The scale of this month’s Dubai Cityscape exemplified the renewed levels of investment and interest in the city’s real-estate sector, but raised concerns for some that another bubble and subsequent burst may occur.
A walk around the exhibition which had 30% more exhibitors this year than last, demonstrated the number and scale of projects now being revived or initiated. Nakheel’s Palm Deira project is starting up again; people crowded the Emaar stand seeking to buy either already completed units or off-plan in a number of major new schemes; a miniature version of the 210 meter tall ‘Dubai Eye’ revolved confidently above the model of the now underway Bluewater man-made island project; the government-owned Dubai Properties Group announcing no fewer than seven major projects; and whilst the live falcons seen previously were not in evidence this year, Falcon City was back on show with its recreations of the world’s wonders such as the Eiffel Tower and Taj Mahal.
Whilst some of the schemes on show may stretch the powers of imagination, the economic context is clear enough. In stark contrast to most EU countries, the UAE look set to outperform the current IMF GDP forecasts of 3.6% p.a. between 2014 and 2017. Real estate price rises in Dubai this year are comparable or even greater than those experienced last year. According to Cluttons, apartments increased in value by over 25% in the second quarter compared to 13.4% in the same period last year; villas increased by 21% and 24.4% respectively.
So will these growing inflationary pressures cause history to be repeated again?
The ‘vanity height’ contained in pre-crash schemes such as the resplendent Burj Khalifa which now towers over the city skyline, was arguably a metaphor for the mentality of many developers and speculative purchasers and investors, for whom the height of potential financial gains blinkered much decision-making.
However it could be breadth rather than height that may point the way towards a more sustainable economic growth in the future. The notion of breadth is arguably evident in a number of ways:
- Schemes are now physically more geographically spread out than before the crash, no longer so concentrated in the marina and downtown hotspots
- A broader range of buyer types and country of origin. Whilst Emirati and Indian buyers still remain important (although government restrictions on taking the rupee out of India may affect the latter), Chinese buyers are becoming increasingly attracted to Dubai’s properties. This perhaps explains the best-selling item in Dubai duty free at the international airport which is Chungwa, a Chinese brand of cigarettes. Interestingly Cityscape had thirty exhibitors from Turkey, a country which has now relaxed restrictions on foreign buyers purchasing property.
- A broader range of properties at lower price points offering good rental yields are proving attractive, especially to Chinese buyers
- New regulation now means that construction can only start once a certain proportion of properties have been sold. The proceeds held in escrow, help ensure that projects are more financially sound.
- Purchasers who require a mortgage will face tighter loan to value restrictions, spreading purchases beyond highly geared speculative buyers and thus dampening price increases.
But despite these factors which hopefully spread the basis on which growth is based and thus the associated risk, the core question remains as to whether underlying demand will be strong enough. Currently 40% of office accommodation is empty in Dubai, and there are more lights shining on the outside than the inside of completed residential buildings; and should Dubai win the Expo 2020 bid, there is danger that this will add pressure on further speculative development that may add to the risk of a future crash. So let’s hope that Poseidon’s Revenge, the latest attraction to open at the Atlantis Aquaventure Water park on The Palm, is not a presage of things to come: it features a trapdoor through which you plummet in free-fall.
Author: Nick Jones