analysis

In Dubai, small is changing around the playbook

So much so, the big names have been taking a few tips from the same

By Sameer Lakhani, Special to Gulf News
08:38 March 10, 2017

The environment today appears to conspire against the small developer, with both human nature as well as risk aversion emphasising focus on the glamour of development.

This real estate cycle has focused on a flight to quality phenomenon that has resulted in development at the most expensive of locations, with capital being timid about advancing funds in areas that are developing. Unlike during the first cycle, there aren’t many 30-year-old developers anymore because capital has been hard to come by.

It is precisely because there has been less interest in these developments that there has been price arbitrage opportunities within as well as across communities that “smart money” has been able to capitalise on in a systematic manner. It is the nature of such opportunities that need to be examined.

Bigger is not always better. Nimbleness and local knowledge are not commodities and several factors suggest smaller developers have played an increasingly significant role. In the first freehold cycle, a number of smaller developers sprouted up, offering price discounts in rapidly developing areas that offered investors value-for-money, even if some came at the expense of build quality.

Although the nature of regulations at that time allowed the proliferation of unscrupulous practices, a tightening of standards by RERA has since weeded out that practice and has allowed for a greater transparency of development sustainability across communities.

With an increased focus on land and construction costs, smaller developers who have built outside of the CBD areas have been less burdened by land cost inflation and been able to pass on the benefits to the end-user in the form of lower unit prices and/or payment plans that extend to well beyond handover dates.

While major banks have still been reluctant to extend project financing to such developments, smaller banks have stepped in to fill the void. Primarily, the use of innovative payment plans have also spurred such developments, with the consequence that such sites have experienced a greater than average price gain in the months after handover.

A preliminary analysis has shown that in the current cycle, smaller developers have on average delivered a price gain that has been more than double that experienced by large developers in the 12 months since handover. These capital gains and above industry norms for rent yields have been recorded in both the residential and the commercial ends of the spectrum, and have encouraged capital inflows from international markets hungry for yield and opportunistic deals. Unsurprisingly, all of these areas have also corresponded with mid-income housing sites, thus fulfilling the latent demand for the price-conscious buyer. This has spurred development of communities such as Silicon Oasis, Liwan, Arjan, Majan, Residential City and Jumeirah Village Circle up until the point where the larger developers have taken note and entered with their more glamorous projects.

More crucially, the lower per square foot selling prices allows for such developments to offer higher rental yields, as well as mitigate lease absorption rates. This allows for the proliferation of bespoke developments catered to medium sized companies whether It extends to residential, commercial and/or industrial developments such as warehouses.

In Dubai, tall buildings, landmark developments and upper echelon markets makes it natural to focus on properties that capture the glamour of development. And headlines gravitate to the biggest and brightest new buildings.

At some point, however, what is ignored is the problem solving innovation techniques that have emerged from the small-scale developer. In Dubai, the land use of master communities have encouraged such diverse development projects, and as the data suggests, has been more lucrative for investor and end-user alike.

It is important to note that much of the change in price as well as development trends have been incremental in nature. The sum of combined efforts have made a significant difference in the diversity of the product as well as the price and payment range offered.

By way of example, innovative strategies such as post handover payment plans as well as prime discounts were first pioneered by small -scale developers, a practice that has only recently been adopted by industry giants. The sheer number of developers that exist today that are comprised of less than 20 employees provides the industry with an ideal laboratory for entrepreneurial innovation.

These practices that will likely continue to offer investors and end users alike to place opportunistic bets for capital gains and healthy rental yields. It is encouraging to note that such a reallocation of capital is already underway.

— The writer is Managing Director of Global Capital Partners.