Introduction
The global real estate market has been experiencing low-interest rates. In 2014, the real estate in Dubai experienced a leveling off during the months of summer. The residential sector has been experiencing recovery over the past 18 years; however, the recovery has slowed (Abdelgalil & Bakheet, 2007). This has been due to the stabilized rental prices and sale values in many real estate locations across Dubai. The key characteristic of the market is the announcement of new projects. The announced projects may not affect the current supply; this is because they are long term, and they will take at least a year to enter the market.
The real estate sectors that have underperformed include the hotel sector, which by the month of June 2015 registered 50% occupancy rate. It is projected that the sector will peak in the last quarter of the year. The rental segment registered a solid growth though the recovery is not guaranteed. This is attributed to increased levels of supply which continue to constrain the market. Against the backdrop of the plummeting low-interest rates and the volatility in the financial markets, capital flow into the Dubai’s real estate has been on the rise (Knight Frank, 2012). For example, Omniyat a key real estate development group is undertaking major projects that have contributed to significant capital flow into the Dubai’s real estate. The following paper is a report of real estate in Dubai with a key focus on Omniyat Group.
Key Areas where Omniyat Projects are Located
The Omniyat Group focuses on the development of real estate in the Gulf region. The group is considered as one of the most innovative, successful and premium development companies in the Gulf region. Currently, Omniyat has different real estate projects that are running in Dubai. The major areas it has invested include the residential, office, hotel and retail units. The majority of the projects are in the prime areas such as Turquoise, Business Bay, and IMPZ. The following table is a summary of the key projects and the locations.
Table 1: Key areas where Omniyat projects are Located.
Historical Selling Prices for Key Areas
Residential units
The values of the property have been on the increase for the past two years. However, the third quarter of the year rerecorded reduced growth levels in apartments and villas. In 2014, the average rent prices increased by 2% while the sale price grew by 1% in the third quarter of the year. This was a slowdown by 3% in rent prices and 6% sales prices in the second quarter of the year. The decrease in the prices was due to the increasing mismatch in expectations between the sellers and the buyers. Currently, there are also tighter government regulations. As a result, the residential sector has gone through a period of stability (Deloitte, 2015). In addition, there have been announcements of upcoming projects; however, the new projects will not alter the current balance due to the sustainable markets, which have been behaving in a healthy manner.
The average sales price for apartments in Dubai grew by fourteen percent. The prices were quoted at AED 1,467 per square feet while the average price for the villas grew by 8.8% in the same period. According to statistics from Deloitte (2015), a villa was selling at AED 1,428 per sq ft. The residential sales prices were highest in first and the second quarter of 2014 (Collier International, 2015).
The prices for the residential units are affected by many of factors. Some of the factors include the type of the development and the location. In the case of Omniyat, Table 2 shows the prices for the residential unit. From the prices, it is notable that the type of development and the area influence the price.
Table 2: Omniyat’s prices for residential units.
Offices
In 2014, there was limited supply of office units that entered the market. The limited changes led to an increase in the rental prices in some areas. This was due to the announcement of projects such as Grand A offices. The offices are expected to ease the constraints in the office supply in key demand sections of the market (Deloitte 2015). The projected office units by 2018 are 3.8 million sq ft. The average price of the offices in 2014 was AED 1,200 per sq ft which presented an annual value increase of 24%. In relation to occupancy, the average office area acquired was 1,320sq per sq ft. “The highest occupancy was in amenities that are situated in areas with good public transport networks, competitive car parking ratio and offices with high specifications and with a range of amenities” (Bloomberg, 2015, p. 4).
Retail Units
The demand for the retail sector was relatively strong in 2014. This was mainly driven by the increasing spending by the residents coupled with a largely affluent population, growth in GDP and tourists demand. A survey by Deloitte (2015) showed that more than 50% of consumers anticipate having more disposable income in 2016 compared to 2015. As a result, there are many malls undergoing expansion in order to accommodate many people waiting for the retail units. The average retail rents are based on catchment profile.
Table 3: Average retail rents for selected areas.
In the case of Omniyat, the retail prices for various projects were as outlined in table 4.
Table 4: Omniyat’s Prices for selected Retail Units.
Forecasted Price (AED psf) for key areas
Residential units
The residential transactions will continue slowing down to a level that is sustainable. This will result in a long term trend. The slowdown may extend in the next 12 months. For instance, in the first quarter of 2014, residential prices declined slightly by a range of between 1% and 5%. This was followed by stabilization in the second half of 2014. Thus, it is forecasted that the decline trend will continue in this final quarter of 2015 but stabilize in 2016. In the subsequent years the prices will be relatively stable (Deloitte, 2015). Table 5 is a general overview of the predicted prices for residential places across Dubai. The projections are based on market demand and supply and the projected economic growth that will range between 2.8%-3.5%.
Table 5: Residential Units: Forecasted Prices (AED/sq. ft).
Omniyat has predicted the rental pool in some of its key investments to increase by a rate of 2% for the subsequent years, which points to the current stability. For example, the projected rental pool for Opus project for the next 10 years is very stable with a provisional growth of 2%. See table 6 below.
Table 6: Omniyat’s projected rental pool for Opus Project.
Offices
There are many mega projects that are intended to supply more office units. It is also expected that other schemes will be put in place such as DFIC where there have been high demands. For example, it is project that there are approximately 2.5 million sq.ft of office planned by 2018. The increased supply will result in greater polarization. For example, the rental growth in 2014 varied between -5% and 20%. The predictions for the next five years are based on trends recorded between 2012 and 2013.
Table 7: Forecasted Office Rent (AED per sq ft per annum)
Note: Data comprises average rents for benchmark office schemes in each district.
Retail Units
The retail trends recorded in 2014 indicated that consumers demanded more than the shopping amenities in the malls. This trend is expected to continue in the last quarter of 2015. The increase in affluent class that is ready to spend implies that the prices will be stable in the coming years based on increased supply of the announced projects and expansion of key retail units. Reidin (2015) forecasts a price increase ranging from 0.5% to 2.5%.
Table 8: Forecast for retail units (AED / sq ft / annum).
Cost of Construction in Dubai
The construction opportunities backed by global and social events have boosted the construction industry in the Middle East. According to AECOM (2014) the tax environment is low and there are low regulatory restrictions that encourage businesses to invest the Gulf region.
The cost of construction in Dubai over the past year has been stable. The drop in the oil prices affected the cost of raw materials for construction; hence, reduction in prices of cement and steel. The current cost of construction in Dubai ranges between Dh 4000 per sq meter and 5000 per sq. meter for projects classed as medium range. For the high end luxury projects, the cost rises to Dh 4500-Dh 6000 AED m2. The prices have remained stable over the year.
The major determinants of the cost of construction include the cost of raw materials, cost of labor, influence on the foreign exchange fluctuation, attributes of the design, site uniqueness and the tariffs applicable to the construction. Table 9 is a summary of the construction costs in Dubai.
Table 9: Cost of construction in Dubai.
The AECOM ‘s tender price forecasts made in 2014, point to stabilized cost of production for upper range products while the lower ranges will record an increase in the cost of construction. The forecasted cost increase for 2015 and 2016 is between 1% and 4%.
Table 10: Construction cost and forecasts for 2016 (Source: Colliers International 2015).
The drivers for construction costs include construction materials, cost of labor and competitiveness. The prices for the materials have been stable. However, the price of steel reduced by 14%. This was balanced by an increase in costs of aggregate, glass, block wood, cement, tiles and marble.
The cumulative cost increase for the materials was 10.6%. On the other hand, the labor cost is expected to swing the costs of building by 3% on either side. This based on understanding that labor costs account for less than 30% of the construction costs. Due to the seasonal changes of the construction materials price can change over a short period of time; hence, long term forecasts are likely to have a big margin of error.
Prices and the Quality of the Construction
The cost of constructing a project is a concern for many clients. Therefore, clients want to achieve the value for their money. Quality is related to cost i.e. “you get what you pay for” (Mckenzie & Betts, 2006, p. 12). In most of the construction projects, cost is a critical factor. The needs and the expectation of the customers vary depending on the nature of the project. Thus, the nature of the project dictates the prices. The architect determines the particular characteristics that in turn influence the cost.
The characteristics can be for affordable, good quality upscale and designer houses. Certain types of projects are subject to cost limit. According to Deloitte (2015), prices do not affect the quality of construction; instead, it influences the type of housing the client requires. Table 9 above illustrates how prices vary depending on the type of construction. Therefore, the buildings that incorporate high quality and high innovative features are more expensive than the buildings that are functional.
Retail
In 2014, the demand for the retail sector was strong due to the growth in the resident spending. For instance, Dubai attracted 80 million visitors. The retailers recorded an increase of 14% in sales growth compared to the previous year. This accounted for approximately 55% of the Dubai’s GDP (Deloitte, 2015). Thus, it is forecasted that the retail prices are to keep on growing. The retail sales volume is projected to increase by 3.1% in 2015, 2.0% in 2016, and 2.3% in 2017.
Market Sentiment for the Future of Real Estate Sector
Dubai has been experiencing phenomenal growth in the real estate industry. The growth has been due to the economic boom in the Gulf region. As a result, rents, and selling prices for the different types of real estate have been on the upward trend. In addition, the middle class with disposable income increased considerably. According to Deloitte (2015), primary research points to a positive sentiment in relation to the disposable income. Similarly, tourists have a preference for super prime malls. Examples of the malls include Mall of Emirates and Dubai Mall. Thus, with the positive feeling, there are indications that buoyancy in the real estate will attract more capital inflows.
References
Abdelgalil, E., & Bakheet, B. A. (2007). Dubai real estate sector. Data Management & Business Research Department, 1(1), 978-9948.
AECOM. (2014). Property and construction handbook: International edition 2014. Web.
Bloomberg. (2015). Bloomberg brief real estate 2015. Web.
Collier International. (2015). Dubai house price index third quarter 2014. Country Research, 4(4), 1-12.
Deloitte. (2015). The UAE economy: 2014 performance and 2015 outlook. Web.
Knight Frank. (2012). UAE Economic performance and Dubai real estate investment overview. Web.
Mckenzie, D., & Betts, R. (2006). Essentials of Real Estate Economics. New York: Thomson South West.
Reidin. (2015). Reidin residential prices. Web.