UAE real estate and business services sector in nominal terms continues to grow recording a CAGR of 20% during 2003 - 2007. In 2007, real estate and associated business services constituted 8% of UAE’s GDP, or AED55.8bn recording a substantial growth of 21% in 2007. This sector was buoyed by the increasing investment in infrastructure, due to the country being positioned as an attractive tourist destination in addition to the increase in the residential and non-residential units. With construction sector, both sectors accounted for 16% of GDP in 2007. Generally, real estate sector is seen by many as a safe haven for investments and UAE is no different. The sector’s key drivers include among others; growing influx of expatriate population, ample liquidity, and friendly regulatory environment. Moreover, being a regional hub for investments UAE attracts international companies to establish offices.
Inflow of expatriates boosts housing demand….
The demand for housing in UAE is a function of both the population growth as well as pent up demand as existing people upgrade to better dwellings. The influx of expatriates is a major factor that has been driving housing demand in UAE in particular Dubai. This coupled with delays in property delivery has created upward pressure on house prices and rental costs in UAE. The average prices trend continues to be on an upward trend in UAE with the average price per square meter in residential land increasing by 67% for the period between 2006 and 2007. With the expansion of lands allocated for residence in the UAE, volumes and value of deals are expected to increase during 2008.
Foreign demand holds cue for the high-end….
While majority of the internal demand has been from the middle and low income groups, high-end property has found takers from abroad. Primarily this has come from the following factors, most of which apply to Dubai; Investment demand: As the liquidity is high in the region, real estate has provided a good investment opportunity with prices of properties doubling in the past few years. Demand for holiday homes/fractional ownership: Dubai has recently become among the fastest growing top holiday destinations, which has made Dubai’s appeal for a summer home/second-home very strong. Multinational companies moving into Dubai.
Steady flow of tourists into the country: Dubai is fast becoming a preferred tourist destination due to its open culture which is encouraging people from across the world to reside there. The demand for commercial and investment lands also is on an uptrend, with a total value of around AED38bn deals taking place as compared to AED8.7bn during 2006, an increase of about 336.8%. The sector continues to attract more investments as more companies vie to establish businesses and tourism projects to gain a large market share of the total commercial and tourism activity of the world. The average price per square meter of commercial land witnessed a noticeable rise during 2007 due to the rise in demand, with average price per square meter increasing 17.2% during 2007 and by 33.3% during 2005-2007.
Supply pressures likely to loose albeit with a check on prices…
According to IMF data, some 120,000 residential units are expected to be completed in UAE over the period 2008-2010. Although capacity constraints have delayed some large real estate projects, especially in Dubai, there are indications that many of these projects will be completed shortly. However, pressures on rents and prices in the Abu Dhabi market are expected to continue as the supply continued to slip in 2007. Given the continued strong demand in the medium term, a sharp price correction in the real estate market is not expected.
Legal changes to help build investor confidence… The changes and the approach towards revamping the real estate regulations in the UAE have been positive from the investors’ point of view. The promulgation of new property laws in the individual emirates, regulating the sale and lease of land and buildings to citizens and expatriates, kick-started the property boom. The regulations vary from emirate to emirate, with some, including Dubai, permitting foreign residents to purchase freehold properties in designated areas, whilst others, such as Abu Dhabi, limit the acquisition of property by expatriates to leasehold properties. The land departments in each emirate are now endeavoring to frame regulations that will eventually create a unified property law. The major legal changes that have come in 2007 has been the passing of a broker's law, the passing of an escrow law, and the creation of the Real Estate Regulation Authority (RERA) Broker’s law came into force in January 2007 which stipulates that all brokers, both individuals and companies, must be licensed with the Land Department. The department has been assigned the role of training and certifying all brokers to ensure that property transactions are conducted by licensed and trained brokers who are able to provide proper advice and professional service to their clients.
The passing of legislation law no 8 makes escrow accounts compulsory for all Dubai off-plan developments, with money released only on the order of the Dubai Land Department. This move marks an end to the days when any developer could launch a project and collect deposits without a guarantee that the funds would be used correctly. Real Estate Regulatory Authority (RERA) has also been formed under the affiliation of the Dubai Land Department in 2007 to unify and regulate all property market-related activities established. Although the passing of the Escrow Account law would restrict builder’s freedom and may slow down the growth a little, all three moves collectively are likely to have a positive impact on the Dubai real estate market by making the market more transparent and thus increase investor confidence.
There are a number of factors that point to continued tightness in the UAE real estate market which will keep the market afloat. Some of these factors are:
The pent up demand is significant. As rents begin to soften, lower and middle-income residents who are currently sharing their accommodation are likely to move to separate housing dwellings. Moreover, some of the workers who are currently commuting from other emirates might shift base to Dubai as rent pressures ease. Infrastructure bottlenecks, supply shortages, human capital challenges, etc would keep the supply of property in check.
Dubai’s dynamic economy will continue to drive strong demand for foreign workers, helping to underpin residential property demand. Dubai has invested heavily in establishing itself as the premier services hub. Regional and international demand for these services has been strong and is expected to remain so given the positive outlook for oil prices and global trade. The burgeoning economy has spilled over to the real estate market which has been witnessing increased activity with several projects in the pipeline in the residential, commercial, industrial, and tourist segments. This will allow the real estate sector to witness further growth in the short term. The demand too is expected to continue to be strong. Improvements in legislation with the establishment of the condominium law as well as further deepening of the mortgage market will also be positive catalysts for growth.