Last year was a turning point for the global real estate market. The $12,000bn industry suddenly faced one of the biggest financial shocks since the great depression. The subprime mortgage crisis hit at a time when many in the industry had already identified a global correction of real estate values. But the inevitable cyclical downturn saw a further sharp drop in the availability and pricing of debt, which in turn sent ripples of negative sentiment throughout the industry.
But it is difficult to say the global real estate market is experiencing a downturn across the board when there are such marked regional differences in the sector. The US and UK investment markets are more highly leveraged than those of Asia-Pacific, mainland Europe and the Middle East which has meant they have been harder hit than those markets less exposed to the debt markets.
The Gulf in particular has shown no signs of its real estate development sector slowing down for reasons of lack of capital, even if the region is experiencing the growing pains of rapid expansion. According to real estate consultancy DTZ, there are more than 2800 development projects under way in the Gulf region, with the most expensive being the $120bn King Abdullah Economic City in Saudi Arabia.
The boom in real estate development across the Gulf Co-operation Council (GCC) countries can be attributed to several factors, including a rapidly growing population, strong levels of liquidity due to high oil prices and the resulting growth in disposable incomes and investment, says Robin Williamson, head of DTZ’s Middle East operations. “Across the GCC, strong levels of domestic and crossborder demand from occupiers and investors have led to double-digit rental growth and demand outstripping supply across all major sectors – residential, commercial office, retail and hospitality,” he says.
The United Arab Emirates (UAE) in particular is careering ahead at full speed with a dizzying array of masterplanned developments and urban expansion, on a globally unprecedented scale. The UAE has long been recognised as a spectacularly wealthy corner of the world but it is only in recent years that the grand visions of its leaders have brought it such global attention. Building entire cities from the ground up requires vision. But it also includes more mundane issues such as transport and infrastructure, available housing and business premises to make ambitious mega projects viable. After all, it is no good being home to the world’s tallest building if it takes two hours to get there because of traffic congestion.
Emirates such as Abu Dhabi and Dubai have many plans in the pipeline for transport, infrastructure and huge mixed-use developments, but implementation is proving harder than simply coming up with the plans: construction delays are becoming commonplace as the cost of materials spiral alongside a growing workforce shortage.
Other threats to the implementation of the UAE’s mega developments include rising inflation and power shortages, issues that must be addressed if the country is to attain its goal of becoming a world class business and tourism centre.
As a result, the UAE authorities, led by Abu Dhabi, have announced the country will be the first Gulf nation to use nuclear energy. The government predicts that national peak demand will rise to more than 40,000 megawatts (MW) by 2020, reflecting an exponential annual growth rate of 9%. But known volumes of natural gas that could be made available to the electricity sector will only provide adequate fuel for 20,000MW to 25,000MW by 2020. The irony of one of the most oil-rich countries on earth suffering an energy crisis is hard to miss.
But despite the challenges, the UAE’s property market continues to flourish. Dubai is the most mature market with real estate and construction representing about 30% of Dubai’s gross domestic product last year, according to HSBC. The sheer scale of development has caused many to predict an overheating of Dubai’s property market. But the market continues to grow as property prices have risen 40% this year and 79% in the past 18 months, according to market analysts at US investment bank Morgan Stanley.
The discussion around Dubai’s future is split. Some such as Morgan Stanley predict a probable 10% fall in property prices by 2010, assuming that the market will become oversupplied by the second half of 2009. Analysts at HSBC, however, believe the 7% sustained population growth alongside construction delays which are maintaining demand will continue until 2011.
Abu Dhabi’s development has not yet reached the intensity seen in Dubai and is regarded by many as a chance to avoid Dubai’s mistakes, which have sprung from unregulated development and a lack of cohesive infrastructure planning. Property consultancy Colliers says the lack of planning by real estate companies is leading to an expected glut of property in Dubai because developers have failed to realise that maximising development returns is not simply a matter of building as much as possible.
Meanwhile, the Abu Dhabi planning authority is controlling the city’s development through closely regulating the development of different property usages. All being well, Abu Dhabi will become a model development for the Middle East. The growth is attributed to access to capital, which is one of the emirate’s greatest strengths. According to ratings agency Standard & Poor’s, Abu Dhabi has a per capita income estimated at $67,600, a state investment authority worth between $500bn and $850bn as well as more than 90% of the UAE’s oil and gas reserves. The emirate accounts for 57% of the UAE’s GDP and its oil reserves are expected to last a century, with production currently about 2.6 million barrels per day, with plans to increase that to 4 million.
But as well has being one of the richest places on earth, a key factor behind Abu Dhabi’s real estate development has been the demand for property prompted by rapid population growth due to high levels of immigration. The government’s future development strategy assumes continued growth, predicting the population will rise to 3.4 million residents from the current 950,00 by 2015.
Alongside a growing population, it is crucial that the UAE’s leaders attract businesses to the region. The establishment of planned industrial and trade zones, offering zero-tax incentives such as Dubai’s Jebel Ali and Abu Dhabi’s planned Khalifa port and free zone, have been a crucial factor in the UAE’s success in attracting foreign direct investment.
The $22bn carbon-neutral Masdar City in Abu Dhabi, which aims to foster businesses in the alternative energy technologies area, has also been flooded with expressions of interest, according to Masdar’s property development director Khaled Awad. As a free zone, Masdar will provide tax-exempt units for light industrial tenants able to operate as wholly foreign-owned businesses.
Such UAE free zones are coming on-stream at a time when multinational corporations are looking towards developing countries for a more cost-effective operating structure, as well as access to new markets.
In addition to industrial companies, there has been an influx of foreign retailers into the country, including Marks & Spencer, Carrefour, Debenhams and Toys R Us. Many of the UAE’s mixed-use developments include a retail component and there has been a boom in the construction of shopping malls anticipating expected consumer-spending growth of between 10% and 20% in the GCC over the next five years.
Foreign businesses locating in the region, as well as an assured stream of migrant workers, will ensure continued growth in the property market. And this growth is critical to the overall health of the UAE’s economy, because property has a direct effect on all other industry sectors; bearing in mind the leadership’s ultimate aim of industry diversification to avoid oil dependence, real estate becomes ever more significant.
The UAE is well placed for a successful future property market as it can offer the political stability and regulatory environment that multinational firms consider prerequisites for a global investment location. The construction boom could not have happened without property rights and the rule of law which are also vital to international investors. The UAE also has the benefit of being located relatively close to India and Pakistan, providing access to a large labour pool.
Political stability, access to capital and cheap labour have enabled the rapid growth of the construction sector but rising material costs, inflation, a skills shortage and massive energy requirements all threaten to impede continuing success. The future of the UAE’s property sector, and indeed the country, will depend on just how far the country’s leadership can balance its vision with the practicalities of such large-scale growth.