Dubai s Real Estate {4 th Quarter 20} Q4
Dubai s Real Estate Q4 RichVille: RichVille is a UAE based real estate asset management company offering the entire gamut of real estate advisory services including investment, development, new projects sales and marketing, leasing and property management, feasibility studies and fund advisory services. RichVille advisory services are built on the edifice of experience, market knowledge and a professional approach. RichVille s report this quarter will focus less on statistics and numbers, and will focus more on initiating a plan or efforts to rescue the real estate market from the risk of correction. The report will include an overview of the market status, some high level segmentation of the market, some high level projections, and finally, some suggestions on what could become a rescue plan for the property sector. Market Status It is very interesting to see that while the authorities around the world are taking all possible measures to revive their real estate markets (and their overall economies) by introducing measures which include among other measures cutting interest rates and providing some tax incentives for property buyers, authorities in Dubai seem to be doing nothing to support the real estate sector which already withstood a very slow summer season, and even slower Ramadan month, a worldwide financial crisis, declining property values in the US and Europe and finally a Cityscape exhibition with no sales activity whatsoever. Since the beginning of the financial crisis, sales and re-sale activities in Dubai market have been almost zero with very few end-buyer deals being concluded here and there. All speculators, investors, and end-buyers are following a wait-and-observe strategy, and they are reluctant to buy. Property owners on the other hand, have been willing to sacrifice their premiums but so far are resisting the pressures to sell below their cost. What is more interesting is that despite all the above, the market has so far maintained its pre-summer 20 prices and is resisting so far - all the pressures on prices. This is a great demonstration of how strong the market in Dubai is. 1
Dubai s Real Estate The question is why haven t the prices gone down? To try and answer this question, let s try to first understand the main reasons behind the worldwide property and financial crisis: 1. It all started with the sub-prime crisis in the US which came as a result of poor lending terms and ease of obtaining credit by unqualified borrowers. 2. The rest of the problem was mostly a psychological effect of the subprime crisis which led some leading banks and financial organizations to file for bankruptcy. 3. Most of the investors in the US and Europe are institutional and these institutions panic quickly and try to liquidate regardless of losses to reduce their risks. 4. Overall lack of liquidity and lending facilities worldwide. If we analyze our market in Dubai, we find the following: On the negative side: 1. Banks have revised their lending terms to make it extremely hard for developers, investors, and end-buyers to obtain approvals for loans. Banks have imposed measures like 35% minimum down payment, very high interest rates and very difficult approval terms. 2. None of the government financial support reserves have been exclusively allocated to support the real estate sector. 3. The increase in the value of the US$ (by almost 20%), and therefore the value of the Emirates Dirham, made properties more expensive for European investors who represent a major part of property buyers in Dubai. 4. Investors are holding on to their cash and are negotiating with developers the possibility of deferring the upcoming payments. This of course will cause some cash flow issues for developers and will delay the completion of many off-plan projects. What is more interesting is that despite all the above, the market has so far maintained its pre-summer 20 prices and is resisting so far - all the pressures on prices. This is a great demonstration of how strong the market in Dubai is. 2
Dubai s Real Estate Q4 On the positive side: 1. The government of the UAE and the authorities in Dubai have been very quick in providing assurances on the financial stability of the country and its institutions. 2. The government has provided financial support for banks in case they needed it. 3. Most reports showed that Dubai s financial position is relatively speaking stable. 4. Most banks and large companies provided assurances of their strong financial position and their liquidity position. 5. Construction costs have been declining, therefore, reducing some of the cash flow pressures on developers and enhancing their profitability. Although the overall economic growth in Dubai is expected to slowdown, which might result in lower than expected population growth (influx of expatriates into Dubai), and therefore resulting lower demand on properties, it is expected on the other hand that the supply of properties will decline in a much greater percentage due to delayed projects and many cancelled others due to the crisis effect. However, and to answer the question why prices haven t declined so far, we believe that the main reason is that most property owners in Dubai are cash-rich local and international individual investors (non-institutional) who don t like to lose money. These investors still believe in the property market in Dubai, but at the same time, they prefer not to make any additional investments in the market until the dust settles. The question will always remain whether the above mentioned strong market fundamental will be enough to offset the effect of any psychological panic that might hit some small distressed property owners, and then spread to the rest of the market? This is something that we can never predict, but only time will tell. 3
Dubai s Real Estate Projections & Property Segmentation We ve reviewed several reports published by leading real estate and financial companies shortly before and during the financial crisis suggesting the property prices in Dubai will decline by 10% by 2010 or by 20% by 2012. Other reports projected a continued growth in the real estate sector over the midterm. In our opinion, we don t feel that a one-projectionfits-all approach is the best approach to project the direction of the market. We feel strongly that different segments in the market will perform differently from others. Therefore, we would like to first provide our high level segmentation of the properties in the market as follows: Based on launch period: a. Previous Projects: Projects launched before 4th quarter 2007 and have the following characteristics: - Prices are 30 50% below current market price; however, more than 20% of property value has already been paid to the developer as a down payment, with more payments approaching. - These projects represent over 60% of the overall supply and most of them are already under construction. b. Recent Projects: Projects launched during and since the 4th quarter 2007 and have the following characteristics: - Prices are at the high end of the market but the down payment is very low (under 10%). 4
Dubai s Real Estate Q4 - These projects represent under 40% of the overall supply with very few already under construction. Based on Value for Money : a. Excellent Projects - Good developer - Excellent location - Good payment plan - Availability of finance - Price is 30% below current market price b. Good Projects: - Good developer - Good location - Good payment plan - Availability of finance - Prices are 15% below current market price c. Bad Projects - Missing one or more of the above criteria. - We expect that a large number of these projects will never see the light, even if construction has already started. Historically, buyers of newly launched projects have been mostly speculators (flippers) who were used to paying a small down payment (as low as 2%) and flipping the property with premiums (also as low as 2%) within a couple of weeks, which provided them with annualized returns of around 2000%. These flippers have been accused of being the reason for the increase in market prices over the past 3 quarters; however, we believe that their margins of less than 10% had a minimal effect when compared to the huge increase in construction costs. We actually believe that these speculators are the main reason for the growth and stability of the real estate sector in Dubai over the past 5 years. In all cases, the speculators are now out of the market and any new property sale or re-sale will have to relay mostly on mid & long term investors or on end-buyers. 5
Dubai s Real Estate Based on this, we feel strongly that the prices of Previous Projects will actually increase especially if they were classified as excellent or good projects. A worst case scenario will see these projects maintaining their value for the time being but increasing over the mid and long term. Most of the future demand in the market will focus on these properties (especially if they are completed or at an advanced construction stage). Unfortunately, the same can t be said for Recent Projects since they are already over priced and were until recently - appealing mostly for speculators. Depending on the classification of the project (excellent, good or bad), these projects will in the best case scenario maintain their current prices but with a good chance that their prices will drop in the midterm. For excellent projects, and even if their prices drop over the short and mid-term, the property market in Dubai will always be a good investment over the long-term. If we take into consideration the weighted average projected price of Previous Properties and Recent Properties, it is safe to say that the weighted average price of properties in Dubai will be stable with a chance to increase to in the mid and long-term. Over all, we expect the market to shift from speculators and short-term investors to end-buyers and long-term investors who are willing to pay up to 35% as a down payment on a property and finance for 20 years or more. Mid-term investors will also be able to find excellent opportunities in the market but they will need to also pay higher down payments and settle for lower returns than they used to during the boom period. Commercial / Office Properties Due to the expected slowdown in the economy, and the impact it will have on the expansion (or the downsizing) of companies (especially real estate companies), we expect rents for commercial / office spaces to stabilize and then start to decline during 2010. However, This will have little impact on prices of commercial properties given the high yield they currently offer and the price elasticity which comes with these yields. At current prices and current rental rates, investments in off-plan commercial properties would offer 15 20% rental returns once these projects are completed. Prices will not be affected even if rental rates decline by as much as 50% (a 7% return is considered high in international standards). 6
Dubai s Real Estate Q4 Residential Properties As discussed earlier and although we expect the slowdown in the economy to reduce the population growth rates (reduced demand), we feel that the delay in construction and the cancellation of many projects will reduce supply by a much higher percentage. This will lead to demand continuing to be higher than supply over the mid-term. However, many projects are expected to be handed over by the end of 2010 providing some stability to rental rates in the short-term. Therefore, we expect renal rates of residential properties to stabilize in the short-term but will probably go back to increasing moderately beyond 2010. At current prices and current rental rates (excluding villas), investments in off-plan residential properties would offer 8 12% rental returns. Prices of residential properties will probably be stable (except for bad properties of course). Conclusion To conclude our projections we would like to clarify that our projections assume that the market will not undergo any hysteric psychological selling as this can never be predicted, however, we feel that the market fundamentals are strong enough to provide some feeling of safety to property owners and investors. Actually, we feel that Dubai s property market has always been the safe haven for investors worldwide at time of crisis, and we are confident that Dubai will continue to play this role this time and in the future. 7
Dubai s Real Estate The Rescue Plan Before we go into our suggestions to create what would become the rescue plan for Dubai s real estate market, we would like to point out that the success of any plan will require two things: 1. The plan needs an influential champion and leader with a vision so that it can be developed properly, and most importantly, implemented. 2. All the stakeholders (mentioned below) in the real industry will have a role or responsibility as part of this plan. The success of the plan will probably require the collective and integrated contribution from all the stake holders. In the following section we will list what in our opinion should be some actions that each stake holder can take to contribute to the success of the plan. RERA - Dubai s Land Department: While RERA s mission is mostly focused on regulating and documenting real estate transaction, its vision is to provide the best environment for real estate investment. It is based on this vision that we request from RERA to take the leadership role and to work with all the stake holders to create and implement a rescue plan for the real estate industry in Dubai. We believe that RERA should conduct its own research and also organize discussion panels of real estate experts to try and come up with a proper plan. RERA can also use its position as the new representative of all real estate stake holders to lobby the government, the central bank and other organizations to assist in implementing the plan. 8
Dubai s Real Estate Q4 The following are some suggested actions that RERA can take as part of the plan: 1. Create property buying incentives for investors or property buyers who are sitting on the boarder line by waiving the 2% transfer fees for the next 3 months (similar to some tax incentives introduced by authorities in some western countries). This of course should be a limited time offer. 2. Provide some flexibility and waiving any penalties to allow developers to delay the start of construction of recently launched projects (which haven t started construction already). RERA needs to keep in mind that if these developers are forced to start construction now, they will face serious cash flow and financial difficulties due to lack of payments from buyers and unavailability of construction finance from banks. 3. Create on-going discussion panels and use the experts to create measures and incentives to ensure the sustainability of Dubai s real estate market growth. 4. Champion an international PR campaign (supported by the investment incentives) to position Dubai s property market as a safe haven for international investments. UAE Central Bank and Banks in Dubai: Although the central bank has pro-actively taken financial measures to support the banks and the economy in general, the central bank has not taken any direct measures to support the real estate industry, which is considered one of the main drivers and contributors to the growth in the UAE economy. As a matter of fact, the measures taken by the central bank and consequently by the banks were very harmful to the real estate industry and these measures can single handedly result in serious damages to the industry. The central bank did not reduce its interest rates when all western countries reduced theirs. Banks on the other hand made project construction finance and end buyer financing almost impossible by significantly increasing interest rates, increasing required loan down payments to more than 35% and finally making the terms for accepting loan applications very difficult. While we don t argue with the risk management measures taken by the central bank and the banks, we feel that they can play an essential role in the rescue plan by following a targeted and segmented approach 9
Dubai s Real Estate to providing financial facilities to the real estate industry. For example, we suggest the following: 1. The central bank can stick to its financial policies and keep the interest rates high, but at the same time, it should allocate some of the cash provisions to directly support certain segments of the real estate market to keep the activity going and maintain (or regain) investors confidence in the market. The central bank can also discuss with banks measures to provide more support to the real estate industry without, of course, exposing the banks to any additional financial risks. 2. Instead of taking the easy solution of making loans difficult for everybody in the real estate industry, banks should make the extra effort to further classify developers and developments based on new criteria that take into consideration the new market dynamics. If for example, someone is asking for finance to buy an excellent property which is 30% below market price, it doesn t make sense for banks to ask them to pay 35% of the value of the property when they are asking for the same from someone who is buying a recently launched and over-priced property. What we are trying to say is that banks need to contribute to the rescue plan by following a more selective approach as opposed to a make-it-hard-for-everybody approach. 3. We believe that banks should focus their lending on qualified end-buyers and investors since these buyers will become the majority of the market and at the same time, this financing will become an indirect way to finance construction of projects and will assist in supporting the cash flows of these projects. Master Developers: 1. Given the financial pressures on developers, we request master developers to wherever possible - defer land payments due from developers by 6 months. 2. If contracts between master developers and developers require developers to start construction before a certain upcoming - deadline, we suggest that the master developers should remove any such conditions or delay it by 6 months. 10
Dubai s Real Estate Q4 Developers: In light of the current market and financial situation, many developers will face serious cash flow problems and many projects will be delayed or even cancelled. Although customers money is protected in the Escrow accounts, the biggest problem is that many properties have been re-sold several times with a premium. Therefore, if a project is cancelled, many customers will lose the premiums they have paid and a huge legal activity will start. Therefore, our preference is for projects to be delayed and not cancelled. The following are our suggestions for the developers: 1. If they haven t launched a project yet, then they should NOT launch it for now and wait for a few months to see how the market will perform. Once a project is launched, then the cash flow obligations start to mount and the financial situation becomes more complex. In all cases, new off-plan project sales are very slow, and developers will need to inject a significant amount of cash to make sure the project is built (especially, in the absence of construction finance these days). 2. If they haven t started construction on a project yet, then they should subject to approval from RERA - delay the construction by 6 months, and then re-evaluate the situation after 6 months as well. 3. If they completed the piling work (usually done by a specialized contractor) but haven t started the construction of the project yet, then they should subject to approval from RERA - delay the construction by 6 months, and then re-evaluate the situation after 6 months as well. 4. For projects that have already been launched and sold, developers will now face a collection problem from property buyers due to the uncertainty in the market and the lack of cash and financing facilities. Therefore, we suggest that developers pro-actively delay any upcoming payments from buyers by 6 months, and at the same time, provide incentives (e.g. 5% discount) for early payments. 5. Developers should be more flexible in deferring upcoming payments (especially from full floor investors or speculators) to avoid major payment defaults, which might result in serious cash flow issues for the project. 6. When launching projects in the future, developers will need to arrange for at least 30% of the project construction cost in cash and also 11
Dubai s Real Estate become more creative in their payment plans and special offers. Having said this, we still suggest NOT launch any new projects for the next 6 months. Speculators / Flippers: 1. It s time for speculators become mid-term investors and focus their attention on managing their cash flows and arranging money to pay upcoming payments. Tariq Ramadan Chairman Tharaa Holding A leading industry figure, Mr. Ramadan is also the Founder and Chairman of Richville, Hadara, Rich Art, RichWeb, Tharaa Capital and Dar Al Tharaa. 2. Speculators should negotiate with developers to delay any upcoming payments in order to reduce the pressure on them to sell below cost which will hurt other investors in the project and also reduce the attractiveness of the project in general. Investors & End-buyers: Investors and end-buyers are the best hope for the Dubai real estate market since all the attention will now be on them to start the new wave of activity in the market hopefully with some additional financing support from banks. There will be a significant amount of good opportunities available in the market including some off-plan cash units at almost half price as well as some distressed sales (in excellent properties). For investors and end-buyers, we suggest the following: 1. They should take advantage of these low risk and high return - opportunities as one way to create some activity in the market. 2. They should make sure to by what we defined as Excellent Properties. We hope that this report and our modest attempt to contribute to a rescue plan will motivate RERA and the media to have further discussions with real estate experts who can provide more suggestions towards an integrated plan. 12
P.O.Box: 122727 - Dubai, U.A.E Tel: +971 4 228 2656 - Fax: +971 4 228 2654 E-mail: info@richvilleproperties.com www.richvilleproperties.com Dubai - Abu Dhabi - Sharjah - Doha - Muscat