Dubai is the Disneyworld of the global property market. When property developer Nakheel revealed plans to develop three artificial islands off the coast of Dubai, the rest of the world waited in disbelief. As construction on the smallest of the three islands, Palm Jumeirah, draws to a close, the ambitious, albeit surreal, plans have become a reality and proved that in Dubai’s property market, anything is possible.

Dubai is determined to be the best property market in the world – or at least the biggest. Construction is under way on developer Emaar’s 160-storey Burj Dubai, the world’s tallest tower; Dubai Mall, the world’s largest shopping centre; Al Maktoum International, the world’s biggest airport; and Bawadi, the world’s biggest hotel cluster with 5550 rooms.

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And Nakheel is outdoing itself with plans for an even bigger artificial island, Dubai Waterfront, which will be the largest man-made development in the world. The project comprises an archipelago of artificial islands shaped in an arc to produce a shelter around Palm Jebel Ali. The project will extend Dubai’s coastline by 510 miles – a 12-fold increase – and at 266 million square feet (sq ft) it will house 400,000 people. Plots of land on the first phase of Madinat Al Arab, one of the 10 islands in the Dubai Waterfront development, sold out within five days and will house 80,000 people when complete.

To the east of Palm Jumeirah and Dubai Waterfront lies The World, another Nakheel development comprising 300 artificial islands in the shape of the world’s continents. The development includes leisure, residential and tourist components, adding 144 miles of new beachfront to Dubai’s coastline. The final stone on the breakwater was laid in January, completing initial development, with the next phase involving handover of the individual islands to developers.

Peak performance

Dubai’s economy has been one of the best performing in the Gulf in the past five years, with yearly growth of 17.9% since 2001. During this time, speculation of a real estate bust has dogged the market and confounded those who predicted it, while the pace of change and growth continues. The Dubai development market will total $310,000m during the next decade and is still the single biggest project market in the Gulf Co-operation Council (GCC). The emirate also has 16% of the world’s largest construction cranes working on projects worth more than $100m.

Constant change

Analyst predictions are constantly changing against the backdrop of the Gulf’s fastest-growing property market, which is driven by an economy with access to huge pools of liquidity, according to the senior head of investment at Dubai-based property management firm Asteco, Simon Gray. He says that the construction market has grown by an average of 32.7% a year since 2001 but alongside the constant predictions of boom or bust, the nature of the market is tangibly changing.

“The Dubai property market is becoming less of a speculator’s market as the government is making a conscious effort to improve regulation and clarity around property sales to encourage mainstream investors,” says Mr Gray. “The perception from overseas is the UAE’s [United Arab Emirates] biggest challenge – selling the country’s property market to the world is hard when there is an inability overseas to understand the market forces which make the UAE such an untraditional property market. I liken it to the US in the pioneering days.”

Property shortfall

Dubai’s commercial property market has a shortfall in available class-A office space and with 80% of the Fortune 500 companies located in Dubai, it is sorely needed if the emirate is to remain attractive in the global marketplace. Mr Gray estimates a further 18 million sq ft will be delivered by the end of this year. “Construction delays due to material and labour shortages are maintaining the high demand for the short term and, of course, some developers either speed up or slow down development time depending on what the market prices are doing,” he says. “And besides, there are a limited number of major contractors available for the sheer number of projects coming out of the ground.”

Asteco is confident that there will be no downside in the property market for the next 18 months to three years, however the firm does not rule out the possibility of a levelling out of either rental or sales values at worst, although not until the end of 2010 at the earliest. The rationale for this is the enormous demand for any project – either commercial, residential or industrial – that is ready for occupancy, with waiting lists for most types of property becoming consistently longer. The firm is seeing a continued strong take-up of projects newly released onto the market by residents and long-term investors rather than speculators, which helps to underpin the market.

Construction constraints

The plight of foreign construction workers has been widely recognised in the global press and heavy government penalties to address the exploitation of illegal workers from India, Pakistan and the Far East were imposed last October. Alongside new labour laws and foreign worker visa regulations, the rising price of materials and supply chain restrictions are constraints for many developers.

But it is precisely these constraints which are maintaining demand for property and proving those who predicted a flooding of the property market wrong. Mr Gray admits that oversupply may become a possibility in the residential high-end luxury sector but a need for low-cost affordable housing for the increasing worker population will endure.

An increasing number of projects catering for the middle- and low-income segment will characterise residential development throughout the next few years. And although supply of residential property is greater than ever, with 190,000 new units expected by 2010, demand is still set to outstrip supply. This is a view backed up by Asteco’s research, which predicts apartment prices increasing further in the next year due to excess liquidity in the economy, inflation and a lack of supply.

Strained market

But it is the commercial market that is straining under the lack of supply, according to president and chief executive of Dubai-based developer Omniyat Properties, Mehdi Amjad. Demand is so strong that in the past six months, prices at Omniyat’s four freehold business tower projects rose by 50%, despite the fact that they have yet to be built.

One Business Bay is a 30-storey high-tech tower, which is due for completion in 2010; Bayswater is a 25-storey commercial tower complete with health club, which has sold out; The Binary is a dual office tower development of 21 and 25 storeys, due to complete in February; and The Gemini is a mixed-use office and retail tower to open next June.

According to research by Asteco, office sales prices have also increased by as much as 53% and 45% in Dubai’s International Finance Centre and Jumeirah Lake Towers respectively since 2006. The limited delivery of new office space in the past few years has created a persistent under-supply, which has prompted significant increases in office rental and sales prices.

The Dubai International Finance Centre, for example, has a waiting list for one million sq ft of office space. Some companies locating to Dubai are resorting to temporary accommodation while waiting for office space to be released. Landlords are even converting residential units into commercial space to profit from the higher returns that commercial property has to offer.

At the same time, occupancy rates remain steady at between 97% and 99% in most available office buildings. Both factors have created some of the highest yields for commercial space globally. Although these yields will soften as more supply comes on stream, Asteco predicts that office rents will remain high this year due to construction delays until 2009, which will be the turning point for rents.

Under construction

Developments in the Business Bay area, such as Omniyat’s new commercial towers, are set to provide 28.5% of office space by 2010. And Business Bay is just one of Dubai’s locations because the city has more than 27 million sq ft of confirmed activity under construction – nearly double the existing central business district inventory of 15.86 million sq ft, with a grand total of 47 million sq ft supplied by 2009, according to Asteco.

“We have $6bn of mixed-use developments, which will be delivered in the next four years,” says Mr Mehdi. And the investors are different at each point of the development cycle. “The government and GCC investors are involved in the masterplanning and parcelling of large-scale developments whereas further downstream are more international investors and even further are the actual developed units, which are being sold to foreign nationals. The GCC investors tend to want to exit the market early in the cycle,” says Mr Mehdi, and they can do that because of the demand from foreigners to buy.

Rise of regulation

The market is becoming more regulated and foreign nationals now have the right to title deeds for their property, which they can obtain from the lands department. This added security and transparency in the market will encourage a different kind of investor, says Mr Mehdi. As the market matures he says that he is increasingly seeing interest from more sophisticated institutional investors, particularly those looking for a more geographically diversified portfolio in the wake of the global credit crunch.

Tangible changes to property law have been the turning point in the Dubai property market, according to Union Properties chief property officer Lesley Sayle, who has worked the Dubai property market for the past 15 years. “The biggest impact on the residential market has been the introduction of freehold and 90- year leasehold sales for non-GCC nationals in 2002, which really started home ownership in Dubai,” says Ms Sayle.

Other significant changes include the Strata title law, borrowed from Australia, which is a form of ownership devised for multi-level apartment blocks. And the buyers’ landscape changed again when the Land Department’s new Escrow law came into effect in June 2007.

Off-plan buying

Prior to the introduction of this law, most off-plan buyers of units had no guarantee that payment instalments to the developer were being used to construct the development in which they were investing, or that a particular stage of construction would be reached before the next payment was due, leaving the buyer in a vulnerable position if a development failed to complete. “The Escrow law has been a godsend because it makes the process of owning property black and white,” says Ms Sayle. “We’re already seeing a more sophisticated and educated investor market.”

The law is backed up by the formation of Dubai’s Real Estate Regulatory Authority, which has responsibility for implementing the Escrow regulations and any other forthcoming regulations in Dubai’s real estate sector.

Time for transparency

Union Properties has been ready for greater transparency and regulation in the market for a while. It is Dubai’s only publicly floated property development company, with an annual turnover of $790bn and projects under construction worth $4.9bn. Among these is MotorCity, a 38 million sq ft motor sport-themed development in Dubailand that will include a residential community, a business park (Dubai Autodrome), and F1-X, a Formula One-themed leisure park.

The implementation of such rules and regulations raise the property market’s credibility and captures the interest of international investors. As well as the Strata Title law, these include registration of freehold titles with the Land Department and the requirements by developers to use Escrow accounts for sales proceeds and to reach certain criteria before releasing projects for sale.

When the mega projects under construction are delivered, the shortage of commercial space will ease up but there is a need to incorporate transport and other infrastructure requirements to meet the needs of multinational corporate tenants. The frenetic pace of development has meant infrastructure needs have been overlooked in the race to build. The result has been traffic congestion on an almost non-existent transport system.

But the emirate is in the process of building what will be the longest fully automated rail system in the world when it opens next year. The urban rail system will be a fully automated light rail network that will run underground in the city centre and on elevated viaducts throughout greater Dubai. The rail system will provide a more direct link to Dubai’s international airport, which is also under construction.

World-beating hub

When complete, Al Maktoum International Airport will be the world’s biggest passenger and cargo hub, with a capacity of 120 million passengers and more than 12 million tonnes of cargo a year. The airport will have six parallel runways and as many concourses with a 300-foot high control tower.

A government-endorsed 54-square-miles urban aviation community, by Dubai World Central, is planned around the new airport. Under construction 25 miles from the existing Dubai International Airport, the $33bn project is almost twice the size of Hong Kong Island and will house up to 750,000 people making it a city within a city.

Dubai’s airport development will be the biggest in the world and will not simply be an airport but the city’s gateway into the global economy and the Middle East’s most significant business hub.