ASIAVIEW: Substance in Dubai’s mirage


This year, there have been noises emanating from Dubai, the one-time poster child for the global financial crisis, to suggest that its real estate market is experiencing something of a mini-recovery. Whether the world once again is being subjected to the emirate’s unremitting PR machine or whether there actually are solid foundations to this claim is open for debate.

Certainly, Dubai’s government would have you think the world again is interested in its bricks and mortar. According to recent findings by Dubai FDI, a division within its Department of Economic Development, overseas capital investment in the emirate increased by 7 percent year-on-year in the first half of 2012 and real estate once again was one of the 10 most popular sectors for investors. More than $10 billion of foreign direct investment into real estate markets in the United Arab Emirates (predominantly Dubai and Abu Dhabi) happened in 2012 – that’s the official line.

One property agent PERE spoke with was skeptical about that claim. Certainly, Dubai’s office market has seen little love and is very much still on its knees, he pointed out. Indeed, most of the property services firms active in the region admit the property markets, commercial especially, are in fact not “recovering,” rather they simply have stopped hemorraging.

According to Knight Frank, the vacancy rate for offices citywide was a jaw-dropping 50 percent as of the third quarter last year. Even prime locations were 20 percent vacant. Accordingly, rents have trended down. For example, you can lease offices in the Dubai International Financial Centre (where most big business resides) for AED2,530 (€532; $688) per square metre today, way down from almost AED4,000 per square metre back in 2008.

To make matters worse, new office developments still are being churned out. CBRE reports that office supply has increased 75 percent since 2009, with another 600,000 square metres coming this year.

Furthermore, with another 68,000 square metres of space slated for delivery in 2013, an oversupplied retail property sector also is on the cards, according to Jones Lang LaSalle’s latest research. The firm predicted increased competition among developers as the market reaches “saturation.”

So, where is the foreign capital going? One area undoubtedly is residential, and that is not surprising as pockets of demand have emerged. In Dubai’s prime markets, rents increased by 16 percent in 2012, according to CBRE. That finding was backed up by anecdotal evidence gleaned by PERE. The agent we spoke with just rented out a beachside villa on the Palm Islands at AED260,000 per year, reflecting an 18 percent increase on what he charged his previous tenant. In another example, a private equity real estate professional who recently relocated to Dubai said he’s paying 15 percent more rent for his home than he would have done last year.

The residential anecdotes unfortunately aren’t all positive. PERE heard how the developer behind one ‘sold out’ development has paid locals to stand in a queue to buy its apartments, purely to impress the cameras. In addition, less than 60 days after this particular development completed, its units have been advertised for sale in local newspapers for prices reflecting a 5 percent margin. There are few better indicators of property speculation than that.

This backdrop boggles the mind as to what private equity real estate platforms like Brookfield Asset Management and Pramerica Real Estate Investors – two groups to have formed recent UAE-focused real estate partnerships with state investment houses – are doing in the emirate. In the case of Brookfield and its partner, the Investment Corporation of Dubai, the question resounds more as they have proposed raising

$1 billion for their ICD-Brookfield Dubai Real Estate Fund – an unquestionably large amount of capital for a market of such limited scale. Obviously, Douglas Kirkman, the former high-flying real estate executive of The Blackstone Group, thinks there’s reason to come beyond just desert skiing – he took the CEO job for the fund last month.

PERE has done some digging around and it appears the thesis behind the ICD-Brookfield fund actually has shifted somewhat from when it was first launched in 2011, and that offers a fascinating insight. Shocking as it may seem given how stagnant Dubai’s commercial real estate market currently is, the focus now is on the future – and new development. That is not crazy if you peg it to Dubai’s focus on its transport infrastructure. Actually, finely-tuned development close to key hubs like the Jebel Ali Port, the largest container port between Singapore and Rotterdam, and the vast air cargo-dedicated Al Maktoum International Airport, could yield some interesting results.

Of course, capturing such an opportunity in a market perpetually inflicted by an inshullah (Arabic for ‘God willing’) culture where things move glacially – PERE understands the ICD-Brookfield fund still is awaiting various licenses to begin raising capital well over one year after it was announced – is another matter. Funds by their nature have limited lives, and Dubai’s real estate opportunity still might be years away. Still, the timing of a fund doesn’t negate the underlying probability there actually is some substance in Dubai’s mirage, even if its PR machine makes so much noise in the meantime.