In Dubai, Regulation Needed as Sales Recover

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The recent surge in investor confidence in Dubai's ability to meet its debt obligations as it brushes off the effects of the economic downturn is translating into a spike in the number of residential property deals. This upward trend is being reflected across Dubai, with data from the Land Department showing a 63 percent quarter-on-quarter rise in the number of transactions, amounting to US$12 billion (AED 44 billion) during the first quarter; residential unit sales accounted for almost a quarter of this total.

The heightened market activity is also drawing international interest, as individuals and institutions seek to capitalise on the recovery of the market. A recent example of this was the June announcement by a China State Construction Engineering Corp. unit, which has invested in SKAI Holdings' US$1 billion (AED 3.67 billion) Viceroy Hotel & Resort complex on the Palm Jumeirah. The resort, which is due to be completed in 2017, will include a 481 room hotel and 250 luxury apartments. The companies have together raised US$570 million (AED 2.1 billion) so far from 1 percent deposits paid by buyers during the project's launch. The scheme's attractiveness stems from the lure of a 12 percent annual rate of return, which is set to be delivered through a 40 percent share of revenues from a sale-leaseback scheme of the resort's hotel rooms.

The Palm Jumeirah has emerged as one of the submarkets in New Dubai leading the real estate sector's recovery, as buyers and investors focus their attention on established communities with near-perfect infrastructure. This is in turn encouraging developers to hone in on areas such as the Nakheel-built Palm Jumeirah Island for new luxury developments, with residential oversupply warnings from the depths of the crisis having now abated. The value of Dubai luxury, high end apartments is now up 16.5 percent on this time last year. 

As the economy picks up steam, the number of new jobs being created is rising, as evidenced by the emirate's growing population. At the end of 2012, Dubai's population stood at just over 2.1 million, up 5.1 percent on 2011, according to data from the Dubai Statistics Centre (DSC). Subsequently, this is translating in to fresh housing demand, which is helping to mop up some of the excess residential supply, built during the heady days of the boom.

The economic recovery is no doubt a result of the successful rebalancing of its center of gravity, which is now trade and tourism. However the rebounding of the property market is also contributing to overall GDP expansion. GDP growth last year reached 4.4 percent (DSC). Although residential values still remain below their 2007 peak, the pace of the sector's recovery has some of the undeniable hallmarks of the start of another cycle of hyperactive growth. The authorities recognized the signs earlier this year and plan to introduce a mortgage-cap law for both nationals and expatriates, which will address some of the debt financing issues of the past; however of bigger concern is the fostering of an environment that lures in speculators, who could undermine the real estate sector's recovery.

As the market is now more mature than it was during the last property cycle, it would be encouraging to see more regulation surrounding resale of property that is yet to be built. The queues outside of Emaar's offices in Emaar Square ahead of property launches underscores the depth of housing demand, which is being bolstered by speculators, the lingering impact of the Arab Spring and the stability offered by the region's commercial and economic powerhouse in an otherwise turbulent neighborhood. However, these signs of buoyancy are all too familiar; and while we welcome the government's initiatives to support the resumption of growth across Dubai through headline grabbing schemes, like the IMF, we would urge the introduction of laws to curtail property speculation in order to sustain this more modest boom as modern Dubai takes shape.

Steve Morgan is a partner in Cluttons. He is based in the United Arab Emirates, where he oversees commercial and residential valuation services for the Sharjah, Dubai and Abu Dhabi offices.