Dubai’s Cautious Property Comeback

As the UAE property market enters a fragmented recovery, developers are keen to tap renewed investor interest and are launching mega projects, betting that UAE’s safe haven status will help to boost the real estate market.

The handfuls of new or revived projects are a direct result of the improved sentiment regarding Dubai’s property market, which slumped by over 60 per cent following its 2008 peak.

Link Global Group plans to build in Dubai the Taj Arabia complex, a mixed-use project that will include a hotel in the shape of India’s Taj Mahal mausoleum. Drydocks World, a unit of Dubai World that is restructuring about $2.2 billion of debt, plans to construct undersea hotels in the Middle East in partnership with Switzerland’s BIG InvestConsult.

But the biggest news came from Sheikh Mohammed, Dubai’s Ruler and Vice-President of the UAE, who unveiled plans for Mohammed Bin Rashid City or MBR city, which will include over 100 hotels, a Universal Studios entertainment centre and a park 30 per cent bigger than London’s Hyde Park, among other complexes in the city.

However, most of the developers behind the mega projects announced in 2012 have not revealed how the projects will be financed or the time frame for completion.

“Mega projects are synonymous with Dubai’s DNA and should not be viewed as clear signs of a housing recovery,” said Saud Masud, chief executive officer of US-based investment advisory firm SM Advisory Group.

“Financing remains challenging, hence not all projects will see near term relief simply because a handful have secured initial funding. Dubai is in a gradual recovery mode which should be the preferred path.”

Dubai, in particular, has enjoyed a market recovery in residential prices and a spike in tourists who are shunning other Arab destinations caught up in the Arab Spring. Investors from troubled countries such as Iran and Pakistan are also snapping up Dubai property, which is seen as a safe investment for their money.

“The political instability in the region is expected to continue through 2013, resulting in the real estate market in Dubai remaining of interest to regional capital,” said Gaurav Shivpuri, head of capital markets at property advisory Jones Lang LaSalle MENA.

“There has been a lot of demand for investment in multi-family residential in Dubai in the past six to nine months from regional investors.”

Dubai’s economy grew 4.1 per cent in the first half of 2012, official statistics show, compared with a 3.4 per cent for all of 2011. The growth was buoyed by a 9.6 per cent rise in hotel guest numbers and a 16.1 per cent increase in the hotel and restaurant business in the first half of 2012 compared with a year- earlier period.

“In 2011 and 2012, retail and hospitality [in Dubai] has performed better compared to our internal forecast and Dubai has shown healthy signs in terms of occupancy and prime retail side,” said Bashar Al-Natoor, a director at Fitch Ratings in Dubai.

“The main challenge continues to be: is this a sustainable trend, if the global economy turns and if additional supplies come to the market. Demand is mainly linked to the health of the global economy and supply is linked to how many projects are going to be completed and how the market is going to absorb them.”

Dubai’s recovery contrasts with sluggishness in Abu Dhabi and the other emirates, which continue to suffer across property sectors and have yet to emulate Dubai’s tourism.

“Property demand is highly fragmented with Abu Dhabi and the northern emirates still seeing a continued downside to sales and rental levels, whilst Dubai is firmly in recovery mode with positive growth being recorded within the residential sector and relatively stable conditions being noted within the office market,” said Matthew Green, head of research & consultancy UAE at advisory CBRE Middle East.

“2013 is expected to see a continuation of these trends with some further deflation during the first half of the year in Abu Dhabi, whilst Dubai is expected to continue on its positive footing.”

Residential lease rates in Dubai rose on average 17 per cent in 2012 from a year earlier due to population growth, economic recovery and limited supply in prime locations, CBRE said in a December report.

There is also strong demand for retail space in Dubai’s best performing malls, which are seeing an uptick in visitors.

Property developer Emaar revealed plans in 2012 to expand Dubai Mall, dubbed the world’s largest.

The mall received more than 44.5 million visitors between January and September 2012, a 15 per cent rise from a year-earlier period, according to Emaar, which has seen revenue from hospitality and retail increase this year.

“The hospitality sector in Dubai is very buoyant at the moment but we still need to create new leisure drivers if we are to truly compete globally with other major tourism destinations,” said CBRE’s Green.

“The announcement of up to 100 potentially hotels, a Universal Studios and various other cultural and entertainment drivers will go some way to achieving this goal.”

Emaar and Dubai Holding, a conglomerate controlled by Dubai’s ruler, have been tasked with developing MBR city, which will include Mall of the World, the world’s largest mall capable of catering to 80 million visitors a year.

But there are fears these projects could create a bubble if they are not phased and if speculators return en masse to the market similar to pre-2008 trends.

CBRE’s Green says projects such as MBR City need to be structured over a period stretching 10 to 20 years to help control supply and avert a property crash.

“A structured and staged delivery is essential to control the amount of supply entering the market to avoid oversaturation,” he said.