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Dubai’s incremental efforts to secure the future of its real estate market by raising the transparency threshold have been duly noted. Global funds are certainly preparing to give this market a try by 2010, the year Jones Lang LaSalle predicts the emirate will move up another step on its transparency chart.

“The volumes of global funds interested in Dubai have increased over the last two years, we expect them to be here within 10 to 18 months time,” says Blair Hagkull, Managing Director of Jones Lang LaSalle MENA, though he remains tight-lipped on who is on the horizon.

For now at least two large funds are here, one of them being the US giant AIG Investments, which has a real estate arm in Dubai and bought two buildings in Emaar Business Park. “The reduction of risk within a fact-based environment makes it easier for them to take that decision. Equally the options and certainty for occupiers are increasing.”

His statement is based on Jones Lang LaSalle’s first ever ‘Real Estate Transparency Index’ for the MENA region, which is classifying Dubai as the most improved transparent city in the region.

“Dubai is more transparent than the popular BRIC block. Investor confidence is reflected in the Dubai Land Department statistics — it has recorded a 12-fold increase in total value of real estate sales between 2002 and 2007 coinciding with the introduction of new laws, especially freehold in 2006,” Hagkull elaborates.

These DLD statistics are compiled by REIDIN and include land sales, developments under construction, and residential as well as commercial property sales.

Craig Plumb heading research at Jones Lang LaSalle MENA highlights that strata, landlord and tenant laws, and escrow accounts have been key improvement factors, while the launch of RERA to regulate the market has been one of the pieces of the jigsaw to achieve transparency.

“But there is still a long way to go to catch up with the mature markets, but the unprecedented scale and speed of development makes the equally quick improvement in transparency that much more significant,” Hagkull adds.

At present, Dubai finds itself in the middle of the five-tier transparency pyramid at the top of tier three or semi-transparent. It moved from tier four, or low-transparency, within the space of four years making it the world’s fastest improver.

“About 10 years ago expatriates could not participate in Dubai’s real estate industry but now contribute a lot to the growth. The impact is felt in the UAE, but more so the country is truly making waves across the region and the world,” enthuses Hagkull.

Plumb even forecasts a tier two for Dubai by 2010. Not that this would put it on par with the likes of Canada, Australia and some of Western Europe, classified as highly transparent, but as transparent as Eastern European contenders Poland and the Czech Republic. Reduced risk will lead to lower yields, but makes the market more resilient.

“The most globalised cities have the highest number of foreign investors and that means even in tough times they maintain higher values,” Hagkull points out.

To attract global capital though Dubai has to complete the building process, creating the assets funds can invest in. “Individuals tend to invest in brick and mortar but we need more asset based real estate to move to tier two. The emergence of REITs within the next two years will be a landmark stepping stone,” Plumb says.

Challenges

Internationally accepted performance-benchmarks increase transparency but do not as yet exist in Dubai. Real estate companies increasingly listing on the stock exchange are the first step, and Jones Lang LaSalle expects RERA to publish a performance benchmark within a year’s time.

“Dispute resolution, although also taken care of by RERA, is another challenge. The DIFC has an effective model, which is expected to be extended to other freehold areas,” Craig Plumb adds.

Going freehold

Currently only 20 per cent of Dubai’s housing units are offered on a freehold basis. I expect that by 2020 freehold will comprise 80 per cent of the total real estate market. The value of transactions this year alone should reach Dh700 billion.” - Blair Hagkull, Managing Director, Jones Lang LaSalle MENA

Legislation in response to concerns arising is the normal way in emerging markets such as the UAE, say Steven Henderson and Brett Scrymgeour of Clifford Chance.

The recognition of the need to diversify their economies and attract foreign investment led the governments of Abu Dhabi and Dubai to introduce a legal framework for property ownership in 2005 and 2006 respectively. For foreign investors and developers, these laws created greater confidence in their legal ownership rights in a market that is experiencing unprecedented growth in the real estate sector.

In Dubai, foreign interest in real estate ownership began early, in fact even before formal property laws were introduced. Foreign investors' entry into the market followed the issue of a decree in May 2002, by the then Crown Prince of Dubai, Shaikh Mohammad Bin Rashid Al Maktoum, to allow foreigners to buy and own freehold property in specified areas of Dubai. Until Dubai's property law was introduced four years later, however, the nature of such ownership rights was uncertain. Foreign purchasers essentially obtained a series of contractual rights from developers to obtain title at some stage in the future, which is a long way from the state-backed 'guarantee' of title more familiar to many foreign investors.

The law has been constantly evolving since the introduction of Dubai's property law. In most instances, the laws have been introduced to address a concern that has arisen in the real estate market, which is expected in an emerging market.

For example, the introduction of the foreign ownership laws saw the entry into the real estate market of a number of developers looking to 'cash in' on what continues to be one of the best markets for real estate in the world. Because there was initially little regulation or 'checks' in place, buyers were left with no guarantees that installments of the purchase price made by them to developers were being used to undertake construction of the property. This becomes a real issue when there are delays to the development, which have been reasonably common in Dubai over the last few years. Incidents like this can have severe consequences on an otherwise strong real estate market because of the negative impact on consumer confidence. This highlighted the need for regulation both to complement and complete the existing property laws. The government of Dubai, in recognition of this need, has introduced a number of new laws aimed at increasing consumer confidence, including:

- Escrow Law — the escrow law introduced by the Dubai government in 2007 requires developers (when they sell units off the plan) to set up escrow accounts. The law requires developers to pay any money received from buyers into the escrow account (i.e. the purchase price is no longer paid directly to the developer) where it is held subject to release in stages as the development is constructed. Even after the development is completed, a portion is retained as further security.

- RERA — the Real Estate Regulatory Authority known as RERA was established in July 2007. RERA has been given wide-ranging powers including licensing all real estate activities in Dubai, and it is now a legal requirement to be registered on RERA's Developers Register for any party undertaking developments in Dubai. RERA has also imposed certain rules in relation to registered developments, one of which requires that all developments must commence construction within six months of launching sales in relation to the development to the market.

- Strata Title Law — the strata title law in Dubai came into effect earlier this year. It seeks to give certainty to owners of units in apartment buildings of their rights to ownership (i.e. it confirms that they may sell, lease or mortgage their unit). One of the fundamental features of an apartment building where various different parties own units is a common set of rules for all of the owners to follow (such rules deal with a number of issues, including the payment of expenses for the maintenance of common-use areas within the development). In recognition of the importance of these rules, the strata title law includes a requirement for owners to comply with the rules for their particular development. However, the key feature in terms of consumer confidence is the introduction of a requirement for an owner's society to manage the development. Each owner of a unit in the development will be a member of the owner's society and have voting rights that gives owners some comfort over the management of the development.

In Abu Dhabi, the property ownership laws evolved differently. Unlike Dubai, there was no decree with regard to the right of foreigners to own property and no right for foreigners to own property until 2005. However, to attract and retain foreign interest and growth in the real estate sector, Abu Dhabi had as much need for the introduction of property ownership laws as Dubai. Since the introduction of a legal framework for the ownership of property in the emirate in 2005, foreign interest in the real estate sector has been 'red-hot', so much so that phases of particular developments have sold out within hours of their release.
The appetite for real estate in the UAE and in particular in Dubai and Abu Dhabi has been unmatched anywhere in the world. To sustain the growth in the real estate sector, and to keep the current momentum going in the current global environment, the governments of both Dubai and Abu Dhabi need to maintain consumer confidence and expand investment, including foreign investment.

The government of Dubai has already taken active steps to increase consumer confidence with the introduction of the escrow law and the strata title laws, as well as the establishment of RERA. The laws passed to date and the establishment of RERA provide a solid legal framework that protects all players in the real estate market — but more laws (and the regulations contemplated in the current laws) still need to be enacted. The government of Abu Dhabi will need to follow suit and take steps similar to those already taken in Dubai if it wishes to maintain the foreign interest in its real estate market.

Dubai: New figures reveal that the GCC region boasts the world's fastest-growing commercial real estate market with an increase of 565 per cent measured since 2000 and it is predicted that large-scale developments will form a significant percentage of this market, which is expected to increase to seven times its size in the decade leading up to 2010.

The retail sector alone is estimated to be worth $100 billion and is second only to the oil industry in terms of its importance as a driving force behind the GCC's booming economy. These figures, combined with an estimated retail spend in Dubai's shopping malls that will exceed $7.5 billion in 2009, make it the ideal time for investors and developers to bring new mall developments online.

Twenty-three years down the line from now, Abu Dhabi and its suburbs will look completely different with an estimated investment of about Dh600 billion in real estate in addition to billions of dirhams pumped in the infrastructure.

The Government of Abu Dhabi unveiled its project for the next 23 years called "Plan Abu Dhabi 2030 – Urban Structure Framework Plan".

The emirates will have four major districts: the Central Business District (CBD), the Lulu Island District, the Grand Mosque District and the Capital District. Apart from these districts, there will also be smaller districts such as Recreation and Leisure Districts on Yas Island and Cultural District on Sa'adiyat Island.

According to Urban Development Council of the Government, which designed the plan, the population of the emirate and its suburbs is to increase from the current 930,000 to 3.1 million in 2030.

The plan projects, the population on Abu Dhabi Island will be 1.33 million, on the mainland, which also includes part of Grand Mosque District and the Capital District, 1.37 million on the North Coast 470,000.

Investment in real estate from now up to 2030 is estimated between Dh500bn and Dh600bn.

The scarcity of villas in Dubai, has resulted in increased demand for villas, reports Collier International UAE.

According to the House Price Index (HPI) of Colliers International, the demand for villas have continued to remain high as against the demand for apartments and townhouses, and this has resulted in surge in prices of villas by 78%.

The CEO of Colliers International UAE, John Davis, says "Demand for villas have remained particularly high, given the relative scarcity of villas as against in the case of apartments. More dwellings are currently under construction, likely to be delivered by end of 2008 and in 2009. The villas constitute 21 percent of total mortgaged properties used to collate the index."

The quarterly overall villa index had increased throughout 2007 till the first quarter of 2008, with an 85 percent increase during the period, it has been reported. The average rate per square foot for villas in Dubai during the first quarter has been Dh.1338.

The growth of townhouses during the period was far slower than the apartments and villas. The annual index saw an increase by 29 percent, while apartments saw an increase by 82 percent. Townhouses constitute 15 percent of the total mortgaged properties.

Dubai saw an increase in the number of completed apartments being delivered into the market during first quarter of 2008, particularly in Dubai Marina, Downtown Burj Dubai and The Palm Jumeirah. This additional supply input available for purchase saw a positive affect on the average rate per square foot for apartments, increasing it to Dh.1841 during the first quarter.

The HPI index report includes details on built-up area of these properties and total value of transactions per month. Depending on coverage of thirteen developments in Dubai, the weighting has been given on the basis of unit type - apartments, villas and townhouses at the rate of 55 percent, 34 percent and 11 percent respectively.

The index reveals that property prices in foreign ownership zones continue to increase - driven by strong demand for properties from end-users. The reason behind the increased demand for these properties are due to factors such as the high growth in UAE economy, particularly in Dubai, with high growth rate being achieved at the rate of 11 percent per annum, and due to numerous profitable finance options being offered to residents and non-residents.

"The index report is across expatriate free zone, and the numbers are likely to grow. It is an on-going process over a period of time," Davis said.

As per the index, the high residential rates in Dubai, currently averaging at Dh.950 per square foot is getting more attractive and cost-effective for end-users. Further, the decline in value of dollar-pegged dirham, as against other global currencies has enhanced the attractiveness of the property in Dubai, particularly for expatriates.

Further surging construction costs are also causing an increase in sales price of newly launched developments in Dubai, with costs expected to rise by 18 to 20 percent towards end of the year, states the report.

A strong growth, backed by huge demand, a growing population and liberalization of the real estate sector, is likely to keep prices strong in the Abu Dhabi real estate sector for the next seven years, reports EFG-Hermes, a regional investment bank.

The report states that the longevity and strength of the real estate phase in Abu Dhabi, is supported by shortages of all types of real estate, controlled by delivery of supply to avoid a surplus, coupled with greater economic liberalization, and creation of a unique identity.

According to the Author of the report, Sana Kapadia, "A strong government presence supports and caps on the amount of real estate that can be built on any given year to mitigate the risk of an oversupply of property."

No major additions of residential units are likely in Abu Dhabi until late 2009, and with the ever-growing demand, the residential market will remain under-supplied until the end of 2009.
It has been estimated that the average price of residential properties will increase by 20 to 25 percent, during the rest of this year, and by 15 to 20 percent in 2009.

Demand for office space, too, will remain strong, with current vacancy rates at 1 percent, and with newer businesses seeking to make their presence in Middle East, it has been predicted.
However, considerable supplies that are likely to come in during 2009, will help cool the rising rents and prices, it is said.

Meanwhile, in a survey conducted by DSL Exhibitions, an international firm, specializing in organizing conferences and exhibitions, real estate investors expect that prices of properties in Abu Dhabi are likely to appreciate more than that in Dubai and other northern emirates.

The survey was done to find out if there exist any differences in the perceptions and attitudes of real estate buyers, between choosing Dubai, Abu Dhabi or one of the Northern Emirates and to underline any apparent trends.

The survey has revealed considerable differences in the attitudes and perception of investors, who choose between the three regions - Abu Dhabi, Dubai and Northern Emirates.