Global Recession Severely Affected UAE

The upheavals of the global financial markets and the ensuing global recession have severely and adversely affected the UAE, and particularly Dubai with its high level of speculative real estate investment and lack of oil revenues. The same was true for the rental market, which had made significant gains in the past year.

Those predictions have been greatly amplified by the economic downturn and continue to be felt in all sectors of the market. However, from about June 2009 sentiment appeared to be tentatively improving with the most bullish commentators suggesting some stabilization was possible in 2009 and 2010.

Given the magnitude of the market declines and comments by less optimistic analysts, including Standard Chartered Bank, which suggests prices may ‘never’ return to 2008 levels. In reality, something between these two positions is likely, but any recovery is unlikely before 2010 at the earliest (Thompson, 2010).

Strengths

Dubai is growing faster than any city on Earth; it is a “Mushroom City”. Dubai truly is unlike anywhere else in the world at present. A unique melting pot of people and cultures that really has a lot to offer both residents and visitors alike. And the main driving force for the huge amount of success Dubai has received in the past few years has been the real estate Dubai freehold property market.

With the opening up of the market and strengthening of the legal processes surrounding buying and selling of property being regulated with escrow etc the Dubai property market has gone from strength to strength over the past decade.

And with Dubai based developers such as Nakheel and Emaar continuing to bring to the market some breathtaking and novel property developments, this has only continued of late, producing a situation where the real estate market continues to boom. We have many apartments available off plan with low deposits and finance in place with prices starting from Dhs 255,000 in Ajman and around Dhs 500,000 in Dubai (Dubai’s Real Estate Market: Investor’s Paradise, 2009).

Nakheel got things started back in 2001 with the announcement of the Palm Jumeirah, and Dubai has not looked back since. The Palm Jumeirah, a man made palm shaped island out in the Persian Gulf, attracted attention from across the globe. And Emaar, not being a company that stands still, has only added to the huge array of property here. With its Emirates Hills development, it arguably offers the most exclusive address in Dubai.

And just with Downtown Burj Dubai, featuring the world’s tallest building the Burj Dubai, it has made a huge contribution to Dubai’s freehold property options. And add in its other numerous developments and those of other developers such as Damaac, Eta Star and Omniyat Properties to name but a few, and you can see why Dubai has such a wide selection of property on offer.

“The World” is one of the big prestige projects, consisting of 300 artificial islands that mimic the shape of the world’s continents. Here you will find the only 7 stars and the tallest hotel in the world, Burj Al-Arab, on an island of its own. The biggest shopping mall in the world is already here.

Another, bigger shopping mall, the world’s largest retail development is under construction. There’s to be the first underwater hotel ($500m). The Middle East’s answer to Disneyland, called Dubailand, which is far larger than Monaco, is costing $4.5bn. It will employ 300,000 people in the various joy lands, servicing 15 million visitors.”Asia” will be the largest hotel in the world, with over 6 500 rooms.

Those looking for a luxury villa will find plenty of development from which to choose, such as Emirates Hills, Arabian Ranches and the Meadows, even more awaiting completion, such Al Kaheel, Victory Heights and the Plantation Dubai. Apartment options are even greater. Be it studio, one, two, three or four bedroom apartments, duplexes or penthouses you have a huge selection at your disposal.

For those looking for value for money there is Nakheel’s International City, Dubai Sports City, Jumeirah Village or Jumeirah Lake Towers for more up market apartments there are always the shoreline apartments on both the Palm Jumeirah and Palm Jebel Ali, or perhaps an apartment in the world’s tallest building, the Burj Dubai.

Real estate in Dubai continues to surpass all expectations and whatever your budget there is always something that is affordable compared to other global markets the only difference is the returns are higher!

Real estate Dubai really does have it all therefore. Prices have risen sharply in the past few years, but are still no more expensive than European prices, and living in Dubai comes with the added bonus of year round sunshine and a great all round life style. Dubai freehold property therefore has something to offer everyone.

And with commercial developments such as Business Bay only likely to cement Dubai’s already strong position as the place to do business in the Middle East, buying into Dubai real estate still looks a good investment.

Weaknesses

Dubai’s Real Estate Market has experienced tremendous and important expansion across all sectors over the past few years. The diversifying economy had led to strong population growth, which has in turn driven investment across all property sectors.

However, this strong growth up to the middle of 2008 was followed by a significant reversal in the last quarter and the first half of 2009. It was the global recession that brought with it financial crisis that majorly impacted the Dubai Real Estate Market. It was a combination of indecisive global economy, unsure local market confidence, tightening credit markets and increasing unemployment which all contributed to the reversal of Dubai’s fortune.

“Dubai became more vulnerable to the global economy than other oil producers through diversification. Real estate is hit hard by the crisis, other sectors stand to gain.” (Fisk, 2008) This is because the country’s focus which was moved by its leaders from oil to areas of construction and development.

It mainly targeted the Dubai Real Estate Market and hit it hard. Some of the major weaknesses that the Dubai Real Estate Market faces in the turmoil are unemployment; construction and the real estate market are in a danger zone and the tourism sector is venerable and faces major obstacles.

In the turmoil, Unemployment has increased tremendously, making it very difficult for people to maintain their jobs. Employers are firing their employees and this gives people very few opportunities for making good money fast like it once use to be in the good times.

Construction and Real Estate Market are in a danger zone. Construction has been the economic engine of the country but ever since the recession hit, the loud sounds of construction no longer exist and has come to a complete standstill.

Investors are seeking legal actions against developers who are not developing and have come to a complete standstill. “All over Dubai real estate agencies downsize, financing companies merge and banks seem to be teetering on the brink. Abu Dhabi, the oil-rich capital/emirate, has granted Dubai a loan to lubricate the staled economy, and the Dubai government has come forth with its balance sheet in a bid at restoring investor confidence; indicating a $80 billion debt and assets standing at $350 billion” (Fisk, 2008).

Tourism is a major industry in Dubai and not only rivals the Dubai Real Estate Market but also depends upon it. It is an immense driving force of the economy of Dubai. It too suffers immensely from the economic recession. There have been severe job cuts in Dubai’s hospitality and tourism industry too. “If people are unemployed, businesses won’t want to spend money on travel, and individuals, certainly the unemployed ones, won’t want to travel” (Lipman, 2009).

According to data revealed from the Department of Tourism and Commerce Marketing, Due to the global meltdown and particularly the financial crises Dubai was facing, the travel sector witnessed Dubai hotels down by 16.4 percent in the first three months of 2009 to 3.87 million. (Dubai tourism sees hotel guest nights fall 16% in Q109)

The hotel industry saw a major decline in rate and tariffs too. This is another weakness that was faced by Dubai and continues to face due to the non improving economy. “Immediately after Atlantis opening, a rumor spread, and was quickly denied, that the hotel was charging 10 percent of the original price and had only 26 percent occupancy” (Fisk, 2008).

Dubai’s Real Estate Market is dead! The year 2010 will be marked as the worst year for the Real Estate Market in Dubai and is assumed to be similar to the year 2009. Some correction and re-valuation losses will be made in some of the real estate companies books because of the downturn.

However, one of the main reasons why the real estate market in 2010 in Dubai would be so dark and dead is because property buying would be very less, close to none due to lack of liquidity. According to a study that was conducted, “Areas where it needs to show improvement include ethics and transparency, education and the quality of its work force” (Dubai – Strengths & Weaknesses, 2009).

Opportunities

Few developers will want to convert their new developments into furnished apartments on short to medium or long-term basis, given the current market conditions, said Mohammed Nimer, CEO, MAG Property Development. This will help in immediate revenue generation for them, rather than leaving their buildings without tenants. The furnished apartments have high rental value due to higher investment value.

The Executive Director of ETA, Abid Junaid, said that his company would be converting a project due for delivery during the third quarter of 2010, into a furnished model, and has hired Star Hospitality, to manage and offer services to the project. The project, namely Grandeur Residences, located along the Palm Jumeirah, will comprise single, double and triple bedroom apartments and beach front villas.

The highest floors of each block will house four exclusive penthouse suites, with private access to each via the spiral staircase to the terrace. According to Junaid, the expected rate of return for such project is around 8 percent per annum, as a developer, but, as of now, it is about 6 percent, depending on occupancy and room rates.

According to real estate agents, the rentals for furnished apartments are 10 to 20 percent higher on an average than unfurnished apartments. Given, the current situation in Dubai real estate market, several investors have been prompted to look at acquiring furnished apartments for short-term leasing.

According to Gibran Bukhari, Sales Manager at Coldwell Banker, this year several individual units will be converted into furnished apartments. The Sales Director of Elysian Real Estate, Robert Macnair, agreed that furnished property generated 15 to 20 percent premium over a typical unfurnished property.

For instance, a single bedroom Shoreline apartment on the Palm Jumeirah will fetch Dh.150,000 per annum by way of rent, while a similar unfurnished apartment will generate about Dh.120,000 per annum. Better Homes, a prominent real estate agency, said that rents for furnished apartments fall in the range Dh.5,500 and Dh.8,500 per month.

Demand is likely to be the main driver of real estate performance across all sectors in Dubai in 2010, according to the latest analysis. The Dubai office market is becoming increasingly favorable for tenants as it is witnessing a significant demand-supply mismatch along with falling rentals and increased vacancies, says a new report from consultants Jones Lang LaSalle.

While demand levels are increasing, as both existing and new tenants seek to consolidate and take advantage of better quality space becoming available on more competitive terms, there is not likely to be enough demand to meet the high level of new supply entering the market in 2010,’ says the Dubai Real Estate Market Overview January 2010.

The tenant is becoming the ultimate winner as the office market is going through a significant adjustment with more vacancies and cheaper rents on offer. This scenario is encouraging for businesses as it offers multiple options for expansion and relocation as Dubai becomes more competitive office location both locally and regionally,’ said Blair Hagkull, Managing Director of Jones Lang LaSalle Mena. ‘Attractive deals can be found throughout the city’s prime and peripheral areas as rental rates and capital values are hovering at pre-2007 levels,’ he added.

The report also indicates that average prices and rentals in the Dubai residential sector are expected to show more stability in 2010 as the rate of decline has slowed in the past few months. The performance of different locations will be more driven by local demand and supply issues. ‘Prices seem to have stabilized over recent months, despite the existing over-supply situation.

Stabilization of transactional volumes is another positive indicator of investor confidence but the lack of housing finance remains a major challenge in Dubai.

An improved lending scenario is one of the key factors for a sustainable recovery as the value of mortgages as a percentage of total sales value has dropped significantly during 2009,’ explained Hagkull. ‘With an additional 24,000 units expected to be completed in 2010 and 25,000 units in 2011, there may be an emerging opportunity for both investors and financiers in the Dubai residential market as it has already seen a significant level of pricing adjustment in 2009,’ he added.

Rental adjustments were comparatively less in the Dubai retail market than the office or residential sectors but the market is still moving in favor of tenants in 2010. Average rentals have declined by around 29% from the fourth quarter of 2008 to the same period in 2009 and by 13% from the third quarter and the fourth quarter of 2009 on the back of a 15 to 20% decline in retail sales in 2009, the report also reveals.

Several planned projects have experienced delays, which in turn has affected the future supply pipeline.

This lower level of future supply relative to planned completions in the office and residential sectors is providing the retail market with something of a breathing space,’ it adds. ‘This is an interesting time as the dynamics of the Dubai retail market continues to swing in favor of tenants due to falling rents and increased vacancies in some centers.

In spite of the cut back in future supply levels, we expect to see an increase in shorter leases, break clauses and rent free periods as we go through this tectonic shift in the market. There will be more and more incentives for tenants due to the shift in power from landlords to tenants. We are also seeing the emergence of a two-tier retail market as occupancy rates in super regional and regional malls remain above 90% as opposed to older shopping centers,’ said Hagkull.

More than this, 2010 is the year that the Gulf Cooperation Council (GCC); consisting of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) plans a monetary union. The general opinion is that this event will be accompanied by an upward revaluation in the new currency against the US dollar. Good news then for home owners who will benefit from an upward revaluation of their property in US dollar terms.

Thus for owners of Dubai property the likelihood is that real estate will gain from a realignment of currency valuations. In short property could jump 10-20 % thanks to a new valuation for the dirham in terms of US dollars.

“The great thing about Dubai, what makes it different from other emerging real estate markets, is that there is so much going on there with tourism and other opportunities, it is becoming the financial epicenter of the Middle East,” said Donald J. Trump Jr, executive vice-president of development and acquisitions and son of the group’s founder. For the buyer seeking a pure investment, the combination of political stability, rapid value appreciation and high rental yield is almost irresistible.

Threats

The Dubai Real Estate Market is facing huge debt problems and seems like a “hangover” from the property bubble that burst after the financial crises caused by the global recession threatened its plans to become an attraction for tourists and a regional hub for everything from shipping to entertainment. (Will Dubai falter?)

Due to the recession, Dubai Real Estate Market which was the biggest industry and the booming factor behind UAE’s economy has faced and is still threatened by several factors. They are, unemployment, re-payments of debts and loans, losing confidence among investors, decline in rentals, and the fear of a double dip in the property market.

Job losses and unemployment is the biggest threat UAE still faces. Although, several people have already lost their jobs, the declining growth of the property predicts that many more will also loose their jobs and this in turn will affect businesses and industries and will also lead towards a decline in population. “Rising job losses would inevitably force a number of workers to leave the country, given that the majority of the UAE labour force is made up of foreign nationals” (Bundhun, 2009).

Government owned Dubai-World, the ports, property and hospitality conglomerate has asked its creditors for a minimum six-month standstill period while they organize a debt plan. According to rediff-business.com, “Dubai World has borrowed $59 billion to finance its expansion, including the acquisition of port, retail and leisure assets and the setting up real estate ventures globally” (Darasha, 2009).

“Unless there is some agreement with creditors on the $10 billion or so that is due in the next two months, I see an indirect perceptional impact on property values in Dubai, maybe even sending them spiraling downward again” (Maitra & Darasha, 2009) This creates a direct negative impact on the investors in the emirate’s real estate sector, who dominantly are Indians, Iranians, Pakistanis, Russians and the British. A potential loss or an asset that brings no hope will completely change the mindset of the investors which will affect their decision.

Rental returns continually keep declining as uncertainty over the business environment makes the expatriate population lose faith and confidence in the Dubai Real Estate Market than previous years. According to, rediff-business.com, “Several rounds of lay-offs by large and small corporations have resulted in rents in most parts of Dubai coming under intense pressure in the past 18 months, making property investments less attractive than they used to be in the glory days of 2002 to 2007, when so-called “flippers” — investors who bought property with a 10 per cent down payment, only to sell it one or two months later for a 100 per cent return on investment made massive amounts of cash” (Darasha, 2009).

Lastly what threatens the Dubai Real Estate Market is the fear of a double-dip. This all depends on the economic policies and the whole Dubai-World debt mess. If the largest conglomerate in the Emirate delays in repaying their debts and settling accounts with its creditors and defaulters, it could result in pushing property prices down again, which will be seen as the start of the double-dip in the property sector.

According to rediff-business.com, “the worry is the double-dip will result in a W-shaped overall economic recovery for the Emirate.” (Dubai property recovery under threat) This can have disastrous effects on the real estate buyers in Dubai, who will see their investments erode even more than before they could recover.