Dubai, Abu Dhabi to get 356,000 new housing units in five years

DUBAI - Dubai and Abu Dhabi will have a combined total of 356,000 new household units available in next five years, but the projected supply is not expected to exceed demand for the next three years, a survey finds out.



By Issac John, Deputy Business Editor

Published: Sat 15 Mar 2008, 9:23 AM

Last updated: Sun 5 Apr 2015, 1:19 PM

Predicting that there will be 202,000 new households in Abu Dhabi and 154,000 in Dubai over the next five years, the survey estimates that unit supply will be approximately 180,000 units for the three-year period between 2008 and the end of 2010. In 2007, only 30 per cent of planned units actually were delivered, as the industry was hit by several production constraints, says the survey by Al Mal Capital PSC, a UAE Central Bank-regulated investment company.

"Contractors were constrained by an extremely tight labour market compounded by a new labour law that required much of the existing labour force to return home and reapply for residence visas. As these issues have, for the most part, been resolved we should see gradual improvement from contractors meeting delivery schedules," it said.

On the demand side, the survey pointed out that incremental household growth would taper off in 2009 and 2010, before picking up again in 2011 as much of the required personnel for the expected hotel launches and other tourism related projects begins to offset declines from financial and development sector growth. "Slowing growth in terms of new household entrants to Dubai should relieve some pricing pressure in 2009. However, much of that relief will be mitigated by existing pent-up demand through 2010," the survey said.

In Dubai, Al Mal expects cumulative supply to overtake cumulative demand in early 2011. "We can expect actual deliveries to ramp up from an estimated 17,000 units in 2007 and peak at roughly 66,000 units in 2010. In Abu Dhabi, a supply shortage is substantially clearer. Cumulative supply is not expected to match cumulative demand until beyond Al Mal's five-year projections. In fact, we cannot expect a significant ramp up in deliveries until 2011."

According to the survey, the demand side of the equation has clearly been supported by substantial population growth over the last five years. The UAE population has grown at a CAGR (cumulative average growth rate) over 7 per cent since 2002 and is projected to grow at a CAGR of roughly 5 per cent over the next five years.

"However, new households are not the only driver of demand. Affordability must be considered in the demand equation. In fact, price appreciation in the secondary real estate market is driven primarily by affordability ratios rather than population growth."

The survey points out that the biggest impact to demand is the move from renting to owning property. In this case, both the availability and cost of mortgage finance are key drivers of demand. According to data from the UAE government and the IMF, mortgage finance is still at low levels relative to global norms. It currently stands at 5.9 per cent of GDP in the UAE, compared to 130 per cent in the US, 70 per cent in the UK, and even 10 per cent in Mexico.

The survey said at prevailing mortgage rates (7 per cent to 7.5 per cent), a monthly payment (including principle payments) will equal between Dh115 and Dh120 per square metre, compared to Dh98 per square metre cost to rent. "Embedded in the premium to own is not only the principle payment but also additional utility value for aspects such as: predictability of future payments, potential future property appreciation, and general enjoyment from ownership.

Additionally, the combination of declining interest rates and increasing rental charges make the cost/benefit trade-off even more attractive. As the trade-off between renting and owning continues to become more attractive in the UAE, we expect a further enhancement to demand beyond that of new households moving to the UAE."

According to the survey, the improved attractiveness of buying versus renting means that we can anticipate pressure on rental yields over the next few years. Rental costs in the UAE are substantially higher than those other comparable markets, but property prices are substantially lower and mortgage costs are near the global average. This supports the expectation that rental costs should be relatively stable going forward, rental yields should decline, and property prices should appreciate.


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