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Dubai real estate still in the dumps

Posted in Middle East Business by thomthumb84 on August 27, 2009
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Certainly the short term news is not promising. Two recent reports released by CB Richard Ellis and Colliers International appeared to promise only the grimmest of statistics with the market placed at a year-on-year decline of 48 percent between Q2 2008 and Q2 2009, with a decline in the overall House Price Index of 9% between Q1 2009 and Q2 2009.

The news from the ground was no better. Elysian Real Estate, a Dubai-based brokerage firm, posted a 60 per cent decline in sales commissioning earnings after a 50 per cent drop in sales. “We were making 20 to 40 sales deals a month last year. Now we are doing about 10 to 20 in a month,” said Robert Macnair, Sales Director of Elysian Real Estate. Harbour Real Estate said that their profits have dipped 38% during the period consisting of the second half of 2008 and the first half of 2009.

“Our revenues dropped approximately 40 per cent over the past 12 months. Sales volumes have dropped approximately 70 per cent,” said Mohanad Alwadiya, Managing Director of Harbor Real Estate.

Even Dubai Holding, part of the business empire of theEmirate’s ruler Mohammed bin Rashid Al Maktoum, is struggling. In July, Moody’s Investors Service downgraded its rating for Dubai Holding Commercial Operations Group to A3 from A2 and placed it on review for a possible further downgrade citing ongoing concerns over the Emirate’s real estate sector. The company has already consolidated its operations to cope with a downturn in the economy. It also intends to merge its troubled real estate units with Emaar Properties PJSC and will pare down its business to concentrate on property, business parks, hospitality and investment.

Foreign dependence

Much of the blame for this rapid decline comes from Dubai’s dependence upon foreign investment, with many of the homes in the city-state bought as investment properties by middle class and wealthy foreigners.

“The key factor that will really dominate Dubai’s recovery will be the global economy, because we are really integrated into that,” Ian Albert, Colliers regional director. “Dubai’s recovery as a business hub will depend on what’s going to happen in Europe and the U.S.” he said. Colliers also cites job concerns among expatriate workers. Nine out of ten residents within Dubai are foreigners whose residency permits are contingent on continued employment in the emirate.

Many builders have responded to the  downturn by cancelling or delaying billions of dollars worth of property projects, putting thousands of employees out of work. Analysts at Egyptian bank EFG Hermes predict Dubai’s population will shrink by 17 percent this year as foreign workers lose their jobs and head home.

But putting these larger questions of international dependency on one side Dubai still has more local problems to confront. Some of the decline can be attributed to a problem shared with home owners in the US or Europe – namely, the availability of financing as a result of the financial meltdown.

Additionally the cost and specificity of entry into the market remains restricted – decreasing the choices for purchasers. In addition to this many developers, who have failed to clarify the ongoing positions of their developments through outright cancellation or confirmed delivery dates, have created an ongoing lack of confidence in many developments and an increase in perceived risks associated with real estate investment.

Light at the end of the tunnel?

The good news is that there does appear to be some light at the end of the tunnel. Some suggest that the real estate market appears to be slowly perking up. There is even some expectation that it will not only stabilise, but rebound, by 2011. A new report from international property consultants Jones Lang LaSalle shows that the volume of transactions has remained consistent in the first half of 2009 compared with a 58 percent fall between the second quarter of 2008 and the same period in 2009.

‘The stabilisation of transactional volumes is an important indicator which reflects improved confidence among investors and the market is beginning to stabilise albeit at significantly lower levels of pricing than  those seen earlier in the year,’ explained Craig Plumb, head of research at Jones Lang LaSalle MENA division.

The report also pointed to a narrowing gap between asking and achieved prices, indicating that vendors are becoming more realistic in terms of the price they are asking, and buyers are prepared to invest. As if to show that all is not lost, some areas have found themselves resilient throughout the crisis. Palm Jumeirah is enjoying a particularly healthy level of average prices going up from Dh1.9mn last December to Dh2.3mn.

A report by the property management company Asteco last month said the prices of villas and apartments on the Palm have risen respectively by 20 percent and 7.0 percent in the second quarter, compared to the first quarter, when they tumbled up to 65 and 53 percent respectively from peak levels.

The Dubai – based real estate agent, said: “We saw a steady stream of bargain hunters in the market snapping up the deals on offer from highly motivated sellers panicked by the downturn and subsequent  drop in prices. However, these properties appear to have dried up and the market has settled down.” “We now have an interesting situation developing on the island that we have not seen elsewhere in Dubai since the downturn – demand is outstripping supply.”

Long hard road ahead

Having said this it is important to remember that Palm Jumeirah is the exception to the rule. Very few share such a positive outlook for the future. In a recent interview Ian Albert, Regional Director of Colliers International, said: “The magnitude of the decline that we saw in the first quarter was not, and is now very unlikely to be, repeated.”

“In the coming months the market will be searching for further evidence of market stabilisation as we draw nearer to the bottom of market prices.” he added, that he was “cautiously optimistic” about the third quarter. This cautious forecast would seem to reiterate that put forward by CBRE. They believe that the high volume of new supply across all property sectors, coupled with the continuation of the economic downturn will result in a worsening picture through H2 2009. Lease rates for residential properties are likely to see a further drop.

However this decline will be marginal compared to the drop since H1 2009. The outlook for the final quarters of 2009 remains negative, but more importantly, forecasted levels of decline are notably less severe than those already experienced during the first half of the year. A period of minimal negative growth over the next 6 months could result in some stability and the market bottom called before year end.

Saud Masud, a realestate analyst at UBS, said a decelerating price fall does not necessarily point to market recovery. “The underlying trends are not supportive of a recovery in the market anytime soon,” he said. 

“It would be a terrible mistake to believe that we are out of the woods,” said Jeremy Mayhew-Sanders, head of investments and development at Sherwoods Property. He added that some prices had improved due to an artificial shortage of units on offer in some areas, as low prices had pushed some owners to pull their units from the market. Landmark Advisory, a Dubai – based consulting firm, has highlighted this apparent distortion in current figures.

Charles Neil, Chief Executive Officer of Landmark, said: “The large amount of rents ending during the same period ultimately creates a  temporary supply distortion following a period of particularly strong demand.” “Many landlords have removed inventory from the market to avoid renting out at current market rates, while others may be out of town during the summer period and consequently unavailable.” With such an unpredictable environment remaining within the market few can say when things will look up. However, it is worth noting that while there is doubt on this front there is no question that a recovery is inevitable at some point in the future. Projects such as Palm Jumeirah only prove this to be the case. Until then, however, the real estate market must hold on for dear life.

Published in Issue 5, September 2009, of The Falcon (An Egyptian Gulf Bank Publication)


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