Dubai: Property investors in Dubai should not be in any rush to sell their assets right now — chances are they’ll end up with much less than they are asking for.
Market feedback suggests that quite a few sellers in the current environment have had to face such disappointment. And this is true for both existing properties and those nearing completion, and even in established locations such as Dubai Marina and JLT (Jumeirah Lakes Towers).
This is particularly the case for properties that were bought between 2013 and mid-2014, when property sale values were at their peak. Buyers who got in at the time and want to sell now find themselves in a precarious situation. And those who acquired units in 2007-08 and are seeking to exit now are in a similar situation.
“For every individual investor trying to offload a property, there is a master-developer with a highly attractive competitive price offer targeting the same buyer,” said an industry source. “In these circumstances, the master-developer gets to win all the time.
“Only existing trophy properties are still able to command a premium when being sold in the secondary market — nothing else.”
There are other reasons why secondary market activity is failing to hit the high notes. Dubai’s realty market is seeing a flood of off-plan launches, with the bulk of these priced at or lower than the values in the secondary market. This is what is placing investors in a bind — hold on to their assets too long in search of a better price, and buyers may have already made up their minds to seek their chances elsewhere. And off-plan launches will be the biggest beneficiary.
The window of opportunity to seek a sale — at a decent enough exit price — is thus narrowing. And for a market yet to nurse itself to full health, these are acute concerns.
“Selling below a price threshold would bring property values down across the market,” said Federico Mariscotti, vice-President at the consultancy A.T. Kearney. “We have read of some properties’ handover being delayed, and that is demand and supply at work.
“An individual buyer may suffer from a delay in a tangible way ... but would conversely [also] suffer from the devaluation of a property delivered on time. Developers have a role in managing this market equilibrium.”
But are developers fully in control of market forces? In the 12 months from mid-2015, developers did scale down the pace of activity on their existing projects. This was done to counter any possibility of excess new stock being delivered at a time when transaction levels had come down appreciably. In this regard, they were successful — 2015 saw the handover of less than 10,000 units in Dubai and for 2016, the numbers are at about 13,000. In both cases, these are well below the initial expectations of 20,000 units each.
According to Mariscotti, the main driver of delays “really isn’t the amount of work”.
“With some management of the project pipeline and sufficient ramp-up time to mobilise resources, contractors can take on almost anything,” he said. “At some point, 30 per cent of the world’s cranes were in Dubai alone.
“The main cause of delay was driven by a zero-sum game across the value chain, with lower prices and thin margins driving unwanted behaviour [such as] under-designed projects and proliferation of claims to resolve disputes on extra works. Lump-sum contracts [are] pushing risk on to the weakest inks of the value chain. It is a complicated environment where friction slows everything down.”
But since the second-half of last year, there is a visible uptick in project activity related to residential properties. November and December saw a steady stream of launches, and the pace was more or less maintained through recent weeks.
Will local contractors be able to absorb all of the new work? And there is also those the Dubai Government will be pushing through as it prepares for Expo 2020.
“Contractors have very flexible capacities, with a large share of their workload driven by labour and subcontractors,” said Mariscotti. “So, their size adapts to demand and they remain busy, but operating at a smaller size.
“The ongoing work is still significant, but overall likely below the peak. What drives their costs and profitability is the predictability of their workload across a portfolio of contracts, and that may now be more difficult to balance.”
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