry remains under-developed relative to the overall economic backdrop.

The overall value of outstanding mortgage loans in 2005 reached Dh4 billion in 2005, whereas the figure is upwards of Dh 11-12 billion in 2006; a threefold year on year growth.

Mortgage lending represented less than 2 per cent of GDP in 2005, as compared to Moody’s estimates that place the ratio at 15-30 per cent on an average across emerging markets, and 50 per cent in developed markets.


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