Rebalance is seen towards ready market
The pattern of activity in the ready market clearly indicates that concentration has receded progressively
It is a known fact that most new industries are fragmented and consolidate as they mature. Most new industries follow the consolidation curve which can be explained in four stages (i) Opening (ii) Scale (iii) Focus (iv) Balance and Alliance. This trend has been witnessed throughout the world, and we have seen this to be no different in Dubai as well, whether the change is due to an innovation, or, as is the case of freehold real estate, whether it is due to legislative changes.
In the United States, in the first decade after the invention of the automobile in 1885, there were only 30 companies. However, soon after, this number increased exponentially to 253 companies as demand continued to increase and by 1929, the number of players had contracted to 44 companies.
Likewise, it appears in Dubai as if a similar trajectory is being followed, where the number of real estate developers in freehold has jumped from slightly more than 100 in 2009 to more than 1,200 currently (the active number of developers are likely a lot lower). We opine that as the consolidation phase kicks in, the number of developers will shrink significantly (going by the automobile example and others, the shrinkage could be upwards of 75 per cent).
In the Dubai off-plan market (which accounts for nearly 65 per cent of total transactions in 2017), there has been a significant increase in concentration, where the top 3 developers have risen from 32 per cent of transactional volume in 2015 to 43 per cent in 2017. This implies that factors such as developer track record, financial size and reputation play major factors in the minds of investors.
The biggest beneficiaries in capturing market share in off-plan transactions have been Emaar and Azizi. While Emaar remains the bellwether of the industry, it is interesting to note that the other major players are from the private sector (Azizi and Damac). We opine that larger private sector developers will survive the current trend of consolidation; however, there is likely to be a shrinkage of market share by private sector developers.
This developer consolidation can be witnessed in project launches. In 2005, 52 per cent of units launched were from the top 3 developers of that time, whereas in 2008, it decreased considerably to 24 per cent, which was clearly unsustainable. In 2017, however, there has been a swing of the pendulum towards the major developers again, where the number of launches by the top 3 has increased to 40 per cent, a figure that we opine will continue to increase.
In the ready market, it appears that concentration is becoming less of a factor; as units become complete (itself a function of private sector developer activity), transactions increase, and investors as well as end-users become progressively less sensitive to the developer brand. Instead, focus shifts to other concerns such as location, price, quality, etc.
The pattern of activity in the ready market clearly indicates that concentration has receded progressively. It is apparent that in terms of investor activity, there is less resonance with the branded developers once the unit has been handed over. Expectedly, the focus then shifts to location and price, and given the price-sensitive nature of the market, it is of no surprise that the market share of private sector developers has increased.
Developer concentration in the real estate market has been evidenced in the off-plan market. Given the fact that the off-plan market accounted for 65 per cent of transactions in 2017, the market share that the top 3 developers enjoy has not been witnessed in other parts of the world.
We opine that as the market rebalances towards the ready market, over time, there will be a greater breadth of market activity; however given the supply pipeline, it is likely that concentration will continue to be witnessed in the transaction volumes as smaller developers continue to consolidate.