DUBAI, 28 November 2005 — With the possible exception of the stock markets, few business topics are gaining as much attention in the Gulf today as real estate investment. Where once land was gifted to citizens by landlords, and expatriate residents had to make do with rental properties, today the region offers investors of all nationalities a staggering array of residential developments. From an executive apartment in the “Burj Dubai” to a private island on “The World”, from a waterfront villa in “The Pearl Qatar” to a marina-view townhouse in “The Wave” outside Muscat, the collective emphasis of the Gulf’s new breed of developers is on luxury “lifestyle” living.
That an international market of such dynamism should have been manufactured in such as short space of time is truly astounding. Since Dubai started the ball rolling in mid-2002 by permitting foreigners to buy homes in selected developments, governments across the region have followed suit as they seek to encourage skilled expatriates to buy into the local economy. The leading developers have perfected the marketing of off-plan sales, meaning their customers have largely pre-funded a project before the first shovel enters the sand.
Some experts believe, however, that investors and developers focusing exclusively on the luxury residential market could soon become victims of their own success in the pioneering UAE market. According to recent research conducted by FutureBrand, prices in “The Springs” by Emaar in Dubai have appreciated by over 35 percent in the past three years. Whereas in 2003 a 465 square meter villa on “The Palm Jebel Ali” would cost $708,000, a year later an identical size property on “The Palm Deira” was selling at twice that price or more.
The concern is not so much that prices are rising — house prices in Dubai are still roughly a third of those in a similar sized British city — but that investor sentiment is heavily skewed in favor of luxury residences at the expense of more stable segments of the real estate market. Consider, for example, that an estimated $45 billion is currently deployed in active construction projects in Dubai while a further $45 billion has been committed to developments that are still on the drawing board. Consider then that approximately 90 percent of all new buildings being constructed in the UAE are destined to become luxury apartment blocks.
Little wonder then that in September the head of the UAE central bank, Sultan ibn Nasser Al-Suweidi, felt impelled to issue a warning to the market. “We expect real estate to do very well until next year,” he said. “Next year we will have too many housing units and if we don’t take steps it will cause us certain problems.”
Second guessing Dubai’s residential housing market is indeed a tricky business. On one hand the bulls point out that 250,000 new residents came to Dubai last year, and that in the first half of 2005 rental prices rose by 40 percent. When a long-awaited UAE federal decree clarifies definitions of freehold ownership for foreigners, the market is expected to receive a further boost. On the other hand analysts point out that majority of residential developments currently under construction in Dubai are due for delivery in the next two to three years. Supply and demand levels will converge over the next few years, until by around 2010 the supply of non-rental homes could well outstrip the numbers of people wanting to buy them and thus prices could cool dramatically.
Faced with underlying contradictions in the market, Robert Lovett, managing partner of Landmark Properties in the UAE, believes the watchwords for investors should be selection and diversification. “Four years ago you could throw a dart at a map of Dubai, buy property there and make money,” he says. “Today it is not so easy. Some investors have become far too emotionally attached to trophy residential properties and the magical promise of ‘freehold’, whereas in fact they would do better to look for longer term growth and stability in sectors such as commercial property and affordable housing for middle class workers.”
Though Arabs have been active investors in overseas commercial property for years, Lovett and his colleagues have noticed that at home in the Gulf real estate investment in non-residential assets has always been a rather solitary affair. Individuals and companies have developed land and bought properties as their means permit, but no one has designed collective investment vehicles that enable investors to pool their assets and access larger commercial opportunities as partners.
Landmark decided to exploit this gap in the market and has built an investment management division to marry the group’s market knowledge with a methodical approach to direct asset management. This month the new division, Landmark Real Estate Investment Management (LRIM), will close its first UAE “Real Estate Opportunities Fund” which aims to deliver an overall return of at least 20 percent on investor capital at the fund’s maturity in seven years time.
Chris Purdon, LRIM’s chief investment officer, explains that the fund’s approach will be to acquire assets in sectors where there is a medium term supply-demand imbalance, especially in locations where major infrastructure improvements — such as Dubai’s second airport at Jebel Ali or the northwards Emirates Road extension into Sharjah — are likely to boost local prices. These assets will then be incorporated into a portfolio offering optimal returns with minimal downside risk.
“For investors news that real estate prices are likely to cool might sound worrying,” he says, “but you have to be clear in your definitions of real estate. There is a potential oversupply of luxury apartments in Dubai, and rental yields on apartments in the Marina district, for example, are under downward pressure. In contrast as less than 10 percent of the pipeline of property being built in Dubai is commercial, we see great opportunities in that sector. For example, one 70,000 square foot warehouse our fund has bought is generating a 45 percent cash on cash yield.”
As for whether other property agents and financial institutions will follow Landmark’s lead, only time will tell. Indicators of economic activity in the Gulf are strong, meaning that demand for commercial real estate should remain buoyant.
