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Property Investment Overseas

Dubai Weathers the Storm

With its phenomenal rise from desert outpost to a supercity featuring the tallest hotel in the world, luxurious mansions and sumptuous business centres, Dubai brings to mind the line from Shakespeare’s The Tempest: ‘The cloud-capped towers, the gorgeous palaces/the solemn temples, the great globe itself…’

By any standards, the 30-year transformation of Dubai from small pearl-fishing port to mega-tourism/business hub (oil now accounts for only five per cent of its GDP) has been an economic miracle. But how is this extraordinary vision of three generations of the Maktoum family, faring in the chill wind of the current global financial crisis?

‘Dubai is slowing down, but it isn’t crashing’, says Brendan Miller, MD of Better Homes SA. Better Homes Dubai, established 22 years ago, is the biggest retailer of new developments in the Emirates city. It experienced a drop in sales and lettings compared with the height of the boom in July 2008, but is now seeing an upturn, with January sales valued at AED65-million (one United Arab Emirates dirham is currently trading at approximately US$0,30) and with 243 lets.

‘Property prices are falling and becoming realistic,’ he adds. Brendan’s advice to prospective investors is to look for buy-to-rent properties, for which a return of about seven per cent per annum can be expected. He suggests choosing those that are either nearing completion or have long completion dates and are in good waterfront areas. ‘You need to take a five-year view,’ he advises.

Although the ongoing investment in the city’s Metro and the recent topping out of developer Emaar Properties’ Burj Al Arab are reassuring signs, the construction sector has been hard hit. Among the high-profile projects put on hold or cancelled is state-backed builder Nakheel’s Burj 2, which is currently on hold for 12 months despite original plans to outstrip Burj al Arab. Nakheel have also cancelled sales on the Palm Jebel Ali. The halt in the five-year long building and property boom came suddenly, following the biggest ever Cityscape Property Exhibition, held last October.

‘It’s hard not to call it a collapse when construction-related industries have had to reduce their staff by 50 per cent,’ says Edmund Batley, principal of Batley Partners, the Johannesburg-based international architecture and design consultants who have operations in Dubai, Jeddah and Abu Dhabi. Since the buoyant situation in October, Batley Partners have seen 15 projects on their Dubai books cancelled and their turnover decline from AED35-million to AED6-million. ‘Fortunately we have been able to find new projects elsewhere,’ he says. ‘We are looking at things starting to move again in June or July, but it will take three to four years before things get back to normal.’

The number of property developers registered with the Real Estate Regulatory Authority (RERA) has reportedly dropped 40 per cent from 800 in November to 500 in February 2009. Evidence of the slump in the building industry includes reports of 3 000 cars at Dubai airport that have apparently been abandoned by Asian construction workers who lost their jobs and were unable to keep up repayments.

One investment consultant who sees a silver lining in the current situation is JP Dippenaar, CEO of MaxVest. ‘Our view is that this type of cycle can and does present opportunities,’ JP says. ‘The fundamentals show that this is a sustainable economy over the medium to long term. Yes, there is financial pressure throughout the world, but this will pass and when it does you want to be part of the ensuing growth. The trick is to buy at the right price. We’re in a position where we can raise cash from our investors, so we can buy at the right time.’ Speculators, who bought when the boom was expected to continue and were able to ‘flip’ properties for substantial profit, are now bailing out in distressed sales where prices are 20 to 30 per cent lower. MaxVest specialise in fractional investment in blue-chip properties and have identified a number of attractive properties that they will present to the market shortly.

These include a high growth fund, a balanced capital and income fund and a fractional ownership fund. The first two are expected to deliver hard currency yields of 12,5 per cent, which will improve as the rand weakens. Projected growth is 120 per cent over five years. Designed for investment-giving returns over a realistic time frame, with minimal risk entry, the level is from R175 000 to R250 000 depending on the product. ‘As specialists in fractional investment, we are able to offer a 15 per cent return where others offer nine per cent. We have the ability to balance investors’ requirements for capital growth, lifestyle or income,’ JP says.

Independent property consultant Thomas Connell of Diligent Investments points out that one of the main reasons for the current economic crisis is the lack of funding, as banks have closed their doors. The adage of ‘location, location, location’ still applies when considering property, he says, but recommends a ‘wait-and-see approach, as prices may fall further. Alternatively, look at developments that are up and running and close to the sea, like Dubai Marina or the Palm Jumeirah – these are asking 20 per cent less than the asking price.’ Dubai has a unique advantage when it comes to controlling the supply of properties coming onto the market, as 70 per cent of major projects are controlled by three major concerns, state-backed Nakheel and Emaar, and government’s Dubai Holdings. Now that less residential property is coming onto the market, demand is predicted to increase in the long term. This opinion is borne out by a study by Egyptian investment bank EFG-Hermes, which suggests that rents in Dubai will rise by five per cent compared with 15 per cent in 2008, but in the long term this will be offset by a greater demand for rental properties, as fewer people will be buying homes.

The Gulf States continue to attract an increasing number of South Africans, according to recruitment consultants Hays GlobaLink. And the UAE embassry reports that there are currently 60 000 South Africans in the UAE and the number is rising, But the traffic is now two-way; Better Homes SA report an increase in house-hunting locally by ex-pats returning from Dubai. This is coupled with increased interest in SA property from Dubai investors, who are among the top overseas investors in South African real estate.

DJ Offshore specialises in fractional ownership investments in overseas destinations like London and Dubai. Based in the British Virgin Islands, a tax haven, they facilitate offshore investing by taking care of the formalities involved in offshore investment for clients. DJ Offshore are positioning themselves for an economic upswing they take as given. Says DJ Offshore MD, Freder de Jager, ‘While Dubai has definitely been touched by the current economic crisis, our product looks beyond that and will only be sold in five years time.’ The company has bought four high-value apartments in Dubai Sports City. Currently under construction, the units should give a 10 per cent rental income yield from completion in August 2010, and according to the company’s projected figures, should yield a 100 per cent profit upon their sale in five years’ time. The deal, which combines rental income with capital growth, also includes one week’s stay in one of the apartments for investors. Share prices, limited to 48 shareholders, are AED172 000 (about R500 000 ), are 60 per cent sold , mainly to SA investors.

Growth in Dubai’s economy, originally targeted at 11 per cent under ruler Sheikh Mohammed bin Rashid Al Maktoum’s strategic plan to 2015, has been revised to between four and six per cent. But there are plenty of positive indicators that Dubai is able to weather the storm: the January budget is set to spur growth with a 42 per cent increase in government spending; in the context of an overall increase in the budget of 11 per cent, government revenues rose by 26 per cent for 2008; trade exports for 2008 were AED935-billion, up 38 per cent compared with 2007; the number of applications for commercial trade licenses has risen; and Emirates, the Dubai-based airline, has increased its capacity by 40 per cent.

‘There is no doubt that the local economy has been affected by the crisis,’ says economist Dr Mohammed Al Asoomi, advisor to Dubai Holdings. ‘But from the beginning of 2010, Dubai will be able to overcome the repercussions of the crisis with minimum damages, thanks to its development of infrastructure and world-class facilities.’