With a surge in delivery during the Expo, will the demand-supply gap further widen?

Around 126,000 new units are expected to enter the Dubai real estate market by the end of 2020, as most developers in Dubai are focusing on handing over properties around the Expo event. Historical trends in the market, however, indicate that materialisation rate is only 40-50 per cent of the estimated new supply. Ali Siddiqui, research analyst at Reidin, says the low materialisation rate will help the market stabilise and reduce any gaps between demand and supply. Around 6,300 residential units had entered the Dubai Real Estate market in the first three months of 2019, he says. “Apartments make up approximately 91 per cent of the realised supply, with the remaining 9 per cent comprising of town houses and villas,” says Siddiqui. “The new pipeline for the remainder of the year stands at 49,500 units for this year and 76,500 units for 2020, as per announcements made by developers.”

Apartments make up around 84 per cent of the under-construction supply in 2019 and 2020, according to Siddiqui, with the remaining 16 per cent comprising town houses and villas. “Areas such as Dubailand, Mohammad Bin Rashid City [MBR City], and Jumeirah Village Circle currently account for 56 per cent of under-construction residential units in 2020. Most developers in Dubai will aim to complete and handover their projects before the Expo 2020, which is linked to job growth, increased government spending on infrastructure and business growth. The supply pipeline post 2020 currently stands at 37,500 residential units,” he says.

Supply leads demand

While there is talk of oversupply in the market, Craig Plumb, head of research at JLL Middle East and North Africa (Mena), says the extent varies between sectors. “It is probably most severe in the retail sector, which is facing pressure due to the increased use of e-commerce,” says Plumb. “The Dubai retail market has seen the completion of around 210,000 sq m of additional space per annum over the past three years. This supply is expected to increase dramatically, with over 700,000 sq m of additional space due to complete in 2019 and 2020.

“The situation in the residential market is less severe than in the retail sector, but there are still high levels of supply scheduled to complete over the next few years.”

If all the projects currently proposed are completed, over 110,000 additional units will be added by the end of 2020. This compares with around 40,000 units over the past two years. This high level of additional supply has been one of the major factors for the fall in residential prices and rentals since 2014.”

Plumb also agrees with Siddiqui that not all of the announced projects will be completed. However, he believes supply levels will run ahead of demand for the next one to two years. “Dubai has very ambitious future growth plans and has always relied upon supply-led demand,” says Plumb. “This situation looks set to continue over the next few years as developers continue to respond to the government’s plans to grow the size of the city to 5 million people and beyond.”

Building for the future

Around 8,000 units in the market are coming from Damac Properties. “We are currently focusing on project execution and have awarded close to Dh430 million towards new contracts just in the first quarter of 2019,” says Niall McLoughlin, senior-vice president at Damac Properties. “We have strong cash balances, and we are committed to achieving our target of delivering 8,000 units across 2018 and 2019.”

McLoughlin believes the supply-demand dynamics will balance out in the next couple of years. “We are all looking forward to hosting the world right here in our home, yet Expo 2020 is only a milestone in the history of the UAE, and developers who factor in business sustainability plan and build within a three- to five-year window. We are building for the future of the UAE.”

Regulations will play an important role in stabilising the market. For instance, off-plan projects now need to have a strong customer base before they can be developed. “It means that a lot of the supply coming online in Dubai has already been sold to investors and end users,” says McLoughlin. “Also, most of the UAE’s major developers are public entities and follow a percentage completion earning model. This means it only makes business sense to develop in line with growth projections for the UAE.

“Since the real estate market has a long product development cycle, there may be market corrections within the cycle. Take the past two years as an example, which was underpinned by shifting global economies. However, the UAE real estate market is due to come out of the current slowdown and is gearing up for another positive growth period.”

Positive sentiments

Dubai saw 15,000,20,000 units delivered last year and this is projected to go up to 20,000 – 30,000 in the current year. “In any growing economy, there would always be business cycles of overinvestment and correction,” says McLoughlin. “What is important in these scenarios is the long-term structural and procedural improvement plans by the government.”

He believes that the enhanced focus on project delivery by developers and government initiatives to improve the salability of Dubai have increased confidence on the investors. “Expo 2020 is expected to provide a strong boost to the Dubai economy with enhanced demand for hospitality and consequent demand in the commercial sector,” says McLoughlin. “Expo 2020 has greatly influenced the scale of real estate development that Dubai has seen in recent years. The overall infrastructure development and expansion planned to cater to the Expo will be a shot in the arm as infrastructure building is a backbone of livability.”

He also notes the government’s investments in areas that are long term and not exclusively catering to the spike in demand during the Expo. “While the long-term economic benefits of Expo 2020 would further strengthen the residential segment, it may not be prudent to correlate the current residential supply with Expo 2020. We see the current master developments in Dubai being planned for horizons much beyond 2020.”

All rights reserved to the initial publisher for Gulf News.

Collected and published by Arms &McGregor International Realty® editorial team. Get in touch with us at [email protected]