INTRODUCTION
The real estate market is cyclical to the economic movement (Gray, 10). This relationship results in the movement of the real estate market in a similar pattern as that of the economy. With this pattern at work, the economic downturn results in having direct impact on the real estate market performance. Dubai is one of the most important states of United Arab Emirates. This report has focused on the major factors that have influenced the real estate sector of United Arab Emirates, including the impact of 2008 economic crisis. While discussing prior crisis condition of the industry, report has illustrated the comeback position of the sector and the current situation of real estate sector. Moreover, the analysis has been done on the basis of three major real estate companies in United Arab Emirates including (ARTC) Arabtec Holding PJSC, (EMAAR) Emaar Properties PJSC and ALDAR Properties. On the basis of calculated ratios, variances, market returns, and risk, report has analyzed the Dubai estate market on average.
REAL ESTATE MARKET OF DUBAI PRE-CRISES:
The most important power behind the establishment of real estate was late Sheikh Rashid bin Saeed Al Maktoum, who played an important role in the development of Dubai as the Trade Hub it is in the current state. Development of Dubai Creek in 1905 has facilitated the further development in the sector and 1960s this helped to bring the first Dubai Construction boom. The major projects such as the Dubai Dry Docks, Ali Jebel port, and the Dubai International Trade Centre have played a major role in the development of Dubai. After the great boom in the real estate sector of United Arab Emirates, year 2002 brought vital changes in the course of Dubai real estate. Few changes in the law have been made such as only citizens can own the property. However, this was made flexible by Sheikh Mohammed bin Rashid AlMaktoum, which allowed foreigners to purchase property freehand. This created a boom in the industry where private developers including both international and local purchased properties for construction. Few of the essential developments after 2002 declaration included Jumeirah, the palm, the spring and many more. The real estate sector in UAE encountered no any interruption in the boom that continued to stabilize until the 2007-2010 financial crisis. This crisis was the most challenging as it flipped the prices of property in UAE. Hundreds and thousands of employees were sacked from real estate companies in Dubai. The debts of real estate industry in Dubai had increased to 59 billion US dollars by 2009, resulting into decline the cost of infrastructure and shares in the market (Bluechip).
The real estate market in UAE reached top in 2008 and then in 2009 it crashed by half. Due to global financial crisis, Dubai real estate market was adversely affected. Increasingly speculative activities caused the real estate market in Dubai to become highly leveraged. Property flipping became common in which buyers were not intended to make due payments. The entire market collapsed due to lack of governmental regulations and the degree of collapse became notable when property rents decreased by 44% and selling price declined by about 50% from the peak in 2009, reported by the Dubai Land Department (DLD) and JJL. The sector entered in the state of recovery in 2011 as the rents and selling prices increased by 12% and 24% respectively.
REAL ESTATE MARKET OF UAE ON THE WHOLE AND ROLE OF DUBAI REAL ESTATE MARKET:
After cutting back money and lowering the cost drastically at the rear of 2008 downfall of Dubai, the financial institutions have started to pour money into real estate industry in the last several months. This is indicated by an increase in bank lending to the UAE’s construction industry. At one fell swoop, value of the property has been elevating on the back of economic expansion in Dubai, raising the likelihood of the market growing to indefensible heights. Combination of supply and unsound demand are an unsafe and risky mix. It is the combination that has already put Dubai into trouble in 2008 crisis; compelling construction companies of Dubai to carry over debts of millions and billions of dollars and affect financial markets across the world. According to Reuters, there can be seen the huge credit growth which shows the construction industry is growing rapidly. But the HSBC's chief economist for the region, Simon Williams, argued that this much increase in the lending activities of Dubai will soon bring downfall and will hit the economic order adversely along with asset prices.
Demand:
The demand scale of Dubai house prices is rising on a yearly basis, and set the fastest rise in prices of houses of all major markets of the world with around 27.7% and rent prices have raised by 30% during the same period. As of the Land Department, with a total population of 2.3 million in Dubai, the value of real estate agreements has increased by 38% to around 61 billion dirhams in the first quarter of the year, which accumulates to $16.6 billion (Dokoupil, and Menon).
The reason behind this huge increase in property price is accounted to annual economic growth to 5% and higher money inflow from investors in Arab. Whereas, few prices have come to a level as they were before 2008 crisis, yet these prices are significantly below than other major global business markets. As of Knight Frank, the cost incurred by Dubai prime real estate is around $6200 to $7500 per square meter which accounts to $580 to $700 per square foot, and this is relatively very small if compared to real estate in Singapore, which is between $27600 and $33700 (Dokoupil, and Menon). It can be seen that volume regarding real estate agreements has not still reached the level as they were before the crash; however, demand is gradually signalling to slow down. The volume has declined more by around 25% owing to less affordable prices and a huge gap between seller’s asked price and buyer’s willingness to pay (Dokoupil, And Menon). The first quarter of 2014 went well, expecting the next three quarters to maintain the momentum. As of the government spending plan in 2012 in the construction industry, there have been a huge development counting in around 100 hotels, largest shopping, all of the world, and parks construction. Government have decided to recover price speculation and to flip where investors rapidly buy and sell properties. In late 2013, the fee on property agreements have been doubled to 4% though the central bank of UAE imposed caps on mortgage lending.
According to anticipations of Knight Frank, the further growth is expected in the year 2014 by 10 -15% that is fostered by limited supply of new properties, owing to increasing population and strongly economic essentials (Dokoupil, and Menon). The below graph shows the market price trend in villas and apartments, the collapse began with Lehman brothers collapsed in September 2008, followed by the rescheduling of debts in Sept 2009. The economy showed a slight comeback in 2011, property prices began to increase, as the demand increases; developers started to construct again. With the introduction of rents caps and increase in transfer fees in 2011, the supply in the sector has boosted, and it is expected to boost more in the coming period.
(Knight Frank, 3)
In this situation, few real estate companies have developed their policies such as Emaar properties allows resale of properties after 40% payment (Dokoupil, And Menon). These initiatives are minor in relation to other countries like Hong Kong, and Singapore imposed 15% and 30% fees respectively on immediate property resale. International Monetary Fund has also suggested Dubai to consider such tools. This shows that real estate industry is willing to grow more aggressively. According to the land department, the high prices were merely owing to a strong economy. Central bank of UAE has warned the real estate industry about its overheating nature.
Supply:
There is a high degree of uncertainty in supply side of real estate industry. Dubai government has announced numerous construction and investment plan that worth over $50 billion for the last 18 months, but there is no certainty in their actual construction. According to central bank statistics, UAE construction loans have increased to 40.1% relatively to last year that accounts to 181 billion dirhams and it is reported as the fastest rate ever since 2009 (Dokoupil, And Menon). Banks loans have increased to a greater extent by 8.8% which shows that developers are willing to launch new projects by lending money from banks. The following graph shows the bank’s willingness.
(Knight Frank, 2)
However, this depicts the great decline in real estate mortgage loans in UAE. Thus, the trend indicates that people are shifting their tendency to banks loans and advances for residency rather than preferring mortgage loans. A come back to the complete extremes of the pre-2008 boom still seems doubtful. The crash eliminated several second tier investors and developers out of the market, and the real estate companies that continue to operate despite their balance sheet scar due to crash; this has created an environment of cautiousness among developers in Dubai. Developers are more attentive toward implementation of projects. Supply is increasing and becoming more coordinated, and if it continues to spend in the property sector, the industry will report great comeback (Dokoupil, and Menon).
FINANCIAL CALCULATIONS AND ANALYSIS OF REAL ESTATE SECTOR IN DUBAI:
The report has analyzed the market trend of Dubai real estate sector by focusing on three major property developers of Dubai, who directly deals with real estate business. This report gives a snapshot of the market. By assessing the market return, market risk, various ratios of these companies, together with the present market condition in a particular sector, report has compiled a complete analysis of Dubai market. The analysis includes the financials of following three major companies from the real estate sector:
ALDAR Properties PJSC:
Aldar properties PJSC is one of the largest companies of construction that is based in Abu Dhabi and operates in different regions Middle East and North Africa. The company owns over total assets of about US$ 12 billion. This company has developed some major projects in UAE while incorporating formula one facility and developing Reem Island (Aldar Properties PJSC). According to financial calculations, company has over 41% of profit margin that is relatively higher than its competitors. However, company has high degree of liability, resulting in greater debt to equity ratio that is 1.63. Company represented relatively strong liquidity position with 1.15 of current ratio.
Arabtec Holding PJSC (ARTC):
Arabtec Holding PJSC was developed in 1975 and soon recognized as the expert developers of pipeline construction, oil and gas, marine works, power generation. The company has now expanded its operations in Dubai, Abu Dhabi, Qatar, Jordan, Syria, Saudi Arabia and Russia (Arabtec Holding PJSC). As of 2013 data, company has generated low net income due to increased operating expenses which are depicted by 5% of profit margin ratio. The 7% of the return on equity ratio shows that company owns greater amount of total equity whereas, the company has reported 1.22 of debt to equity ratio means that its liabilities are higher to be paid off by total equity alone.
Emaar Properties PJSC (EMAAR):
Emaar properties PJSC is a Dubai-based property development company, founded in 1997. Emaar has developed most famous building of Dubai including Armani Hotel Dubai, the Dubai Mall, At.mosphere, the Dubai fountain and much more. Company is now operating in UAE, Syria, Saudi Arabia, India, Pakistan, Egypt, Turkey and five other countries. The company’s data shows that despite higher sales, its net income is accounted to UAD 2540.6 million, resulting in 25% of profit margin ratio. The company depicts higher liquidity of 5.56, representing that company has enough current assets to pay off its debts (Emaar Properties PJSC).
The market risk was reported as 3.229% before the economic crisis as the prices of property got below the average level; there was high risk of losses in the real estate sector. Whereas, market risk has reduced to 3.135% after the economic comeback as the economy began to stabilize and increase in overall demand of property.
The variance is the square of standard deviation; this represents the same propensity of market risk in the real estate sector. Before the crisis period, the variance showed 0.1043% of market risk which decreases after the crisis period to 0.0997% of market risk. This is due to the increased price speculation leaning to develop market into highly leveraged one.
Hence this shows real estate sector was in great pressure during the period of economic doom. Owing to high economic growth and increasing interest of Arab investors to invest in the sector, the market began to stabilize, with a significant increase in supply and demand of property development.
REFERENCES:
Aldar Properties PJSC. Company Overview. Online. 2 Jul. 2014 http://www.aldar.com/en/article/about-aldar/overview.html
Arabtec Holding PJSC. Company Profile. Online. 2 Jul. 2014 http://www.arabtecholding.com/Page.aspx?PageId=2
Bluechip. The Past & the future of Dubai Real Estate Market. Dubai Real Estate Blog. 16 Mar. 2013. Online. 2 Jul. 2014. http://www.bluechiphome.com/blog/the-past-the-future-of-dubai-real-estate-market/
Dokoupil, Martin, and Praveen Menon. Dubai faces moment of truth over looming property bubble. Reuters. 15 Jun. 2014. Online. 2 Jul. 2014 http://in.reuters.com/article/2014/06/15/uk-emirates-dubai-property-idINKBN0EQ08320140615
Emaar Properties PJSC. About Emaar properties. Online. 2 Jul. 2014 http://www.emaar.com/index.aspx?page=home
Gray, Douglas. Making Money in Real Estate: The Canadian Guide to Profitable Investment in Residential Property. John Wiley & Sons, 2008.
Knight Frank. Dubai Prime Residential Review. 2014. Online. 2 Jul. 2014. http://inc.iirme.com/Sites/Cityscape/v1/CSGlobal/downloads/market_reports/Q1_2014_Dubai_Prime_Residential_Review.pdf
