Mega- projects now laced with realism
Anumber of us who have been in the region over the past decade associate the UAE and, more specifically Dubai, with mega- projects, some really successful and some not. Development activity has returned to the UAE over the past 18 months initially starting with Dubai, then Abu Dhabi and, more recently, in the northern emirates.
A number of real estate industry experts, including JLL, had raised the issue of unsustainable price rises and irrational exuberance during the latter part of 2013 and first quarter of 2014. Thankfully, measures taken by the authorities have resulted in some cooling down of the market with reduced growth in sale and rental values, as per JLL’s recent Dubai Q2 Market Report. ( Albeit, rental growth in Abu Dhabi continues after the removal of the rent cap.)
It is interesting to note some of the differences between large- scale projects before and after the financial crisis. Based on our involvement in several high- profile projects, it is clear that lessons have been learnt.
Before the global financial crisis of 2008- 09, there was undue reliance on land sales to fund large- scale projects, which required master- developers to rely on small- scale developers and investors with limited experience and track record.
This was one of the main reasons the Dubai property market suffered as these investors would buy land by putting a minimal down payment then sell off- plan property based on a concept design and use the proceeds to buy more land instead of investing in the project.
The market was highly fragmented with a slew of developers with limited joint venture or risk sharing. Most of the projects were more style than substance and with limited focus on market fundamentals, demand assessment or development strategy. These were what we call ‘ design- led’ and not ‘ market- led’ projects.
Irrespective of how most of these projects were marketed, in the end, theywere all off- plan residential focused on targeting short- term investors and not the end- users. There was 80 per cent supply targeting 20 per cent end- user demand.
Over the past two to three years, we have seen a number of large- scale projects being announced, some new but most rebranded, repositioned or repartnered old projects. Some of these are Mohammad Bin Rashid City, DWC Golf City, Lagoons, Deira Islands ( formerly Palm Deira) and the recently announced project by Dubai Holding.
There is a marked difference in how developers are going about planning megadevelopments with a number of landowner- developer deals announced such as Dubai Holding- Emaar for Lagoons, DWC- Emaar for Golf City, Meydan- Sobha for MBR City District One, Meraas-Emaar for Dubai Hills, plus many more in the pipeline.
This clearly shows that increasingly landowners for whom real estate development is not core are happy to partner and share risks with developers with credibility and track record, which was not the case pre- crisis. There is also a reluctance to sell land as a means of cross- funding development. Slowly but surely developers and investors are realising the importance of land, particularly in Dubai, and are more interested in setting up joint ventures rather than selling.
Finally, it is of critical importance that the developer sets the vision, not the adviser. If there is no vision, projects tend to be planned as a bit of everything catering to everyone, in most cases, being outsold or outleased by better planned and better positioned projects having a clear vision.
Developers should focus on the trinity of perspectives for mega- projects:
Market perspective: The project has to be market- driven and targeted towards end- users and not investors.
Development perspective: The project has to relate to its location, surroundings, traffic situation, infrastructure capacity, and regulatory requirements. Other development related considerations are massing, scale, synergies, accessibility, sustainability and liveable design.
Financial perspective: A project has to be financially feasible not interms of simple cash- on- cashbut interms of the time value of money. Some of the other key issues to focus on are:
■A comprehensive market and financial feasibility assessment for the project before any planning or design work is started. Ideally, both the planner and real estate experts should work collaboratively and not one after the other.
■Importance of having all stakeholders ( senior developer leadership, real estate consultants, masterplanners, engineering firms, branding/ marketing firm, etc) on board as one team rather than a piecemeal approach.
■A clear understanding of the demand profile being targeted across the different asset classes.
■Arobust and balanced phasing approach, flexible design which can absorb medium to long term market changes.
■A well- developed funding strategy with a clear understanding of project development costs.
Increasingly land owners for whom real estate development is not core are happy to partner and share risks with developers with credibility and track record, which was not the case pre- crisis.