Source: www.ameinfo.com

Danial Schon, Vice President of Schon Properties, talks to AME Info about the Dubai real estate market, which sectors investors should be looking into for the biggest returns and why he thinks that prices across the city can only keep increasing.

Schon Properties is well established in Dubai’s property market.

The company already has four projects under development.

Its flagship residential projects are the Dubai Lagoon development and Schon Suites and the latest launch, the Signet project in Jebel Ali.

The Signet is a mixed-use development that will allow people to make use of one space for their business and residential needs.

This, Schon believes, will prove popular in the face of ever-increasing commercial rental costs.

‘This project was made keeping small businesses in mind.

‘The biggest problem for these people when they move to Dubai is that, because of the rising costs of rent they can never find a place.’

Recent reports that home owners would not be automatically eligible for residency visas have added further questions for investors from outside the GCC.

‘I think that everybody is still seeking clarification on that,’ says Schon.

‘But I know that the government of Dubai is so pro-business, and the policies are for the benefit of the economy, buyers, end users and so on, that the final decision will work in everybody’s favour. I don’t think that it will be a case of ‘we were promised this but didn’t get it’.

‘But we do tell our buyers that the residency visas will be subject to approvals at that time. We don’t know what they might be, laws change all over the world, so we don’t say that you’re guaranteed a visa.’

Most profitable branch of Dubai’s real estate market

Of the various projects springing up across the city, all are designed to attract investors.

But though prices are spiralling in the residential, commercial and hospitality sectors, Schon believes that, for individuals, the latter will bring the best returns.

‘Serviced hotel apartments are definitely the most profitable, because Dubai is built on tourism. You see the campaigns all around the world.

‘We launched a project called Schon Suites about three months ago. The concept is that all the rent goes into a pool, then an independent auditor distributes the rent equally according to your percentage ownership of the building.

‘It’s for people who can’t build hotels themselves. And it’s a very good return, the projected yields come up to 20% per year - that’s on 10 year historical information from the Department of tourism and Commerce Marketing, the inflation rate and so on. We’ve done extensive research on this and the numbers are phenomenal.’

Dubai property prices to increase

Almost all developments have shown these increases.

Most of the projects in Dubai have posited double-digit growth over a 12-month period.

This growth, driven in part by speculation and supply shortages, will not slow down as more properties come online, Schon believes. The root cause of the price escalation is down to the construction component.

‘I think prices have a long way to go yet,’ he says. ‘Mainly due to the rising cost of construction, which is detrimental to the industry as a whole.’

Global factors, such as China’s decision to increase payments for steel imports by 40% above market rate, are continuing to have a local consequence.

‘Things like that have a huge effect. The minute you’ve purchased your steel it’s already going up 1.5% per month, that’s the rate that we calculate construction inflation at for our contingencies.

‘What this does is that it drives prices up, because it controls supply but the demand is still high. So, prices have a long way to go. People ask me why property is so expensive - the most important thing in development is not hype, it’s not marketing or sales, it’s delivery. If developers don’t price at the risk of tomorrow’s costs, then they will lose money. And, if that happens, the quality suffers.’

Increased regulation helps property market

‘The creation of Rera [Real Estate Regulatory Authority] will ensure that it never gets to the point where the credibility of Dubai is affected, because they will step in,’ Schon notes.

Rera is a prime example of how Dubai’s property landscape has changed, partly in response to concerns over the lack of transparency in the market. Government legislation has enforced a set standard of regulation among the city’s developers and agents.

‘Every transaction is regulated, everything is transparent. You have to set up an escrow account before anything is sold now,’ he agrees. ‘We also have green building guidelines to follow.’

Thanks to initiatives like these, Schon is convinced that the upward trend is certain to continue, and that investors should take advantage of the opportunities on offer.

‘We were offered plots in 2002 that we didn’t go for, because analysts were saying ‘the bubble’s about to burst’. These are the same reports that are still going around now. Anyone who says that is not looking at the whole picture.

‘Dubai is the centre of the region for property, there are also investors from Iran, Pakistan, India. Even Chinese groups have started investing here. Everybody wants to be involved.’

By Parag Deulgaonkar  on Thursday, July 10, 2008

Dubai will face an oversupply of property if current projects are delivered on time, according to an international ratings firm.

There is also a risk of the emirate being unable to stimulate demand in view of the massive developments in the pipeline, said Fitch Ratings, in a report on the state of Dubai’s property market.

“Many challenges have begun to surface, mainly the prospect of oversupply – if current delivery plans are met – and the risk of being unable to stimulate demand in view of the massive development projects in the pipeline,” it said.

“Nevertheless, there is a high probability of late delivery (and even project cancellation) due to logistical constraints that could ultimately result in a better match between supply and demand.”

Another dimension was the risk of oversupply in each segment due to the choice of targeting top-tier customers.

Moreover, the relationship among regional real estate markets and Dubai’s ability to maintain its leading position will come under the scanner in the long term, with the emergence of new centres in the region such as Abu Dhabi and Doha.

Strong gains in property prices in recent years have prompted concern that speculative real estate investment was increasing, which clearly adds to the risk profile of the sector. “The magnitude of price corrections, should they occur, could be substantial given the emerging nature of the market – and depending on the magnitude of inexperienced speculators, and/or short-term holders, in the property market,” the report said.

Compared to Western markets there is little transparency or reliable data in Dubai’s real estate sector. A key tool that should act as a mitigating factor is the improving regulations of the local market, together with transparency, and the production of dependable comprehensive real estate market data.

On the back of an anticipated slowdown in the world’s advanced economies, the impact of the credit crunch and sub-prime lending crisis on the Dubai real estate market is also another concern, which is magnified due to the fact that the demand is driven by expatriates and foreign investment.

The Dubai real estate market remained strong in 2007 and in the first quarter of 2008, performing well in each of the residential, office and commercial sectors. The driving factors included strong regional economies, inflow of foreign investment, low interest rates, and limited supply in all real estate segments.

During the first quarter of 2008, the main developers continued to report strong gains in revenues, margins and profitability, while their credit ratios showed more reliance on external debt. The outlook for construction in general in the Gulf Co-operation Council (GCC) is more positive than in western Europe. Supportive factors – such as strong GDP growth, rising income levels, healthy liquidity, rapid population expansion and increasing mortgage availability – continue to underpin robust growth in Abu Dhabi, Dubai and Doha.

These positive fundamentals, together with increasing corporate sophistication, should support companies’ credit profiles over the medium term. Foreign demand is the main driver, and Dubai’s ability to continue attracting investment is the fundamental success factor. Moreover, the relationship between regional real estate markets and the ability of Dubai to maintain its leading position is to be tested in the long term with the emergence of new centres in the region such as Abu Dhabi and Doha.

However, depending on the future supply-demand balance, the impact of any potential decline on a developer’s credit profile will vary on the basis of the proportion of off-plan sales (pre-sales) in its portfolio, phasing, size, and time of project delivery. Also key are risk management practices and management reaction – especially in a softening market scenario. On the regional and global front, the impact of rising inflation and input costs on developers is a growing concern.

On the supply side, the government is the key market player – through large developers, either fully or partially owned. Indeed, given that an estimated 50 per cent of supply over the next few years is under such central control, Fitch believes it is difficult to envisage the authorities will deliberately flood the market with supply and erode market fundamentals and their own projects’ profitability.

Fitch believes foreign demand is the prime driver of Dubai’s property market for reasons such as expatriates living and working in Dubai, institutional investors, the rise in Dubai’s status as a financial centre, location for “parked money” (Iranian residents) and overseas investors (from India, Russia, Pakistan and other parts of Asia), and speculators.

In the past, regional investors turned towards real assets – in particular, property – to protect their savings. Conversely, property has become a popular investment in its own right over the past six years, just as it has in the United States and the European Union.

In Dubai, real estate markets have been opened to citizens of countries outside the GCC. Falling interest rates have led to more borrowing, and while rents and prices continue to rise steeply, it is generally believed that the sheer number of newly built properties completed and brought on to the market will lead to an orderly moderation in rents and property prices in the medium term.

However, a geopolitical deterioration or a real estate downturn in Dubai’s real estate market may have an impact on the foreign demand, and could be more damaging to the economy than the correction in stock markets, which took place in 2006.

In Dubai, the average price for all residential properties in the first quarter of this year was Dh1,579 per square foot. This was still well below Dh2,093 in London, according to Colliers International.

However, during 2009-2010, the number of new homes coming on to the market will reach new record highs. If current delivery plans are met, the fast expansion in housing stock is likely to extend supply beyond demand. It is worth noting that Dubai’s apartment segment will be more sensitive to a potential market correction than residential villas, due to more supply and the fact that the villa title-holder also owns the land.

For the office sector, the outlook also remains stable as a result of strong demand due to Dubai’s economic prospects — as well as the wave of financial institutions setting up regional offices, and existing ones expanding their operations. The 1.6 million population has approximately the same amount of office space under construction as Shanghai (population 20 million) and Moscow (10.4 million). Again, contingent to delivery plans being met, the market may start experiencing a price correction as a result of the massive new supply in 2009-2010.

Positive outlook

The outlook for construction in the GCC is more positive than in western Europe. Strong GDP growth, rising income levels, healthy liquidity, rapid population expansion and increasing mortgage availability are some reasons that drive the market.

These positive fundamentals, together with increasing corporate sophistication (such as improved corporate governance, increased scale, better geographical diversification, and more refined risk-management procedures) should support companies’ credit profiles over the medium term.

In general, property prices tend to react to changes in the balance of the market with a time lag of several months. This should mean the increasing supply effect will be reflected in medium-term prices. The favourable economic conditions in the region – together with project delivery delays – have deferred any such signals so far, and led to an extension of the period of rising prices. While Fitch feels these fundamentals should remain sound, property prices may moderate in an orderly fashion in the medium term – though the extent and severity will vary from sector to sector. Furthermore,the Dubai market is partly driven by sentiment, and, therefore, future price moderation could be more severe if sentiment were to be affected.

Mortgage asset quality

Rapid growth in residential mortgages in 2006-2007 has not resulted in a deterioration in banks’ asset quality to date, but mortgage asset quality has yet to be tested through the cycle.

According to UAE Central Bank statistics, the banking sector’s exposure to residential mortgages represented about eight per cent of its overall lending portfolio by December 2007. Residential mortgages are collateralised by the underlying assets, but risk arises as the realisation of collateral can be a complex and lengthy process – particularly when dealing with residential mortgages made to UAE nationals.

Many banks have been increasing their exposure to the real estate sector, particularly in Dubai. Since 2005, some of the largest UAE banks have also set up subsidiaries to manage projects, provide brokerage services and/or invest in the property sector. Exposure to non-residential real estate has been growing year-on-year and has gained a substantial proportion in most of the large UAE banks’ lending portfolios. Islamic banks tend to have a higher exposure given that all their transactions are asset-based.

Apart from direct lending exposure to the real estate sector (either commercial or residential), some large UAE banks hold property investments at fair value on their balance sheets in order to book a profit from the periodic revaluation of these investments. This exposes banks’ profitability to high market risks. However, banks’ exposure to the real estate sector should not account for more than 20 per cent of customer deposits, which is the regulatory limit.

Residential mortgage growth was less noticeable before 2006. This was in large part due to the lack of clear legislation and the inability of foreigners (apart from GCC nationals) to own freehold properties.

 (Source: www.business24-7.ae)