Saturday, July 12, 2008

Dubai property sector fears an oversupply

The Dubai property sector could take a backseat, if the surplus developments likely to come to the market next year, outstrips demand, and if the government steps back on its promise to issue residency visas.

In the opinion of Matthew Green, the Research Director at Cluttons, UAE, if the government withdrew its promise to grant residency visas for freehold purchasers and their families, it would shun away several hundreds of expatriate buyers, who consider Dubai market to be safer against troubles than in their home countries.

These comments were made following the release of report by Fitch, the ratings firm, which identifies oversupply, and sustaining of foreign demand, as major challenges that Dubai realty sector is likely to witness in near future.

According to the report, if the supply does not surpass demand, prices of properties will decline, reducing revenues further, and this would leave a negative impact on credit profiles of developers.

There are high chances of late deliveries and even project cancellation, due to logistical constraints, that would ultimately result in better match between demand and supply, it is said.
According to analysts, although supply is fast catching up with demand, oversupply is not considered as major threat to the market. As far as supplies are concerned, there are two factors that affect supply -one is delays and the other is construction constraint. However, risks are expected to a certain extent, as supply is catching up with demand beginning next year.

According to Green, oversupply is not a major concern at this point, or for the next three years. Looking at the deliveries over the past two years, only 50 percent of the expected supply has been delivered on time. In 2007, for instance, only 30,000 units were handed over after completion, as against a forecast of 60,000 units in 2006. Delays are part of the Dubai property market, and in fact, it may help in the long-term by 'drip-feeding' supply, rather than dumping numerous new units all at once.

As for the office space, it is said that with a population of 1.4million, Dubai currently has, more or less, the same amount of office space under construction, as in Moscow or Shanghai. The office sector is likely to experience a “price correction” when the new supplies hit the market in the next two years.

Dubai is expected to draw considerable demand for properties, as the emirate is a major player in contributing to the $1.8trillion worth of projects that are likely to enter the GCC realty market next year.

The report by Fitch states that foreign demand is a major factor that contributes to Dubai property market, mainly due to the number of expatriates living and working in Dubai.

According to Green, the tension between US and Iran, will not affect the stable Dubai or Middle Eastern markets in any way, nor will it dampen foreign demand, as historically Iranians have been major investors in Dubai, and any escalation in the region, could actually contribute further demand for property.

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