Property Doubts

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A record number of real estate developments are currently being promoted in Dubai and the Northern Emirates. This booming property market was initially sparked when the emirate of Ras al-Khaimah (RAK) passed laws allowing freehold ownership for non-Gulf Cooperation Council nationals in selected areas in 2005, a move quickly imitated by Ajman, and other emirates following suit with more limited freehold and leasehold plans. Thanks to this liberalisation, the Northern Emirates have been able to attract billions of dirhams for the construction of massive real-estate developments that hope to absorb part of the demand of the saturated Dubai market.

But analysts have warned that the high ride currently enjoyed by UAE property developers might soon have an end.

Regional investment bank, EFG-Hermes predicts that a price decrease could start as soon as 2008, and the fall in property values could reach 25 to 30% by 2010. Rating agency Moody's also warned of a possible risk of a "short-term real estate downturn" in the UAE, and warned of the possible consequences to the banking sector.

While the booming UAE economy can cope with a real estate price correction and the Dubai property market should be able to absorb this adjustment, such a development could mean trouble for the Northern Emirates' nascent property market. Indeed, most development projects located there have been largely designed as upscale dormitory cities for mid-to-high income professionals who work in Dubai and are willing to commute daily in exchange for bargain housing prices. With current, off-plan average prices ranging from AED385/sq ft ($105) in the Ajman One project to AED651/sq ft ($177) in the posh Al Hamrah Village project in RAK, property in the Northern Emirates is a steal compared to Dubai and its average price of over AED 950/sqft. Declining property prices in Dubai or nearby Sharjah, however, will mean that the incentive to live in a more remote emirate - with the commuting times and lack of services that entails - will diminish proportionately.

In addition, most major developments being pushed in the Northern Emirates have target delivery dates well past 2008, after any correction takes place. For instance, the first phase of Tameer's Al-Salam City project in Umm-al-Quwain, which is expected to house half a million residents, should be opened in 2009, with the project being fully completed in 2020. Ajman One's 3000 planned apartments should hit the market in 2009-2010, while RAK Properties' Mina al-Arab, with more than 3,500 residential units planned in Ras al-Khaimah, should be fully completed in 2010.

According to a study released by the Dubai Chamber of Commerce and Industry, the city's population is projected to reach 1.85m by 2010, an increase of 432,000 people. However, only a minority of these, as few as 30% according to the local press, will be high-income individuals, spurring demand for roughly 52,000 middle-to-high end residential units between now and 2010.

While this figure seems high, it compares with an even stronger supply. EFG-Hermes, forecasts that as many as 69,000 units will be delivered in Dubai in 2007 alone, and up to 139,000 in 2008. Many additional projects are also slated for release in 2009 and 2010. If promoters' showcases at the recent International Property Show in Dubai are anything to go by, most of those projects are targeting the middle-to-high-end income bracket of the market.

Although Dubai's overall housing demand is set to remain extremely high, an excess of supply on the high-end segment seems to be accumulating, while the needs of labourers and other low-income individuals, who account for most of the population growth, remain unaddressed. This, analysts say, could lead to a significant price correction for the high-end segment.

The good news is that with many projects still in their initial phases, plans can be revised and adjusted to new property market trends. Northern Emirates-based developers are hoping that local demand, spurred by the area's growing economies, will eventually take off independently of Dubai's demand. This is why many of the proposed projects feature commercial and office space in addition to apartments and villas, and developers are also planning industrial areas nearby. In addition, according to industry observers, foreign investors, particularly Indians, Pakistanis and Iranians, continue to show a strong interest in Northern Emirates property, for themselves or for resale. This interest could help demand remain strong for the years to come and partially offset the effects of a likely market correction.

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