Dubai is one of the seven Arab emirates which belongs to the UAE (United Arab Emirates) situated in the Middle East. In the last twenty years, this once inexistent country soon became one of the most controversial of our time with each year new out of the ordinary developments that were fascinating the rest of the developed countries. This money making city surfaced from the sand in the middle of the world and was soon seen as the best place to invest, where conservative returns would be double the ones in Europe or in the United States. The government's plan was to change Dubai from a Middle Easter hub to a global one in a short amount of time. Dubai's aim was to become the most modern financial centre in the world with the tallest skyscrapers. This region economic boom was mostly driven by the oiling economy but from 2000 the government wanted to diversify its scope and not only rely on the oil, so that when it eventually ran out, Dubai could exist on its own. Suddenly there was a very important demand for space and as the supply was scarce, the rent and trading prices were above and beyond any of the European ones. Both the government and private investors wanted to take advantage of this new found expanding economy. We will study the real estate sector in Dubai until the recent crash and look at the factors that contributed to this, as well at the future perspective of the real estate sector.
Source: World Atlas
The research Objectives:
The main objective of this project is to look at the past growth in development of the Dubai real estate market, analyse the recent property crash and assess what the future holds for this region.
The research Design:
The research will mostly be an analysis of the Dubai real estate market though secondary information and data. The main data will be collected mainly from the Dubai Statistics centre, the United Arab Emirates Ministry of economy, as well as from the Dubai Chamber of commerce for past information. Any recent information has been taken from the internet, mostly newspaper articles in relation to the crash. The forecasting will be based on the findings as well as the perceived recovery by real estate experts. This will mostly be taken from outside sources as any UAE official website promote the region and therefore might not reflect the true picture.
The growth years of the Dubai Real Estate Market
As we know the property market is a complicated one. Mostly the property price will be determined by the supply and demand, as well as other factors, such as its geographical location, the specification of the building, the investment purpose. Before 1999, the investment in Dubai was only allowed to Gulf Cooperation Council [GCC] countries and the only mean of buying in Dubai was to be living and working there full time.
From 2000 as the government wanted to diversify the economy of the country a lot new residential and commercial real estate were planned to be built. At the same time the market started allowing foreign investment to develop in Dubai, "this in fact has come to include almost every major property development project subsequently launched in Dubai."
Below we can see that the construction business represents 13% of the economic sectors in Dubai. But when the economic growth started and everyone wanted to invest in Dubai the need for financial office spaces, hotels, commercial and residential space was all related to the property market and prices skyrocketed. As we know the real estate market is different from other competitive markets. The demand for new space in Dubai to meet all of these booming sectors could not be met by the supply. The planning and building of new supply is a lengthy process and the market cannot react to these changes immediately. This is also the big problem with a very fast increase of supply, when suddenly the supply is no longer needed it cannot be instantly reduced "on demand".
There are many other factors that will also affect the demand and supply in real estate market.
The main drivers of the real estate supply demand will depend especially for Dubai on the population growth, income that can be generated within the territory, the cost and availability of financing for larger projects, and the future returns or any long term growth.
As Dubai increased its population size very quickly the demand started to feed onto the need for additional supply. This already started the higher real estate value.
The Dubai population
Going back to 1968 we notice the population of Dubai was only around 58 971, less than 20 years after the population had gone up to around 370 800.
The graph below shows the extremely high increase in population today it is almost 1,600,000.
We can see above that in the last 30 year the population of Dubai has encountered extremely high population growth, its cumulative growth rate increased by almost 7%. The 2010 projections are to hit close to 2 million inhabitants in Dubai.
To encourage the real estate demand and attract more people to invest in Dubai the local laws had to be liberalised and simplified. This meant the government had to rethink about the labour laws, immigration policies as well as the residence applications.
For the real estate this involved the changes in the lease and tenancy regulations. By doing this the Dubai government's aim was to attract even more business to the state.
Best and worst case scenarios for Dubai's population figures and how they reflect the Emirate's GDP.
The main reason for this increase in population is due to the economic expansion. The additional demand for this expansion will result in mostly needing workforce to satisfy this growth. Looking at the year 2000, the population of Dubai consisted in majority of foreign born men aged between 20 and 40 years old. The census reported that in 2005 only 17% of the Dubai population was composed of UAE nationals.
The Dubai Economy
The Dubai industry was mostly built on the oil revenues. But very soon the country realised that the oil supplies were not endless and that there was a need to diversify to different industries. The focus was progressively put forward towards real estate, construction, finance, trade and tourism activities.
Source: Dubai Chamber of commerce
In this graph we can see that since 1985, the economy relies less and less on the oil resources and has managed to diversify its activities to others.
Today the sector looks like this, with only 3% of the activities of Dubai relying on the oil sector.
Source: www.2daydubai.com
In the year 2000 the economic goal for the emirate was to reach a GDP level of 30 billion
USD by 2010. As early as the year 2005 it had passed that level and thereby managed to reach its goal five years earlier. In 2008 it was publicized that the government expects to maintain an average annual GDP growth equal to 11% and reach a level of 108 billion USD by the year 2015 (UAE Yearbook 2008). Figure 3 shows the development of the GDP level in Dubai whereas figure 4 shows the percentage growth of the GDP per capita in comparison to the previous year. The latter can be compared with figure 5 which shows the percentage growth of the GDP per capita in Europe in comparison to the previous year.
Gross Domestic Product (GDP) of the Emirate of Dubai 2006-2008
Here we can look at the GDP indicators that show the strong position of the economy until 2008. We can observe a significant growth between 2006 and 2008.
"The real GDP growth (at constant prices) for the year 2007 was 9.2% and 18.3% growth in nominal GDP (at current prices), while in 2008 the real GDP (at constant prices) growth was 5.7% and 14.2% nominal growth (at current prices). The Emirate of Dubai GDP in 2006 amounted (223.3) billion AED at current and constant prices, and in 2007 the GDP amounted (264.2) and (244.0) billion AED at current and constant prices, while the GDP in 2008 is amounted (301.6) and (257.9) billion AED at current and constant prices."
Another important factor which will play a major part in determining real estate demand will be the income of the local population. The graph below give a historical perspective on the GDP of Dubai (gross domestic product), including the population size at the time and the income per capita. The GDP is given in million AED and population in million persons.
As we can observe in the period below between the year 2000 and the year 2006, there was a cumulative annual growth rate increase of 13% GDP of the total GDP and the population only cumulatively grew by 9%, as a result of this the cumulative growth of the income per capital when up 4%. Similar trends were seen in other GCC countries.
The development of the Dubai Real Estate:
The supply of real estate is controlled by the government and the private sector. For a long time the Dubai real estate was only run by the government but in 2000 the market was opened to foreign investors.
The City of Dubai has divided the real estate into 3 clearly defined groups:
Villas and residential complexes
Multi-storey buildings for commercial purposes
Industrial recreational and service buildings
As we can see from the table below the residential villas and complexes show the most significant increase with an augmentation of almost 30% between the years 2000 and 2005. In the last year they showed a small decrease of approximately 5%. The total number of completed buildings in Dubai increased by 16 per cent during the period 2000 - 2006 from 1,917 buildings in 2000 to 2,222 buildings in 2006. One of the aspects that decreased during this period was the recreational and services buildings: here we can see that there is an important difference in fluctuation. We can only assume that these buildings were only internally converted to meet the demand and that the difference in fluctuation was mainly due to them being converted into commercial entities. This can be demonstrated further by the increase in number of commercial buildings, which also shows a quite significant fluctuation during this period. Another possibility to explain this would be that the government would have sold them to private investors. But in general the total government complexes experience a significant growth between 2000 and 2002, and then suffered a decrease between 2003 and 2004. Again these fluctuations could be selling to private investors.
Source: Dubai Municipality
The projects being built in 2006 by the government were valued to around 11 billion AED (United Arab Emirates Dirham). They were distributed mianly into commercial buildings, industrial and residential complexes.
This chart explains the repartition of the different residential units that were built during 1993 and 2005.
From these figures we can identify that the total of all housing units grew by more than 100% between these years. Most of the units were flats as a lot of expats were relocating to Dubai and this is when the demand was the highest for that type of housing.
Source: Statistic Centre of Dubai
To promote further development the Dubai government started setting up semi- private companies. These key companies are Emaar Nakheel and Dubai properties. They receive the main benefits of the decision taken by the government to delegate responsibility to develop the real estate sector. The government incentive was to subsidies land at advantageous rates which were sold more cheaply to these companies a. As the attitude to investment in real estate in Dubai was changing most developers were faced with an sudden extremely high demand and were pre selling projects on plans or drawings. There was added pressure from promoters and developers to complete more properties in order to meet the demand.
The supply of finance that was available before 2008 and the change in law that expatriates were able to now own property increased drastically the demand and supply of constructions, more specifically the more expensive range. The land price is one of the main factors in the extreme prices for the real estate.
Supply in Dubai
If needed: The primary determinants of real estate supply are the costs of production inputs, cost of financing, advances in technological know-how, and expectations regarding future demand.
Increases in the cost of production inputs reduce the quantity of real estate supplied at a given price. Real estate production inputs include land, labour and materials. If land is not available at a price that permits a profit, then development cannot occur. Moreover, land is not useful for development unless a suitable infrastructure is in place.
Land prices
The high prices that suffered the real estate market in Dubai is mainly due to the extremely high prices of purchasing the land. Another factor that contributed to these very high prices was the cost of construction, mainly the transport and costs of machinery and material.
But unlike other regions for each building that will come on the market for purchase, the Dubai Land Department will issue two prices. The maximum and the minimum prices each will indicate the highest price and lowest price of land that was sold in the same area. This will be issued with considering the different feature for each land area.
Between 2002 and 2006 the maximum prices seemed to remain constant at the same price levels, while the minimum prices had significantly increased as per the table below. Except for Al Nahda second which increased so much between 2004 and 2005 that it was corrected the following year. The second table give the cumulated annual growth rate per area. All were positive expect for Al Nahda which we explained previously but places such as Emirate Hill third grew by almost 200%.
Source: Dubai Land Department
Construction and financing
The construction market in Dubai was greatly impacted by the volatility of material costs. The main materials used for the purpose of construction are cement, aluminium wood and steel.
All of these increased by 23 to 44% between 2002 and 2006. For example in 2006 the steel commodity price went from 4,000 US dollar to almost 6,000 US dollar.
Financing costs and accessibility are also some of the key drivers of supply, demand and production. Another important point for additional cost in Dubai was the added pressure to complete developments. As this was one of the major issues, there were added costs in doubling or even tripling the construction workforce so that the construction site would operate day and night. For that the technological construction costs were very high as the site had to be noiseless as it would operate even at night. In Dubai and in most of the United Arab Emirates the financing accessibility started to greatly expand in the recent years and was mainly responsible for the many of the larger real estate developments such as residential, commercial and offices. The main players in providing financial solutions in Dubai were firstly Amlak and Tamweel which had to adhere to the Islamic Sharia Law (Appendix 1). As foreign financial institutions started to enter the Dubai market, and created additional competition within the market, this enabled reduce borrowing rates, extend the amortisation and repayment periods which also contributed to facilitating the investment from foreign and local developers.
Before the crash, the dubai contruction landscape looked like this. As prices between 2007 and 2008 rose by 78% everyone wanted to invest in this market.
Today most of these projects have been put on hold.
Source: www.2daydubai.com
