A lot of Saudi money is invested in Dubai real estate, both buying and selling. Not only are Saudis buying residential and commercial property (villas, townhouses, apartments, office condos), but many high networth Saudis and Saudi companies are also invested in the property developers themselves or in their projects. There are no statistics on the Saudi share in Dubai real estate, but official statistics show that, among Gulf Cooperative Council (GCC) countries, Saudis are the second largest owners of land in Dubai, after Kuwaitis. About 27 percent of land is owned by Saudis, following a 29 percent share by Kuwait (Oman is next with 19 percent, followed by Qatar, with 13 percent and Bahrain, 12 percent).
The key question facing Saudi investors is “Is the market in a bubble and is the bubble about to burst”? This is an important issue in view of the recent bursting of the stock market bubble in Dubai and in the region. Can the real estate bubble be far behind? In this report, we look at the strengths and weaknesses of the Dubai real estate market, and what Saudi investors should watch out for.
Strengths: The key drivers of the property boom in Dubai are:
• Demographics. Dubai’s population growth is one of the highest in the world. Population has been growing at an average rate of 7 percent per annum in the last 5 years. For 2005, growth is estimated to be 8 percent.
In comparison, growth in Saudi Arabia is 2.8-3 percent, and it is even lower in the developed world. At this rate, total population is expected to grow from 4 million in 2003 (the start of Dubai’s boom) to 5.3 million by 2007. Nationals account for a small portion of the total population (19 percent of total or 870,000 in 2005). Over a quarter (27 percent) of the population are in the home buying age group (25-34 years olds). Growth has been driven primarily by a huge influx of expatriates. Since most expatriates come to the country with a job, they have the need for housing and the income to pay for it. However, the majority of demand is for low-end housing.
• Record high regional liquidity. The GCC region is awash in liquidity from oil revenues and repatriation of GCC funds from abroad. Over $340 billion in liquidity flowed into the region in 2005 and 2006. Much of this money has found its way into Dubai. This has fueled double-digit economic growth (18 percent in 2005; 12 percent in 2006) and raised people’s incomes. High liquidity means low borrowing/carrying costs for developers (lending rate to businesses is around 8 percent), another driver of growth.
• Growing demand from overseas expats including returning short-stayers (tourism). This includes rich Muslims from the West, rich GCC and South Asian citizens, upper middle income groups from Western and Central Europe who want a home in Dubai for visits and/or investment. It is notable that over 120,000 UK citizens have established residency in the UAE, plus over 1 million UK visitors come every year. The total number of visitors from abroad stood at 5.8 million in 2005 (7 percent increase). This has fueled the demand for hotel and serviced apartments, tourism and leisure projects, shopping malls, and investment properties.
• The government is actively and energetically promoting Dubai as the regional hub for business and the financial capital of the Middle East. Specific sectors have been targeted and state-of-the-art modern facilities have been established courtesy of government, including Dubai International Financial Center (finance), Dubai Media City (IT), Dubai Health City, Dubailand, Dubai Sports City, shopping malls and amusement parks (recreation and tourism).
• The property developers in Dubai are big and have deep pocketed parents. Some (e.g. Nakheel, Dubai Holdings) are extensions of the government itself. Their size and leadership position allow control and coordination over the pace of development (slow down or redirect, if necessary). Deep pockets allow them to wait out profit squeezes or weak demand. Lack of transparency (advertising from developers and sponsors is often the main source of information) allows them to shape investors’ view of the market picture. Size and scale allows cost-efficiency in procurement, contracting, financing and land purchase.
(Khan H. Zahid is chief economist at Riyad Bank. He is based in Riyadh.)
