Tuesday, February 19, 2008

Raising the roof

The real estate boom that has fuelled the prodigious growth of Dubai and fast-tracked many to a better life in the sun has been hit by a series of steep hikes in the cost of core building materials. Add to that continuing housing supply shortages and all of a sudden (if HC Securities Brokerage is to be believed) you have a city whose property market is rapidly approaching the price levels of London’s West End.

With its large-scale real estate projects, Dubai has become more than just a playground for discerning holidaymakers and professional expats. But with increasing costs and supply fears, developers are fearing huge financial implications for the construction industry which, according to Abdulrahman Al Tassan, CEO of Rakaa Property, may lead to a crunch that could add to inflationary pressures, create an economic slowdown and cause a subsequent investment collapse.

But cynics predicting the imminent demise of the emirate’s property boom have so far been wide of the mark, says Blair Hagkull, managing director of Jones Lang LaSalle MENA, who is confident fresh supply will come to the market this year. But, he says, problems persist in the short term.
As demand outpaces supply, Hagkull says the region will be faced with a ‘flight to quality’, where property-seekers take what they can get from a market fast running out of prime real estate in the most desirable locations. Tassan believes that the pace of development in Dubai has become its own worst enemy, as the availability of both building materials and manpower has been overtaken by the sheer speed of development.

Record oil prices, surging inflation and droves of expats combined to produce a 19 per cent rise in property prices last year - a figure well above market expectations.

Tassan cited local statistics, which found the total value of land transactions in Dubai to have risen 70 per cent in 2006, compared to the previous year. This surge in investment has created distinct areas within Dubai and established patches with unique characteristics and serving specific purposes.

Dubai’s real estate market is not the homogeneous market that it was five years ago,” contends Hagkull. “We very clearly see a differentiation between the older historic areas of Bur Dubai and Deira and the central business district in the World Trade Centre area. Then there’s what is referred to as ‘new Dubai’, which takes in Internet City and the Marina.”

While banking giant HSBC has said it doesn’t expect supply to catch up with demand until 2015, Hagkull says that the 300 per cent rise in property prices seen in the last five years is a phenomenon that’s not likely to be repeated. “We’re seeing a broader trend to a more maturing of the market. Once you’re at a world level, it’s unlikely you’re going to reach twice that level any time soon.”

A formidable force weighing on the tireless expansion of Dubai is the new laws governing the financing of developments, while others predict that the breakneck pace of construction will eventually tip the market into a state of oversupply. Then there is the question of what will happen years down the line when developers have to pay back the loans which, in the wake of the global credit crunch, have been more readily available as borrowing is cheaper.

But Hagkull says much of the answer for the long term lies right here in Dubai, in the form of pent-up demand. “Right now, Dubai is about 25 per cent under-served. It’s only natural that if you have limited space, you put more people in that space. In the long run that has an impact on employee satisfaction in the workplace. So we anticipate a reallocation of space, as people move out of less-than-optimum locations. This will accommodate a significant amount of demand,” he said, adding that it would create a cascading effect, where people leave less optimum, smaller, older and more distant locations and move into the central areas.

Whatever the doom-mongerers say, the overwhelming international interest seen at the International Property Show over the past three days suggests Dubai’s surging real estate market is here to stay and has served as the opening salvo to what is shaping up to be another lucrative year for the emirate’s property sector which, according to research reports, is responsible for up to 50 per cent of all property-related activities in the Gulf.

Article source: www.7days.ae/business

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