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Economics & Finance

Real estate in the UAE: Moving from speculation to solid value?

Grace Segran |

When the flashy Emirate of Dubai asked for a six-month moratorium on its debt obligations just over a year ago, the world trembled. In reality, the problems of Dubai had been well-known in the region for over a year: unfinished developments, redundancies with expatriates returning to their home countries and the collapse of the property market.

When the flashy Emirate of Dubai asked for a six-month moratorium on its debt obligations just over a year ago, the world trembled. In reality, the problems of Dubai had been well-known in the region for over a year: unfinished developments, redundancies with expatriates returning to their home countries and the collapse of the property market.

According to international real estate agent Jones Lang La Salle, total real estate transaction values in Dubai plunged 65 percent in 2010. And while demand fell, oversupply kept on rising as builders completed their contracts. As the region’s centre for finance, Dubai is regarded as the barometer for the region’s real estate sector and so it’s no surprise the bleak scenario is replicated in varying degrees throughout the United Arab Emirates (UAE).

Today, the UAE finds itself caught between being the centre of economic opportunity in the Gulf Cooperation Council (GCC) and at the same time surrounded by the political turmoil in the Middle East. The UAE’s stability could prove to be an incentive for businesses and investors to re-locate there – thereby providing a ready-made solution to the real estate crash. But there are still a few obstacles in the way.

Elaine Jones, Chief Executive Officer of Asteco Property Management, believes a couple of non-market elements need to be cleared up before foreign investors will come in. “People need a good and clear legal structure in which to buy property. We also need clear real estate laws - right now we don’t have enough clarity on how to resolve issues when they arise.” Conflicts have arisen between developers, investors and financiers since the flow of money ran dry. There needs to be clarity as to how much money developers and investors are due when an investor defaults on their payments, or how interim interests will be treated in a bankruptcy situation.
The scramble to write such laws can create confusion. Jones says that the UAE is a young nation and the economy will benefit in the future if they can learn from other countries that have written property laws over hundreds of years, taking the best parts and making it work for them. It will also be helpful if there is consistency across the Emirates and across the GCC.

Then there are the legal, administrative issues concerning the rights of foreigners who are buying these properties. Without the right documents, it’s impossible to get your electricity connected. “We’ve also got to regularise the visa legislation or the ability for people to live in the Emirates. As soon as you own a property, you have to be able to connect to your utilities and perform other preliminary setups and you need to have a visa to be able to do that,” she adds. “There are countless numbers of people, funds and international businesses who would like to invest here but our administration system is just not ready for them yet.”

On the positive side, the real estate crash has given the UAE a chance to review what was built, why, and for whom…and to revise building plans for the future. The original property boom was fuelled by investors who bought properties off-plan in the luxury market, creating a huge glut of properties on the high-end of the scale.
“Let’s learn from our mistakes and do some planning first. We were targeting and building so many high-end properties whereas there is actually demand across the board. Because of the nature of our industries, we have a lot of rank-and-file staff so there’s a need for affordable housing as well. We need to build to suit demand and target end users. Let’s hope the unfortunate occurrence will serve to benefit us in the medium to long term,” says Jones.

Current market conditions and trends

Asteco has seen a dramatic improvement in the first few months of 2011 compared to 2009 and 2010. Considering the region’s current political turmoil, Jones believes it’s foolhardy to say that this real estate improvement is going to continue. She points to some market ripples already in evidence: in Bahrain, the market is technically on hold at the moment, while Qatar is growing steadily. In addition, Qatar’s hosting of the 2022 FIFA World Cup offers substantial potential for the construction sector over the medium term as it invests in stadia, hotels, transport networks and recreational centres, thus bringing stability to the property sector.

Another real estate trend today: renters have replaced buyers. “We’re leasing more in the Emirates than in 2009 and 2010. We see a lot of businesses growing. A lot of people are coming into the Emirates again so opportunities are growing. There are more manufacturing facilities in Al Ain and Abu Dhabi and demand in Jebel Ali Free Zone continues to exceed supply,” Jones told INSEAD Knowledge on the sidelines of the International Women's Day seminar at the school's campus in Abu Dhabi.

Property management business is growing as a result of the completion of properties. The completion of new buildings that have been sold to multiple owners (more in Dubai than Abu Dhabi as yet) are now requiring home owners’ association management, as well as individual property management where there is an absentee landlord.

As properties become available - in Abu Dhabi for example when Reem Island fully starts making a lot of inventory available - Jones says there will be a lot of movement of people from the old, less sophisticated buildings to these new areas. The government has also put in place steps to move businesses out of so-called “villas” into purpose-built business structures, which opens the door to a more planned and developed property market.

Outlook

The UAE has been through a major property boom and now appears to be in a period of correction which will bring about stabilisation. However, rents will not go back to the same level that investors enjoyed in 2008, says Jones. “That was not the real figure anyway but we look to 2006 and 2007 rates and I can see that happening on the residential side. On the commercial side, we have a very large oversupply in Abu Dhabi and Dubai so it will take time for those rents to go up. We will then see a differentiation between rents and what the offering is in different locations which is very healthy.”

Right now, it’s a buyer’s market with bargains galore. However, the question on every investor’s mind now is probably: has the property market bottomed out? Now, that’s a tough call.

Elaine Jones addressed a seminar marking International Women’s Day at INSEAD's campus in Abu Dhabi.

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