Up and Up!

Prop­erty de­vel­op­ment in Dubai is re­bound­ing af­ter the fi­nan­cial cri­sis.

Southasia - - COVER STORY - By Jave­ria Shakil

In a 2005 in­ter­view to a lead­ing me­dia group, Damien Har­ring­ton, then as­so­ci­ate di­rec­tor of CBRE, an in­ter­na­tional real es­tate firm op­er­at­ing in the UAE, claimed that he didn’t be­lieve that the con­struc­tion boom in Dubai was un­sus­tain­able. "Dubai has been ex­pand­ing con­tin­u­ously for 30 years. There has never been a crash here," he de­clared.

The in­ter­view was printed in De­cem­ber 2005. A year back, in 2004, the rate of growth of Dubai's econ­omy was al­most 17 per­cent – four times higher than that of the econ­omy of the United States.

This was the time when thou­sands of peo­ple, a large num­ber of them in­vestors, were mov­ing to Dubai, one of the seven emi­rates com­pris­ing the United Arab Emi­rates. It of­fered them a tax-free en­vi­ron­ment, the prom­ise of lit­tle gov­ern­ment in­ter­ven­tion and a safe place for in­vest­ment in a re­gion rife with vo­latil­ity.

Har­ring­ton be­lieved that Dubai’s fu­ture was bright and in­vestors, es­pe­cially in the con­struc­tion sec­tor, were of the view that the con­struc­tion busi­ness would con­tinue to grow as it would be sev­eral years be­fore sup­ply met de­mand.

Hardly two years later, how­ever, in 2008, Dubai’s con­struc­tion bub­ble burst in the wake of the global fi­nan­cial re­ces­sion that saw some of the world’s strong­est economies col­lapse. The im­pact of the cri­sis was so hard that real es­tate value in the king­dom fell by 60 per­cent in some cases. Real es­tate con­sul­tant and bro­ker, Jones Lang LaSalle put the de­cline in value of

res­i­den­tial trans­ac­tions even higher – at 65 per­cent – while their vol­ume had de­creased by 53 per­cent by 2010.

In 2002, the Dubai gov­ern­ment had al­lowed for­eign own­er­ship of prop­erty in cer­tain ar­eas. This re­sulted in a surge in real es­tate in­vest­ment as the grow­ing ex­pa­tri­ate work­force went on a spree to buy prop­erty in the emi­rate. Ac­cord­ing to some es­ti­mates, the price of prop­erty quadru­pled in the six year fol­low­ing the 2002 de­ci­sion. The con­struc­tion bo­nanza con­tin­ued as banks ea­gerly lent money. But soon af­ter the fi­nan­cial crunch be­gan in Septem­ber 2008, banks across the UAE stopped lend­ing. In no time, about 50 per­cent of Dubai’s real es­tate projects were can­celed or came to a halt.

The en­su­ing panic saw hun­dreds of peo­ple fired from their jobs. Work­less and with­out res­i­dence per­mits, peo­ple started leav­ing Dubai in hordes, leav­ing a num­ber of hous­ing units va­cant. The price of prop­erty came crash­ing down. The ex­am­ple of Burj Khal­ifa, known as Burj Dubai for­merly, is worth men­tion­ing. Be­fore the cri­sis hit, the price of of­fice space in that build­ing, as claimed by the de­vel­oper, had reached US$4,000 per sqft. Some ten months into its inau­gu­ra­tion, the price de­creased by al­most 40 per­cent.

The prop­erty doom that many had failed to fore­see had ar­rived. It stayed for al­most two years. Those two years wit­nessed ma­jor wheel­ing and deal­ing, one of them be­ing the name-change of Burj Dubai to Burj Khal­ifa ‘to honor the UAE Pres­i­dent, Khal­ifa bin Zayed Al Nahyan for his cru­cial sup­port.’ Some spec­u­late that the cru­cial sup­port was in the form of a bailout that saved Dubai from go­ing com­pletely bust.

But as the sud­den and largely un­pre­dictable prop­erty boom of Dubai sur­prised peo­ple, its re­bound also amazed many. The con­struc­tion sec­tor, es­pe­cially, started pick­ing up within two years of the dis­as­ter. One of the rea­sons was the emi­rate’s strict laws.

Many de­vel­op­ers started to go back to their un­fin­ished projects in or­der to com­plete them. The other al­ter­na­tive was to re­turn all the ad­vance pay­ments to cus­tomers – a le­gal obli­ga­tion which would have cost them dearly. The cost of walk­ing away from th­ese projects was much higher than com­plet­ing them. Another rea­son was the de­cline in con­struc­tion costs and low in­ter­est rates.

But most im­por­tant of all per­haps was po­lit­i­cal tur­moil and the erup­tion of vi­o­lence in the Arab World. The Arab Spring, as it came to be known, re­sulted in regime change in many Arab coun­tries. In the wake of vi­o­lent protests and po­lit­i­cal in­sta­bil­ity, the af­flu­ent class in th­ese coun­tries started to trans­fer their wealth abroad. And what bet­ter choice of a coun­try for an Arab than Dubai, a fel­low Arab state?

As a re­sult, while the economies of the coun­tries that were af­fected by the rev­o­lu­tion­ary tides, al­most col­lapsed, a surge was recorded in the buy­ing and sell­ing of prop­erty in Dubai. In ad­di­tion to buy­ing prop­erty, a large num­ber of busi­ness­men from the tur­moil-af­fected coun­tries also trans­ferred their busi­nesses to Dubai, thus con­tribut­ing to its growth.

The surge in eco­nomic ac­tiv­ity was so strong that Dubai recorded a phe­nom­e­nal growth of 4.4 per­cent in 2012 – far bet­ter than that of many ad­vanced economies of Europe and the U.S. To­day, av­er­age prop­erty prices have once again reached high lev­els. Prop­erty in­vestors op­er­at­ing in Dubai pre­dict a fur­ther 10 to 15 per­cent rise in prices.

Words such as ‘tallest’, ‘big­gest’ and ‘most ex­pen­sive’ in the con­text of con­struc­tion are once again a part of the lex­i­con in Dubai. The rulers have even an­nounced another gi­gan­tic project – a new Taj Ma­hal which would be four times big­ger than the ac­tual mau­soleum. Con­struc­tion of many new shop­ping malls and ho­tels is also un­der­way and the sit­u­a­tion is more or less the same as it was prior to the 2008 cri­sis.

So will the cur­rent boom con­tinue?

The sud­den in­crease in prop­erty prices and fren­zied ac­tiv­ity in the con­struc­tion and real es­tate sec­tors reminds peo­ple of the pre-fi­nan­cial cri­sis sit­u­a­tion. There are con­cerns over the sus­tain­abil­ity of this re­newed con­struc­tion bo­nanza. Fahd Iqbal, head of Mid­dle East Re­search at Credit Suisse, a lead­ing in­ter­na­tional real es­tate com­pany, an­swers some of the con­cerns in an online ar­ti­cle.

In his opin­ion, sup­ply is now much more closely con­trolled than be­fore as new de­vel­op­ment projects are pri­mar­ily backed by gov­ern­ment-owned de­vel­op­ers. He gives the ex­am­ple of Emaar, a par­tially gov­ern­ment-owned de­vel­oper, which has an­nounced two multi-bil­lion dol­lar projects.

He also be­lieves that “Dubai's le­gal frame­work, in­fra­struc­ture and fi­nances are much stronger than be­fore. The RERA (Real Es­tate Reg­u­la­tory Au­thor­ity) has greater depth now, the es­crow law has been es­tab­lished and a mort­gage law is im­mi­nent.”

Another fac­tor, in his view, is the im­proved cash flow in Dubai, thanks to its thriv­ing tourism and trade seg­ments. “The suc­cess­ful re­struc­tur­ing of the bulk of Dubai’s debts has left the emi­rate bet­ter placed to ser­vice its li­a­bil­i­ties,” writes Iqbal.

Th­ese, and other fac­tors, make Dubai the world’s fa­vorite trade and tourism hub, not to men­tion the first choice for res­i­dence of many wealthy peo­ple. And by show­ing re­silience and a re­mark­able abil­ity to bounce back, Dubai has proved that it is a wise choice when it comes to pru­dent in­vest­ment.

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