Will the UAE property market recover?

Will the UAE property market recover?
08 May 2011

BRICKS and mortar have suffered a torrid time in many parts of the globe, and the UAE is no exception. So will the property market here recover?

cashy spoke to Saud Masud, head of real estate at Rasmala Investment Bank. Here's what he had to say... 

Q What's the outlook for UAE property?

A The short of it is that, yes, it will recover. The long of it is the number of years for such a recovery. Property 101 first: real estate is a cyclical sector where asset prices tend to appreciate over longer periods and by that I mean not months but years, perhaps even decades in some cases.

Fundamentally house prices are correlated with GDP (gross domestic product) growth and job creation: that is the more jobs, the more inflow of expats (in the case of UAE) and the more the economy grows and vice versa, and so does the value of housing in general. The other side of the property equation is supply. The more the supply the longer it takes for prices to start their long-term upward climb.

Q What's the supply/ demand picture like here?

A In the UAE one must first get comfortable with the idea that the investable property market is fairly nascent with freehold entering the picture only eight years ago at around 2003 in Dubai, followed by Abu Dhabi roughly two years later.

Furthermore, the overall market size is quite small with approximately 325,000 residential units in Dubai and 180,000 residential units in Abu Dhabi. The remaining five Emirates are excluded from this discussion as much of the freehold scale and investibility revolves around Dubai and Abu Dhabi.

In a nut shell when we talk about UAE housing we are primarily focused on a little more than half a million residential units catering to a population of 3.2 million (with Dubai and Abu Dhabi fairly evenly split at 1.6 million each) and an estimated 60,000 more residential units to be delivered in the foreseeable future. Note that the total UAE population is around five million with the other five Emirates, including Sharjah, making up the remaining two million. Also note that almost 80% of UAE's population is expat-based, hence sustainable local demand is driven largely by continued economic expansion and job additions.

Q Do prices have further to fall first?

A The UAE enjoys branding and by that I mean a tried and tested environment that has created economic opportunities over the years and allowed for a cosmopolitan lifestyle to flourish in the Middle East. Clearly Bahrain is not very different, but scale-wise it's much smaller than Dubai, for example. Dubai is not just a destination for tourists, but home to expats who have settled for many years with relatively better opportunities as compared to their home countries, case and point, the sub-continent whose nationals comprise of nearly 60% of Dubai’s population. Abu Dhabi is now investing in reshaping its image and infrastructure and modernizing to comparable levels of a Dubai or Bahrain.

While the Middle East in itself is fairly small note that Middle East combined with North Africa is roughly 350 million people and add to this the sub-continent and we get roughly 1.7 billion people or roughly 25% of world’s population in roughly a five-hour flying radius. The point here is that as long as multicultural and multinational element of demand is kept centre point of UAE's future there will likely be healthy demand to benefit from. Secondly, the property sector has to reprice itself to the volume sweet spot or essentially where not just the top 2% of the target market may afford housing in Dubai or Abu Dhabi, but middle income families may also find property investing within reach.

Q How does the UAE property market differ from others?

A The UAE market is really no different than any other property market globally where fundamental investing rules apply, but give certain unique demographics, the market size and maturity, the timing of recovery may be extensively debated with no real right answer.

The UAE also has relative political stability and a brand to work with. The rest is down to dealing with a property cycle and the market reforming based on lessons learned to appeal to longer-term investors for the next up cycle.

Q What else will aid recovery?

A While it goes without saying that demand and supply need to be in equilibrium (perhaps two to five years from today), there needs to be greater transparency and regulatory coverage that may assist everyday investors in true price discovery.

In other words, laws should be able to protect any investor and developer and prevent speculative buying and selling and price masking in the marketplace. This is easier said than done, indeed. However, with property likely to be the largest investment in a family's or individual's life, governing laws and regulatory enforcement matter significantly in restoring or eroding confidence, and in turn demand.

Pic credit: phanlop88/ FreeDigitalPhotos.net

Do you think the UAE property market will recover? How long will it take? Engage in the conversation!

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