The mismatch between planned and actual deliveries and its impact on the market and the buyer
Despite a general slowdown, there were 14,600 residential units that entered the Dubai market last year, the highest number of handovers since 2012, when around 16,000 units were delivered. Property Consultancy JLL attributes the rise in deliveries in part to corporate demand for staff housing, which included 1,500 villas for Emirates staff in Meydan and 690 units in Wasl Oasis II in Muhaisnah. The fourth quarter of last year also saw the completion of more than 1,000 town houses in Emaar’s Reem Community and 1,200 apartment units in phase one of Meraas’ City Walk.
“The [deliveries in Meydan and Reem] contributed to the volume of completions. This translates to an active supply pipeline, but still represents less than 60 per cent of the 26,000 units that were originally proposed for delivery last year,” Asma Dakkak, Research Manager, Middle East and North Africa at JLL, tells PW.
In Abu Dhabi, around 3,100 residential units were completed last year. According to JLL’s The UAE Real Estate Market: 2016, A Year in Review, the new deliveries bring the total stock in the capital to 248,000 units. Of the new deliveries, 700 were in Marina Bay One and Marina Bay Two towers on Reem Island, which were completed in the fourth quarter.
This year, there are 31,000 units scheduled for completion in Dubai, according to JLL. Of these, 550 are in Dubai South, which has also seen a further 10,000 units announced in the pipeline.
Property consultants base their projections on expected handovers announced by developers. However, there is usually a considerable gap in what is announced and what finally enters the market. This staggered delivery schedule works as a market correction mechanism, stabilising the market, which may otherwise have to cope with oversupply. Developers tend to time completion based on demand and project sales.
David Godchaux, CEO of Core-Savills, tells PW, “As our data show over the past years, actual deliveries have been consistently 30-50 per cent lower than developer projections; this is a healthy adjustment of supply from developers to the demand, and we expect this mechanism to continue playing an important role in price stability over the mid-term.”
In Abu Dhabi, JLL says expected completions will be seen along the Corniche, Al Raha Beach, Reem and Saadiyat Islands, adding approximately 5,000 units. However, similar to Dubai, the rate of materialisation is likely to be below the announced supply, as projects are delayed.
“As in previous years, there are far more projects announced than are likely to be delivered, with the materialisation rate likely to remain low at 35-50 per cent, as many announced projects have not commenced and those that have commenced are likely to experience delays,” says Dakkak.
However, estimates widely vary due to the unpredictability of the market. Godchaux says, “Our conservative forecast this year has contracted from 20,000 at the end of December to around 18,000, as we expect further phasing in deliveries as developers align demand with supply.”
When developers are releasing properties depending on project sales, stock in demand is likely to come into the market earlier. Currently, the focus is on first-time buyers who are looking to cash in on the downward trend.
Expecting the market to recover this year, Godchaux says, “A large proportion of the units expected to come to the market over the next few years are targeting the affordable segment, [thus] we expect the affordable segment with units below Dh1.5 million to face absorption issues due to the glut in supply, particularly in outer areas. Well-planned and efficient units with attractive overall prices, for example Onyx in the Greens, Belgravia in Jumeirah Village Circle, as well as Mira in Reem, have seen good absorption from first-time buyers.”
Attributing the oversupply to overestimation of completion stages by developers, Dakkak says, “They tend to phase out the release of units to dampen the opportunity for oversupply and this is crucial the closer we are to the World Expo 2020, which could see a lot of new projects unveiled.”
Buyer, tenant impact
While fluctuations in estimated and actual deliveries tend to affect the mortgage buyer in the short term, the phasing out of ready stock may in fact benefit the property market in general.
“Although this creates an artificial fear of oversupply and in a few cases penalises buyers who have mortgages over off-plan property, overall the contraction in deliveries have helped in many ways,” explains Godhchaux. “As all the stock is not brought to market at the same time, phasing helps developers to let the limited stock be absorbed relatively well, while assessing strategies for future phases based on market conditions.”
As Dubai caters to the residential demand of residents, the impact is varied across market segments, with developers introducing newer types of housing to comply with the requirements of owner-occupiers.
“In 2015, 22 per cent of residential units launched were affordable, while 18 per cent of residential units launched last year were affordable,” says Dakkak. “With affordable or middle-income housing in high demand for residents in Dubai, the government has recognised the need to regulate the market and require developers to provide an agreed percentage of affordable units, but more work remains to be done. Similarly, developers have recognised the opportunities presented by the middle-income segment and have adjusted their business models accordingly.”
This has resulted in more handovers in some areas compared with others. “Therefore, we see the exodus of some tenants into ‘affordable’ areas such as Dubai Silicon Oasis and increased interest in developments such as Town Square by Nshama, due to the attractive rates they offer,” says Dakkak. “The additional supply in the market has created competition, which could result in rentals remaining stable and even declining in some locations, as tenants have more choices.”
On the other hand, individual buyers may be affected by project delays. Often a delayed project means that end users have a chunk of their savings blocked in the property, while still having to pay rent beyond the expected date of moving in.
“Individual buyers are always the most penalised, as a share of their disposable income has been immobilised in a project that does not provide any return until the actual handover,” says Godchaux. As handovers are delayed, the relative cost of immobilised funds is increasing and mechanically decreases the investor’s internal rate of return (IRR).
With less flexibility on rental period adjustments in Dubai’s relatively rigid rental market, some buyers may have to pay another full year of rent, when the handover of the unit is delayed by even a few months. “This can sometimes have potentially disastrous cash-flow impact on buyers who do not have sufficient buffer factored in for this,” says Godchaux.
While some amount of adjustment of supply is expected, most markets tend to regulate developer schedules. “There are penalties linked to late deliveries in many established markets, which stop developers from using this adjustment mechanism,” says Godchaux. “Although these regulations make it more difficult for some of the more established markets to adjust on their own the supply level with anticipated demand, they also strengthen investor and end-user confidence on off-plan — something that is for now still lacking in Dubai, except for a very few large developers with a strong track record of almost timely delivery.”
Construction delays are a common feature across the world. However, the reasons may vary. “Construction delays are common in overseas markets, but the low level of materialisation seen in the UAE and elsewhere in the Gulf markets results from their high dependency upon pre-sales as a means of funding,” explains Dakkak. “Under these arrangements, developers are able to obtain access to some of the funding from the buyer before delivering the product. Although this is controlled by escrow accounting provisions in the UAE, it still encourages more development to commence than in more mature markets, where developers do not receive payment until the completion of the units.”
In the UAE, payments are mandated to be linked to actual construction. If implemented stringently depending on buyer complaints, there is provision for compensation for late deliveries.
“At present, there are more stringent regulations, which protect homebuyers,” says Dakkak. “While the real estate development regulations make provisions for penalty payments to be made to purchasers if developers miss completion dates, this is not strictly enforced and many buyers have been unable to obtain financial compensation for late delivery of products.”
World Expo effect
Expect more projects to be announced as the World Expo 2020 draws near, which will impact both launches and deliveries.
“We expect more than 60,000 deliveries in the run-up to 2020, mostly in the mid to lower segment, concentrated in the outer areas such as Dubai South, Dubailand, Dubai Silicon Oasis and Dubai Sports City,” says David Godchaux, CEO of Core-Savills. “Construction contracts of Expo-related projects have started to show a boost in the job market, however, this may not necessarily translate into high levels of absorption as the current mortgage regulations make it difficult for the target audience due to the high level of upfront deposit.”
Areas such as Dubai South are scheduled to be a key focus of activity. Asma Dakkak, Research Manager, Middle East and North Africa at JLL, says, “Dubai South is gaining prominence in the lead-up to the Expo. More residential projects are expected to be announced this year as preparation gains momentum.
“Data from MEED projects supports that and suggests new construction tenders across the UAE could increase by more than 95 per cent this year.”
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