The
performance of the real estate economic activities,
namely construction and real estate services,
have been robust and as well as being a catalyst
for other economic activities. Since 2001,
construction and real estate services shares
in Dubai non-oil GDP have been rising steadily
and as do their GDP growth rates (see figure
1). This is not a sheer coincidence, but a
direct result of the economic strategies and
policies of Dubai government. Now, there is
even more need to build further on those strategies
and policies to strengthen Several factors
have positively contributed to this robust
performance of Dubai real estate sector. This
article discusses the influence of these factors,
which some of them work on the supply side
while others work on the demand side of the
real estate market.
Oil
prices: The rising oil prices
(from the range of $20s per barrel to the
range of $60s and still rising) have created
huge financial surpluses, despite inflation
of imports prices and depreciation of US dollar.
These surpluses are mainly flowing into the
real estate market, given that there are very
few other investment channels with considerable
returns that can absorb these surpluses beside
the stock market.
Political will:
The vision of the government is to turn Dubai
into the trade hub of the region. The political
will of the government is rallied behind the
achievement of this economic objective. This
has necessitated the construction of infrastructural
facilities that will support the realization
of this objective. Basically, it means building
more residential and commercial premises that
can accommodate businesses and people, in
addition to other infrastructural facilities
like roads, airports, harbours, etc. As a
result, government owned real estate developers
such as Emmar, Nakheel and Dubai Properties
have been set up for this purpose. This part
of the real estate market, which is controlled
by government owned real estate developers,
has been opened to foreign investors who can
own freehold properties, which has created
even more demand.
Freehold ownership:
Property rights, transaction cost and capital
gains taxes are issues that are critical for
real estate investors. In most countries of
the region, if not all, foreigners are not
allowed to own property, especially freehold
properties. In addition, real estate transactions
cost (stamp duty, registration fees, etc.)
are relatively high. Moreover, real estate
taxes are common and sometimes are prohibitively
high. All these factors has made Dubai a very
attractive destination for real estate investors
from the countries of the region such as GCC
countries, other Arab countries, Iran, and
India, Pakistan, etc.Before the introduction
of the freehold
ownership
of properties to foreigners in Dubai,
only U.A.E. nationals (who represent about
20% of total U.A.E. population) and the GCC
nationals were allowed to own properties.
Therefore, the real estate market was limited
to a small number of people who were legally
allowed to buy and sell properties. Now with
the real estate market opened to the world
population, i.e. international investors,
a huge demand for properties has sprung up.
Given the limited supply at the time, and
in combination with the accompanied population
growth exceeding 7 percent annually, the prices
and rents of real estate have skyrocketed
in Dubai. With the entry of more private real
estate developers, beside the government owned
developers like Emmar, Nakheel and Dubai Properties,
supply is expected to catch up with demand
and real estate prices to be stabilized in
coming few years.
World interest
rate: The U.A.E. interest
rate is determined by international market,
especially the US interest rate. The latter
has been relatively low during the past few
years. This has encouraged the demand for
real estate because of low cost of mortgage
financing. The heightened competition in real
estate financing has helped develop competitively
priced financing products in the market. In
addition, new financing products have been
introduced to the market, like the Adjustable
Rate Mortgage, whereby borrowers enjoy relatively
low rates.
Implications
of 9/11: After the event of
9/11, the US and the EU governments have taken
more aggressive and intrusive stance regarding
international investors, especially from the
Arab and Middle East countries. Some of their
accounts in the US and EU have been frozen
and others have been under continuous surveillance.
Therefore, those international investors have
been looking for safe heaven in the Arab and
Middle East region. Hence, Dubai has come
as a natural choice given its economic freedom
and policies. The most popular investment
targets in Dubai are the stock market and
the real estate market. Therefore, part of
those investments flow into the real estate
market.
World economy:
The developed economies, such as US, EU and
Japan, have been slowing down during the last
few years. Therefore, the investment opportunities
in those sluggish economies are dwindling.
Naturally, international investors have been
looking for alternative investment destinations
in the emerging economies. Therefore, Dubai
looks more attractive alternative investment
destination for those who have been looking
out for investment opportunities in the newly
emerging markets. This factor is expected
to be more influential after the signing of
Free Trade Agreements (FTAs) with the US and
the EU.
Dubai economy:
The economy of Dubai has been growing steadily
for the past few years and it is estimated
that it grew by 13% in 2005. No doubt, such
an impressive economic growth helps the growth
of the real estate sector, given the linkages
among the different sectors of the economy.
To build further on the successes of the past,
several policy measures are in order. The
oil surpluses can be used for the diversification
of the economy away from oil. More opening
up of the real estate market will encourage
more foreign real estate developers to enter
the market and this will stabilize real estate
prices and therefore put a halt to the inflationary
pressures in the economy caused by the skyrocketing
real estate prices and rents. Enactment of
clearly defined freehold ownership titles
for foreign investors and expand their scope
to include areas in real estate market that
are now off limit to foreign investors. Maintaining
low transaction costs and real estate tax
free environment. Enhancement of competition
among commercial banks and other financing
institutions whereby borrowers can enjoy low
mortgage rates. Promotion of the investment
opportunities that are available to international
investors in Dubai and the creation of a welcoming
business environment that provides safe heaven
for
investors who have been returning to the region.
