Middle East Investment - Hot property in the UAE

While the Dubai property market is continuing to flourish, some are predicting an impending downturn. So what’s the next investment hot spot in the UAE?.

The United Arab Emirates (UAE) has long been a magnet for the discerning international investor. To date, the property market in Dubai has been the centre of this interest, as the city continues to grow at an unprecedented rate. But other emirates are rapidly emerging as potential targets for development, and progress is particularly marked in Ras Al-Khaimah.

With Dubai’s population dramatically increasing to over 1.5 million in 2007 a growing demand for investment property and living accommodation has been created. More than 800 people move to the city every day. Rentals and land prices are therefore continually being forced upwards, doubling and tripling the cost of living in record time. The population of Dubai is now set to increase to 1.9 million in 2010 and exceed five million by 2020.

In addition, some seven million tourists visited the Emirates in 2007. Ten million are expected by 2010 and 15 million by 2015 – further evidence that the demand for residential property and rental accommodation will remain strong.

A programme of infrastructural investment has been initiated to accommodate the population and holiday boom. A £3.35 billion metro project, due for partial completion in 2009, aims to alleviate traffic levels and support the growing numbers.
The Emirates airline is seeking to expand its capacity by more than 20 per cent during 2008-2009 and approximately a further 25 per cent the following year.

Average residential property rentals in Dubai have increased in price by nearly 50 per cent in the past year, with rentals in the northern emirates such as Ras Al-Khaimah likely to follow a similar pattern.

Gareth Milton, Operations Manager with Property Showrooms, says, “Prices in Dubai may level out and growth is likely to slow due to the knock-on effects of the current worldwide economic climate, but the best locations are still likely to maintain their growth because Dubai is now an established global business hub. Waterfront properties and business districts in particular are more likely to perform for investors in the long term.

“New residency visas are still being issued at a massive rate, up until recently around one thousand a day, mainly for people moving there to start working in the corporate sector. As long as that kind of demand continues, Dubai will still see future growth, though at a sustainable rate.”

In August 2008 the Dubai Department of Economic Development (DED) and Dubai's Real Estate Regulatory Agency (Rera) signed a partnership agreement to enhance the quality of support services offered to real estate investors and customers. The agreement states that Rera will use the licence and business registration system applied by the DED for issuing licences related to real estate activities. This is aimed at easing licensing procedures related to real estate activities and enhancing the overall performance of Dubai's real estate sector.

EFG Hermes is one of the leading Arabian banks in the Middle East. The bank published a report in September 2008 predicting that the Dubai real estate sector will remain buoyant.
“The Dubai real estate market has a unique make-up, origin and competitive positioning, and the dynamics that govern it are distinct,” notes the report. “The real estate sector has matured significantly since it was opened to foreign ownership in 2002.”

EFG Hermes state this is reflected in:
i) the increasing degree of segmentation
ii) the deepening of the secondary market
iii) the importance of location, quality and the developer’s reputation
iv) the greater attention being paid to project execution, infrastructure build-out, legal improvements and overall standards.

Current market dynamics

The bank identifies that the trend of continued price appreciation of 2008 has stemmed from:
i) continuing supply delays
ii) deepening demand and liquidity, spurred by lower interest and mortgage rates
iii) limited relief from construction cost inflation
iv) greater confidence in the market following recent legal improvements.

Delays in supply have persisted for four years, with delivered supply falling short of expected supply. These delays have continued due to finite contractor capacity, a shortage of building materials and infrastructure inadequacies.

Demand for real estate in Dubai also remains strong on the back of end-users looking to buy rather than rent and the wider use of mortgages and greater liquidity.

Construction cost inflation has run at an average of 15-20% for a second year due to the significant demand for construction services, the limited number of large qualified contractors and capacity constraints - building materials and labour.
Finally, Dubai unveiled a series of new laws in 2008 that included the mortgage law, the off-plan sales registration law and a number of by-laws. In this way, the emirate has taken a pioneering role by ensuring that it establishes best practices to help govern the sector.

Dubai Property Prices may begin to fall in 2009

The peak year of supply in the Dubai market is anticipated to be 2009. But with 70,000 units expected to come on stream, it is now more loaded than before, with half of its supply consisting of spillovers from 2007 and 2008. Given this large release of supply, EFG Hermes maintains the expectation that prices will peak in the first half of 2009 before starting to decline in the second half, with a cumulative decline of 15-20% by 2011. The supply of new units remains a key determinant of the timing of a potential correction, and the assumptions and estimates involve a strong degree of subjectivity.

Dubai market segments expected to perform differently

Given the increasing segmentation of the Dubai market, the bank expects that the price correction will affect various segments differently. For instance, a sizeable proportion of the supply coming on stream over the next five years is skewed towards high-end apartments, while demand is skewed towards affordable housing. This creates a disconnect between what people (end-users) want to buy and what is available for purchase, and as a result, the bank believes the high-end segment is likely to experience the full extent of a price correction. On the other hand, because villas make up only 15% of total supply, the bank expects that they will remain highly coveted.

Moreover, EFG Hermes expects the importance of location to rise, with projects in the existing downtown core i.e. Central Dubai, likely to hold on to their value. The land area within this segment is geographically constrained and the expected supply of new residential units will make up only ten per cent of total supply, lending it an exclusive nature. New and Outer New Dubai, which consist of a multitude of new projects and together account for an estimated 60% of total supply, are more likely to have an oversupply, with the effect even greater if demand turns out to be weaker than expected.

Dubai Property Investment - Upside risks

The move towards better professional standards and a comprehensive legal framework to govern the various aspects of the property market should help to provide greater transparency and clarity. This should encourage more end-users to enter the market. Dubai has proved its ability to package and position itself as a destination of choice. If it continues to do so, and if the flow of new businesses and thus immigrants to the emirate continues uninterrupted, the potential for demand growth will continue in the long term.

Dubai Property Investment - Downside risks
An extension of the recent negative sentiment, a transfer of liquidity from the real estate to the equity markets or a reduction in foreign demand could accelerate the pace and timing of a price correction. Potential changes to the freehold visa framework and legislation geared towards reducing the amount of speculation may also slow the market, and in a worst-case scenario, short-term negativity may pervade the market as a whole. Also, as average selling prices and market prices reach new heights, potential buyers are coming to view property across Dubai as less affordable, a situation that could potentially deter Dubai from its longer-term goal of becoming a more end-user driven market.

For expatriates relocating to Dubai the property market presents a different perspective, as renting is the norm.

Nadia Hussain is International Sales Manager with LIH Group/Landmark International in London, and has had extensive dealings in the Middle East/North Africa (MENA) region, with a particular focus on Dubai.

“The main disadvantage of renting is the extremely high cost, with accommodation considerably more expensive than the London rental market. For example, a one bedroom apartment near the beach with only a partial sea view could easily cost £18,000 a year to rent. Annual rental on some of the larger and more palatial residences, such as those on the Emirates Hill, can cost as much as £176,000 which clearly puts them out of the range of most people’s budget. However the cheaper housing which is slightly away from the beach can be as little as £7,000 for studios and £11,000 for one bedroom flats in International City.” 
 
On the more positive side, there is a rent cap. Rent cannot be increased during the second year and a subsequent cap of five per cent applies to the third year. As the law currently stands, considerable protection is accorded to the tenant, with the landlord required to give 6-12 months notice that a property should be vacated. A tenant cannot be simply told to leave on the day the tenancy agreement expires. Landlords must give tenants notice, unless they can establish that they require the property for their own use.
 
 “There are now a number of well-established and reputable firms operating in the rental market,” she observes. “Contract and tenancy agreements are drawn up just as they are here in the UK and are subject to the jurisdiction of the federal laws of the UAE.”

Property hotspot
Ras Al-Khaimah – the new emirate on the block – is widely tipped as the next property hot spot in the UAE. Those who failed to invest in Dubai’s ‘original’ Palm five years ago will understand the phrase “he who hesitates is lost.” Properties on Palm Jumeirah have skyrocketed in value, up to 300% apiece, after being sold and resold on average four times each before even being built. A lucrative boat to have missed.  However, there is a second chance, and that chance is Ras Al-Khaimah – or RAK to the locals.

A 45-minute drive from Dubai, this 1,700km² emirate is more attractive, more verdant, more mountainous and importantly, more affordable than its big brother. Construction materials are sourced locally. More than 75% of the cement produced in the UAE comes from RAK, which keeps property prices reassuringly low, although not for long.  As Bebhinn Kelly of the Oxford Business Group said last year, “there seems to be nothing standing in the way of RAK's ambitions to become the next major development story in the Gulf.”

Adam Godwin, Marketing Director for Dream Homes WorldWide, comments, “RAK is a growing tourist destination as well as a free zone business hub and the property sector is gathering pace. Developments in the area have already seen their prices increasing by 20% annually for the past two years. Those who invest in multi-faceted resorts such as La Hoya Bay Residence will have several options for realising a return on their investment. These could range from ‘flipping’ before completion in the same vein as the Palm to renting to holidaymakers or to Dubai businessmen who prefer to commute to work from tranquil RAK. La Hoya Bay Residence’s developer is demonstrating his faith in the market by offering an 8% guaranteed rental income for the first year. Capital growth of between 100% and 200% over the next five years is not an unreasonable expectation.”

La Hoya Bay Residence itself occupies prime marina-front real estate and residents can enjoy dozens of on-site facilities to include three temperature controlled swimming pools, a health club, Spa, private beaches, tennis club, ten waterfront restaurants, a nightclub, retail outlets and a medical centre. Al Marjan Island’s golf course, yacht club and business village will also be within reach. Accessibility is currently via Dubai’s International Airport. However, Ras Al-Khaimah International Airport is rapidly expanding as part of a five year $410 million plan and will be receiving many international carriers in the near future.

Prices at La Hoya Bay Residence start from £61,760 for a studio, £96,633 for a one bedroom and £170,774 for a two bedroom apartment. Purchasers can participate for as little as 30% with a 70% finance option available upon completion scheduled for December 2009.  Property is available on a freehold basis and tax is a heavenly 0% - no income, capital gains or corporation tax. A rental income of 8% is guaranteed for the first year.

Sheikh Tariq, the Chairman of RAK-based Union Group of Companies summarises perfectly, “You have one to three years to take the best of RAK and this is the most suitable time for investors and for doing business in RAK... I think market entry will be more difficult for those who are waiting.  I would advise all investors to look at RAK now and not delay.”

While the property market in Dubai remains relatively robust there are clear indications of a potential slowdown during 2009, due in part to the global liquidity crisis. Richard Rodriguez, the former chief executive of Emaar Properties in Dubai, said in September 2008: “Either the pace will drop or the prices will. Both cannot be sustained in these market conditions.”

But the emirate of Ras Al-Khaimah appears to be an enticing prospect for the international investor, and is arguably at the same state of development as Dubai was six or seven years ago.