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Dubai Review

Back in business

While Dubai’s construction sector continues to be under pressure on account of a lacklustre real estate sector, there is reason for optimism given the renewed interest in the emirate, says MRIDULA BHATTACHARYA.

01 April 2011

AFTER three years of gloom and doom, there is a now a silver lining on Dubai’s economic horizon as the emirate and the rest of the UAE stand stable amidst the unprecedented unrest that’s currently sweeping the Arab world.

While political unrest elsewhere in the region is tempting investors to take another look at Dubai, a final agreement last month to restructure $14.7 billion of debt by Dubai World, the government-controlled conglomerate, has boosted business confidence in the trading hub, which was the worst-hit of the UAE emirates during the global recession.

Though the romance with the biggest, the largest and the highest projects may have disappeared, there is now a sense of optimism with more than 200 real estate projects moving forward, in addition to some major infrastructure developments in the emirate.

Dubai was the Gulf’s fastest-growing property market from 2006 to mid-2008, but its collapse took a significant toll on its largest state-backed conglomerates. With the freefall in the property market, Dubai’s construction sector took a sound beating and has been going through challenging times.

Now, Dubai is back on the upswing, having learned a few lessons along the way. In a message posted on his website last month, the emirate’s ruler HH Sheikh Mohammed bin Rashid Al Maktoum stated that the emirate has recovered from the impact of the global financial crisis.

Over the past couple of months, since the wave of unrest hit the region, Dubai has seen an influx of tourists and business visitors and occupancy rates have surged for hotels and hotel apartments. Housing demand in Dubai could also rise as a result of the current situation. “Political turmoil in the Middle East and North African countries may prompt companies to move staff to more stable places like Dubai,” says Matthew Green, head of UAE at CB Richard Ellis Group, the leading commercial property advisers. “That could boost housing demand in the sheikhdom.”

Echoing similar sentiments, Hamad Buamim, the head of Dubai’s Chamber of Commerce and Industry said: “I don’t want to call Dubai an escape haven, but Dubai should be viewed as a very stable entry point into the Middle East.”

Buamim predicted Dubai’s service-oriented economy may expand by up to five per cent this year, though according to him it was too early to quantify the local business impact of uprisings elsewhere in the region.

Nevertheless, this year will continue to be challenging for Dubai’s construction sector as the emirate currently faces an oversupply in its property market. While work has been going on at a number of projects launched before the crisis, it has been at a much slower pace and with a more cautious approach.

An oversupply of residential and commercial units has resulted in the sector redressing the speed with which it built pre-crisis, especially since many developers found themselves overstretched when the market dried up, leaving them with large-scale projects in the early stage of development alongside high levels of debt.

According to industry sources, until equilibrium is reached between supply and demand and banks’ ability to lend improves, the construction sector will continue to be under pressure.

According to a recent report by the London-based real estate broker Cluttons, 48,000 homes are expected to be completed over the next two years, increasing current supply by 12 per cent. Of these 35,000 will be completed through 2012, prolonging the price slump for another 18 months.

The report said the developers have chosen to complete projects started before Dubai’s property market collapsed rather than cancelling them and facing a legal obligation to return all advance payments to customers. Falling construction costs and low interest rates also provide an incentive to build now rather than waiting for property values to increase.

Around 12 million sq ft (1.1 million sq m) of commercial space probably will be completed in Dubai this year, according to Jones Lang LaSalle, a global real estate services firm specialising in commercial property management, leasing, and investment management. Office vacancy rates stood at 41 per cent in the fourth quarter of 2010 and may exceed 45 per cent over 2011. Average rents dropped by 30 per cent during the fourth quarter.

According to the latest report by Dubai-based property management company Asteco, an increased supply of high quality, affordable accommodation, particularly in the apartment sector provided the catalyst for considerable tenant movement across Dubai in Q4 2010. In addition, apartment rental rates declined by just three per cent during the same period, the lowest quarter-on-quarter fall during the year, an indication that the market is showing signs of stabilisation.

Dubai’s government expects its economy to grow by up to four per cent this year, helped by a recovery of trade and logistics sectors, although slow lending and debt repayments will remain a challenge. The emirate has registered a 2.2 per cent growth last year, according to Dubai Statistics Centre.

The International Monetary Fund’s sees the economic output of the emirate, whose overall debt pile is estimated at around $115 billion or 144 per cent of GDP, expanding by 2.8 per cent in 2011.

Moving forward
According to a recent report by Dubai’s Real Estate Regulatory Agency (Rera), around 220 projects have been evaluated and are moving forward. The report also said market sentiments had improved this year and transaction volumes were on the rise.

Commenting on the market, Areej Sharif, head of construction community at Zawya Projects says: “We are past the romantic era in terms of the biggest/tallest and so forth. Recession has made people learn to go slow, go over the plans and look at the feasibility.

“Dubai is focusing more on maintenance. Its infrastructure is more or less established but a few tenders may come in from Dubai Electricity and Water Authority (Dewa) to fix up on existing systems like desalination.”

Infrastructure is expected to play a key role in the construction sector’s recovery as Dubai continues to invest in infrastructure projects such as power and water, metro, roads and airport expansion, a strategy that is part of the government’s drive to counter the recent economic slowdown and to build for the future.

While there has been a scaling back of some projects, or more often a rescheduling of delivery dates, there have been few outright cancellations of infrastructure developments. There could be a reduction in the pace with which new schemes are unveiled in the short to medium term as the government reassesses the emirate’s immediate needs and its ability to fund them.

Infrastructure
In an effort to meet the increasing demand for water in Dubai, Dewa is currently working on completing a project for extending four lines to transmit desalinated water from Station M to Jebel Ali’s tanks and Diamond Crossing along Emirates Road involving a total length of 30 km. Two out of the four lines – a total of 15 km – will be completed by summer to coincide with getting Station M into service. The other two remaining lines are expected to be finished in April 2012.

Dewa is also working on Al Mamzar Beach substation with the capacity of 132/400 kV. The Dh642 million ($175 million) project is unprecedented, as it is the first time that the technology of high voltage 400 kV cables through underground tunnels will be used in Dubai.

Dubai Metro
Dubai Metro, the world’s longest automated driverless train system and the first metro in the Gulf region, saw further progress with work on all 18 stations on the 23 km-long Green Line – which runs around the Dubai Creek through Deira and Bur Dubai – anticipated to be complete by this August. Train tracks have been completed on the Green Line and trial runs are being conducted since October.

Meanwhile, the Red Line, launched on September 9, 2009, is almost fully operational with the recent opening of Jebel Ali Metro Station, bringing the total number of opened stations to 27. The remaining two stations are complete and will be opened when the demand arises.

There are plans to add three more lines in the future.

Airport
In line with its ambitions of being a global hub in the aviation section, Dubai continues to move ahead with the expansion of its airports. Construction work on Concourse 3, part of Terminal 3 of the Dubai International Airport, is expected to be completed by 2012. Built exclusively for the Emirates Airbus A 380, Terminal 3 is claimed to be the single largest building in the world in terms of floor space and will have a capacity of more than 80 million passengers by 2012 when Concourse 3 opens.

Also under construction is Al Maktoum International Airport, which forms part of Dubai World Central, a new 140 sq km airport complex located in Jebel Ali. The airport began cargo operations in June 2010 and was expected to begin passenger operations in March 2011 but has been further delayed to 2012.

Hotels & commercial projects
Major developers such as Emaar and Nakheel have announced resumption of work at several construction sites.
Nakheel has said it would restart work on seven projects that were in various stages of construction when work was halted in 2008. The developments include homes in places such as Al Furjan and Jumeirah Park, which are scheduled for completion by mid-2012.

The developer had also put on hold some of its most ambitious projects as it completed its restructuring. These include the Trump International Hotel and Tower on the Palm Jumeirah; Nakheel now intends to build a shopping mall at the site instead.

Emaar too had halted all its Dubai projects following the crisis except the Burj Khalifa, the world’s tallest skyscraper that opened in January last year. It is now focusing on completing developments that have been started and sold and may consider new ones in view of the improved economic conditions and demand for properties especially in downtown Dubai.

Meanwhile, Damac Properties is working on a number of projects as well as the Burjside Boulevard and Park Towers.

Work is also in progress on the first phase of Dubai Pearl, a world-class, mixed-use project in the Dubai Technology and Media Free Zone, overlooking Palm Jumeirah. The first phase of the development is expected to be topped out by the end of next year.

And Al Ghurair City, one of Dubai’s oldest shopping malls is on track to roll out its Dh2 billion ($545 million) expansion by the year-end. The expansion will add 150 retail, food and beverage outlets as well as a five-star hotel. The hotel is scheduled to open next year.

Meydan Group, the developer of Dubai’s iconic horse racing complex, and Emirates airlines, are partnering to develop a gated community to accommodate the airline’s pilots. Named Meydan Heights, the first-of-its-kind project is located next to the training tracks at Meydan Racecourse over an area of 2.94 million sq ft. Contracts for the construction of the project, which will comprise 528 townhouses, are to be awarded shortly, with projected completion in three years.

Construction work is also progressing on Pentominium, Dubai’s second tallest building and the tallest residential building in the world. The 516-m tower has been designed by Aedas and is being developed by Trident International Holdings. The project is expected to be completed in 2013.

Work is also progressing at a slower pace on a number of hotel projects. W Hotel is under construction in Dubai Festival City. Operated by W brand of Starwood Hotels and Resorts Worldwide, the property will have 350 rooms, restaurants, a spa, and festival centre. The construction has been delayed and the hotel is expected to be completed this year.

Work is also due for completion this year on the Palazzo Versace Dubai, which is being developed on an area of 130,000 sq m. It was initially slated for completion in 2009.

Meanwhile, Dubai-based conglomerate Al Habtoor Group intends to build the world’s largest hotel on Sheikh Zayed Road, Dubai, which would be 25 per cent bigger than the Atlantis hotel located at Palm Jumeirah in terms of number of rooms. The hotel will add nearly 2,000 rooms and suites to the emirate’s burgeoning supply of rooms.

Outlook
Property expert CB Richard Ellis reports that 2011 will see a mix of positive and negative sentiment entering the market which is likely to lead to another challenging, yet interesting, year for the market. Oversupply will remain a fixture for the foreseeable future in both the office and residential sectors but some of the negativity may be offset by forecasts of a significant economic recovery over the next two years. Economic expansion is set to drive growth in real estate demand both locally and internationally, although it is unlikely to result in a return to positive sales or rental rate growth in the short term.

Given the renewed interest in the emirate against the backdrop of political unrest in the region, Dubai looks poised for a strong comeback. And with the costs of construction having dropped by as much as 40 per cent compared to their peak in 2008, developers may well be looking at retendering projects – particularly those targeted at the mid segment of the market that would meet current demand.