Land values set to rise further

The local real estate market is far from seeing its peak yet. The latest trends would suggest UAE’s residential real estate would hover in the range of $7,200 a square meter from the prevailing $4,066 a square meter.
‘We feel that, while real estate values have come a long way over the last five years, on a relative income basis there is still room for higher valuations’, says a report recently released by Al Mal Capital.

In fact, the report suggests UAE’s land values of the moment would be at the low end compared with courtiers with similar income levels. ‘Fro countries with per capita GDP in the $30,000-$40,000, the range is $3,595-$14,600 per square meter’, it notes.
‘At the top of the range is France with a top marginal tax rate of 40 per cent and at the low end is Germany with a top marginal tax rate of 42 per cent. The prevailing value in the UAE is at the low end of the range at $4,066 a square meter’.

For its report, Al Mal Capital compared the market on a per square meter relative to the per capita GDP across the world, but excluding London, Moscow and New York. It also did not make adjustments for the 0 per cent tax regime in the UAE, ‘which we feel significantly impacts the affordability of real estate.’

Significantly, it sounds a note of caution for property investors looking to place their assets in the rental market. ‘In our view, the combination of high rental yields, rental costs per square meter near global relative fair values, a growing mortgage market and purchase prices still low relative to income levels will drive yield compression over the next four to six years.

‘We expect yields to decline approximately 240 basis points on average over the next four years. However, we expect most of the yield compression to come in the low-to-mid price range.’

UAE’s current rental yields – an average 7.7 per cent – are high relative to markets running on the same macro fundamentals. Annual rent payments here average $314 per square meter compared with $194 in Germany at the low end of the $30,000-$40,000 per capita GDP group and $588 per square meter in France at the high end.

Future Demand

The dilemma that we face when looking to the market is to assess the ‘true’ demand for the future housing supply, while also judging the reliability of planned supply’, the report states. ‘We estimate that unit supply will be approximately 18,000 units for the three-year period between 2008 and the end of 2010.

‘However, in 2007 we project that only 30 per cent of planned units actually were delivered as the industry was hit by several production constraints. Contractors were constrained by an extremely tight labor market compounded by a new labor law that required much of the existing labor force to return home.

‘As these issues have, for the most part, been resolved, we should see gradual improvement from contractors meeting delivery schedules.’
For Dubai, the Al Mal Capital findings suggest combined supply to overtake demand only by early 2011. This would have to come on the basis of supplies touching highs of 66,000 units in 2010.

With regard to demand, the incremental household growth should taper off in 2009 and 2010, then going on to pick up again in 2011. This would be because much of the required personnel for the expected hotel launches and other tourism-related projects begin to offset drops from financial and development sector growth, the report adds.

‘Slowing growth in terms of new household entrants to Dubai should relieve some pricing pressure in 2009. However, we believe much of that relief will be mitigated by existing pent-up demand through 2010.

‘In Abu Dhabi, a supply shortage is substantially clearer. We do not expect cumulative supply to match cumulative demand until beyond out five-year projection. In fact, we do not expect a significant ramp up in deliveries until 2011.