The existing supply and demand imbalance in the United Arab Emirates (UAE) real estate market would continue through 2010 in Dubai and beyond 2010 in Abu Dhabi, Al Mal Capital PSC, a UAE investment bank, said in its study on UAE real estate sector released last March. “We expect rental yields to decline over the next four years, driven mainly by real estate price appreciation. We expect average prices in the UAE to increase from AED1,400/sq. ft. in 2007 to roughly AED1,800/sq. ft. by the end of 2008,” it said in a study furnished to the Saudi Gazette. However, the gap between the high and the low end of the market should widen over the next few years. “We expect the difference between the 5th and 95th percentiles to grow from 165 percent in 2007 to 204 percent by 2011,” Al Mal said. The real estate market in the UAE has been a tremendously successful area for investors over the last 5 years. Looking at where the UAE real estate valuations have come from in just 5 years, with over 300 percent cumulative average appreciation, it would be impossible not to worry about current valuations. The study said significant regulatory and structural changes throughout the emirates offer more than sufficient justification for today's real estate valuations, considering the extremely low base valuations in the earlier part of the decade. The introduction of freehold rights in specified areas of Dubai, population growth, a strong fundamental economic environment, a growing tourism and hospitality market, and substantial consumer and mortgage loan expansion have all supported the rising real estate prices. Al Mal noted that the planned supply of housing units is not expected to exceed demand for the next 3years. We estimate that unit supply will be approximately 180,000 units for the three-year period between 2008 and the end of 2010. “However, in 2007 only roughly 30 percent of planned units actually were delivered, as the industry was hit by several production constraints. Most notably, 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 a reapply for residence visas.” The UAE population has grown at a CAGR over 7 percent since 2002 and is projected to grow at a CAGR of roughly 5 percent over the next 5 years. In terms of household units, the study forecasts 202,000 new households in Abu Dhabi and154,000 new households to come to Dubai over the next 5 years. The study further stated that the UAE is currently at the low end of the range for real estate prices in countries of similar income levels. For countries with per capita GDP in the $30,000 to $40,000 (UAE is $35,100) the range is $3,595/sq.m. to $14,600/sq.m. At the top of the range is France with a top marginal tax rate of 40 percent and at the low end is Germany with a top marginal tax rate of 42 percent. The prevailing value in the UAE is at the low end of the range at $4,066/sq.m. The implied trend value for UAE residential real estate is roughly $7,200/sq.m. “We feel that, while real estate values have come long way over the last 5 years, on a relative income basis there is still room for higher valuations. Average rental yields in the UAE, at 7.7 percent, are substantially higher than the levels in countries of similar income levels. The rental yields tend to decline as income levels improve. This tendency is driven by the increased ability of the population to finance the purchase of real estate rather than rent. Though rental yields are high relative to global peers, rental costs are near relative fair value. UAE annual rent payments currently average $314 per sq. m., compared to $194 per sq. m. (Germany) at the low end of the $30,000-$40,000 per capita GDP group and $588 per sq. m. (France) at the high end. According to Al Mal, the combination of high rental yields, rental costs per sq.m. near global relative fair values, a growing mortgage market, and relatively low purchase prices will drive yield compression over the next 4 to 6 years. “We expect rental yields to decline approximately 240 basis points on average over the next 4 years. However, we expect most of the yield compression to come in the low-to-mid price range of the market.” In Dubai, Al Mal study forecasts that cumulative supply to overtake cumulative demand in early 2011. “We expect actual deliveries to ramp up from an estimated 17,000 units in 2007 and peak at roughly 66,000 units in 2010. On the demand side, we expect incremental household growth to taper off in 2009 and 2010, before picking up again in 2011 as much of the required personnel for the expected hotel launches and other tourism related projects begins to offset declines from financial and development sector growth. 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, with the “cumulative supply to match cumulative demand until beyond our 5-year projections,” it said. The biggest impact on demand, Al Mal said, is the move from renting to owning property. In this case, both the availability and cost of mortgage finance are key drivers of demand. According to data from the UAE government and the IMF, mortgage finance is still at low levels relative to global norms. It currently stands at 5.9 percent ofGDP in the UAE, compared to 130 percent in the US, 70 percent in the UK, and even 10 percent in Mexico. At the prevailing mortgage rates of 7 percent to 7.5 percent, a monthly payment (including principal) will equal between AED115 and AED120 per sq.m. compared to AED98 per sq.m. cost to rent. Price appreciation should begin to slow 2009 as more supply is delivered. “However, we still expect a brisk increase of 17 percent in 2009,” Al Mal said. __
