Harbor Real Estate Blog

09-Jun-2010 - Emirates Business 24-7

Issue of confidence must be addressed: report

The pace of recovery will be determined by the ability to instill confidence in property, says realtor.

Vacancies in single ownership buildings in the most sought-after locations are in relatively short supply in Dubai, says the Harbor report. (EB FILE )
While the degree of uncertainty surrounding the real estate industry will gradually dissipate, the pace of recovery will be largely determined by the ability to address the fundamental issue of confidence, according to a Harbour Real Estate report.

“The economy and real estate industry cannot recover unless those commercial enterprises, investors and individuals that will underpin and be central to the recovery have regained the confidence required to adopt the emirate as their preferred location for establishing a business or home,” Mohanad Alwadiya, Managing Director, Harbor Real Estate, said in the report.

Rebuilding and reshaping the economy will require time, which, unfortunately, suggests a long, painful yet inevitable recovery is ahead of us,” he said.
There are an estimated 50,000 residential units expected to be delivered onto the Dubai market by the end of 2011, which is down from previous estimates of 60,000 units, the report said.

“While this is good news for the industry as a whole, any number closer to zero would be better,” Alwadiya added. However, the issues facing the residential segment of the market, pale in comparison to the office segment. With an estimated 30 million sqft of space coming on stream in the next two years, the office segment of the industry is going to be hardest hit.

“Real estate brokers and owners today are facing the issue of prospective office tenants refusing to consider strata titled buildings, especially those which are situated in non-core locations,” the report said. With an average estimated reduction in office lease rates of 50 per cent over the last year, many existing tenants have been looking to relocate, partly because of their own downsizing efforts, but also to lower their operating costs and improve their business locale.

Vacancies in single ownership buildings in the most sought-after locations are in relatively short supply, particularly for some larger organisations who require multiple floors. The situation is expected to worsen as more strata-titled, non-core position office space is released onto the market, Harbor said.

Slow but positive growth

More affordable areas such as Discovery Gardens, Dubai Silicon Oasis and International City are expected to stabilise throughout the year as these projects are well established and already have a relatively secure tenant or owner-occupier base.

Slow yet positive growth can be expected in areas such as Dubai Marina, Emirates Living and Downtown Dubai. These areas are expected to witness a steady yet slow increase in prices towards the end of the year while areas like Jumeirah Lake Towers and Business Bay are expected to improve subject to the speed of progress in addressing infrastructure and service retail issues. Exclusive properties such as the Dubai International Financial Centre, Burj Khalifa, villas within the Palm and Al Barari are expected to continue to gain momentum because of superior locations, status and product offerings.

Correspondingly, rental prices will stabilise in the more developed and exclusive areas yet continue to slide down in areas not so well located or established, the report added.

“Pressure on rental yields will come from the sheer number of units which are released to the market during 2010, with investors and real estate brokers scrambling for tenants in order to generate whatever income they can,” said Alwadiya said

Need to curtail supply

Harbor believes that supply needs to be curtailed in the short term by either cancelling or rescheduling projects.

Developers will always be reluctant to cancel, as the financial implications, in most cases, will be significant. By choosing to delay they can buy time to address whatever issues they face while cancellation leaves no room for even partial returns on the project at hand.

There may be a significant proportion of projects “delayed” by developers, which will actually never be started. There are many projects which are up to 30 per cent unsold and which will probably face a 15–20 per cent buyer default rate. These projects will be very difficult to deliver, as finance from other sources is extremely difficult to procure and shortfall in investor funding would be crippling, the report said.

There are currently of 875 projects registered with the Real Estate Regulatory Agency. 685 projects have escrow accounts, while the rest are either more than 60 per cent complete or have total bank guarantees. The number of registered developers stands at 427,down from 800 registered more than a year ago. “While the cancellation of unviable projects is a positive initiative, the cancellation of 29 projects will do little to address the oversupply situation given the magnitude of the problem, the report said.

One initiative that has shown some promise and should be explored further is the practice of property consolidations and issuance of credit notes. Some developers have offered investors the option of consolidating investments on projects that have been completed in lieu of those that had been deferred. The practice has had some success and, in certain cases, has allowed developers to either cancel or delay projects without totally dissolving investor capital while allowing investors to realise returns on their investment a lot earlier. However, the practice of consolidation would have far more impact if it became a course of action recommended and supported by Rera.