…what is true of cities with large urban and suburban areas who saw their urban geography molded over hundreds of years is difficult to translate to Dubai
David Godchaux, CEO of Core Savills discusses shaping Dubai and prime property prices and how not only the number of properties available but geographic distribution matters.
Despite the global perception that the majority of Dubai’s real estate stock and transactions is in the luxury end of the market, it often comes as a surprise to first time buyers of high end properties in the emirate that prime and ultra-prime property prices here are now amongst the lowest of any comparable global hub.
Prime residences in Dubai are approximately 40 per cent less expensive than Singapore and 50 per cent less than Moscow and Paris. In fact, only 3 per cent of Dubai’s residential transactions in 2017 were concluded within the prime segment.
The question naturally arises: why aren’t prime property prices in Dubai on par with other global cities in the world? It is not that significant and fast price appreciation may always be desirable; the booming affordable and mid-market property segments demonstrate that the market has significantly widened over the past ten years – meeting needs from a much larger and diversified population base. This is a good thing.
However, over the long term, slow and steady price appreciation – although naturally cyclical – also signifies credibility for buyers; being confident that their lifetime savings, when they move from rental to homeownership, is unlikely to depreciate over time.
As we are well into the third consecutive year of price softening in Dubai, it is becoming apparent that while the market has certainly matured, the long term “price credibility” that may enable the return of many end users and investors to real estate is challenged by a few recent factors.
It is very tempting to blame it on the 2016-2018 ‘affordable housing’ boom – to argue that the oversupply concerns because of this boom is amplifying the price softening noticed across the board. The recent Dubai Land Department initiative to limit the overall amount of new off-plan supply by imposing stricter funding regulation on developers comes as a very positive measure.
However, restricting the discussion to an argument on the total supply is misunderstanding some of the more fundamental drivers behind prime and ultra-prime prices. In other words, total supply is a component, but more important is the distribution of supply and its geographical concentration.
We often hear that real estate is all about location. This is generally true because in the very long run value preservation sits primarily in location, rather than on what stands on it. However, we equally often forget that for this statement to be correct, location must be widely recognised by market players as a critical component of their decision, which can only happen when land becomes rare.
In other words, we recognise something is valuable only when we feel we might not have enough of it. Because land becomes rare and desired, owners and buyers recognise that a prime location is very likely to be considered prime tomorrow or in ten years’ time. This geographical confidence constitutes the strongest contributing factor to buyers’ sentiment of safety.
Physical constraints are one of the common factors resulting in land scarcity and fast real estate appreciation. Cities such as Hong Kong, Monaco, Panama City and Singapore with strong geographical limitations and fast-growing population are a good illustration of this phenomenon, with dramatic property price surges even over relatively short period of time. However, Dubai is not short of land, and is unlikely to be anytime soon.
Large European cities are not either. In fact, prime real estate prices in London, Paris or Moscow for instance have reached high price levels that were not driven by any physical constraints. However, here there were powerful demographic forces in play to mold what have become established city centres and expensive prime areas over centuries of growth, with pressure building up in a concentric manner on central prices.
Nonetheless, what is true of cities with large urban and suburban areas with more than 10 or 15 million inhabitants who saw their urban geography molded over hundreds of years is difficult to translate to Dubai – where exponential geographical evolution and growth has occurred over a much shorter period of time, and where a significant amount of vacant land still lies in what is increasingly considered future prime areas.
Dubai is a unique model, with very few historical examples to compare it with. The city, made of large master-planned districts with central infrastructure connecting them, has from the beginning followed a very different path.
As each “district” or hub healthily competes trying to reach their own critical mass, demand is spread across large areas instead of gradually shaping one unique central location as a historical consequence of years of demographic pressure. This is what makes it challenging for property prices to catch up with global prices in the short term, despite construction quality, lifestyle and infrastructures being on par with (or sometimes exceeding) other global cities.
The concept of value for land is still nascent here in investors’ minds, as witnessed by Core Savills’ last Sentiment Survey. Even if buyers are increasingly valuing location above facilities, mostly they are still very price sensitive. This has led a few developers to increase the pace of new product offerings in areas ever further away from the centre as a way to focus on price rather than trying to demonstrate value in location and quality of product or concentrating demographic pressure to create more land value.
The good news is that there are now opportunities for long term investors to seize in the Dubai upper-middle and prime markets at very reasonable prices, by global comparison. Large reputable developers such as Emaar, Meraas or smaller ones such as Sweid and Sweid, continue investing in quality products in prime locations they believe will display steady growth in value over the long term.
If total supply remains under control over the next few years, the pace and credibility of this growth will then depend on how concentrated or fragmented future new residential offering comes to the market.
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Written by David Godchaux – CEO of Core Savills
