Strong economic growth fueled by high energy prices, availability of ample liquidity and a steady inflow of expatriates has helped push the value of current projects in the UAE real estate sector to an estimated US$45 billion. The continuation of these factors is expected to provide a conducive macroeconomic environment for further development in the medium term.
Repeated delays, continuous announcements of new projects and changes in master plans make it extremely difficult to accurately forecast the incoming supply of residential projects in Dubai. Prime Research consequently feels a sensitivity analysis yields better results than forecasting a single total for incoming supply of residential units. Its analysis suggests a total of c.a. 40,000, 65,000 and 66,000 residential units are scheduled for completion in 2006, 2007 and 2008. However, Prime Research's base case scenario assumes 20% delays in 2007 and 2008, implying actual deliveries of c.a. 52,000 and 63,000 units respectively.
Prime Research expects the steady inflow of expatriates to serve as the biggest source of ongoing demand. Given the skewed focus of the incoming properties towards the upper end, Prime Research's analysis suggests a minimum wage of AED10,000 per month for the definition of an addressable market. Prime Research estimates 30% of the incoming immigrants belong to this category. Based on Prime Research's base case population growth forecast of 7%, this translates into a demand for c.a. 30,000, 32,000 and 34,000 residential units in 2006, 2007 and 2008 respectively. Additionally, Prime Research estimates a pent-up demand on c.a. 23,000 residential units in 2006 due to the prevailing undersupply situation.
Prime Research's base case demand and supply forecasts imply a shortage of c.a. 12,000 residential units in 2006, followed by a supply excess of c.a. 6,000 and 33,000 units in 2007 and 2008 respectively. Rents and prices are thus expected to follow an upward trajectory in 2006. The marginal imbalance foreseen in 2007 leads us to believe that the general perception of a severe correction in the medium term is incorrect. Adjustments in prices are likely to vary from segment to segment, with a continued shortage in villas and medium to low end apartments expected to support prices in these sectors. Within the high end apartments segment, fundamentals, such as location and quality, are expected to determine the extent, if any, of correction. Rents, on the other hand, are more likely to witness a downward adjustment as a result of increased vacancy and greater acceptance of mortgage finance.
Depending on the actual delivery schedule of completed units, the market could witness intra-year imbalances in demand and supply in 2007, which in turn could negatively impact prices. If such an imbalance is incorrectly perceived to be a long term problem, prices could experience a sharp decline. Thus, Prime Research foresees the general expectation of a severe correction, which could turn into a self-fulfilling prophecy, rather than the problem of a major oversupply, to be the biggest threat facing the market in the medium term.
While Prime Research's estimates suggest the possibility of a sizeable oversupply situation in 2008, the oligopololitic nature of Dubai's real estate sector could help avoid such an outcome. Moreover, The government's large stake in all three dominant developers further enhances the possibility of cooperation to avoid such an imbalance. Thus, Prime Research feels the nature of the local real estate market makes it impractical to pass a definitive judgment at this point on the likely situation in 2008.
Abu Dhabi and Ras Al Khaimah also launched a number of significant freehold/leasehold projects in 2005. Prime Research expects RAK to initially develop as a domestic tourism hub. As for Abu Dhabi, the first sizeable delivery of residential units in the capital is not expected prior to 2008. This implies a continuation of the prevailing undersupply situation in the medium term, leading to rising rents and prices.
