In a recent cross-section analysis of two-bedroom apartment rents across Dubai, it was found that in the freehold space, there was a paucity of options available. Less than 2 per cent of the overall freehold supply was catering to a rent ticket of Dh70,000 for a two-bed apartment.
This contrasted sharply with leasehold Dubai, where options were far greater, and in terms of supply, nearly a fourth of the overall market having the same rental point. This remarkable disparity — more than any other statistic — illustrates both the opportunities available for developers in the mid-income space, as well as highlights the challenges planners and investors alike face as the city gears up for its next building boom in the run up to World Expo 2020.
To be sure, developers have already begun to address the relative paucity of options in the affordable housing space, with a plethora of projects been announced in the last two years. These options, along with post-handover payment plans have stimulated demand to some extent within the resident population, as developers realise there was pent up demand in the mid-income segment.
However, despite the flurry of launches, developers have been more vigilant to the price slowdown in this market cycle, by pushing back handovers. This has meant that unlike the last experience where price declines were largely a supply driven story, supply this time has consistently been below even the most pessimistic of forecasts given out by analysts.
Therefore, even as there has been an economic slowdown on the back of reduced oil prices, rents thus far have barely budged. And perhaps counterintuitively, prices have even started to rise in select communities, as the cumulative impact of reduced supply led to “shortages”.
Investors have swept up available bargains by recognising the fact that the much expected rent decline has not yet transpired. This rent inelasticity (in response to greater supply elasticity in this market cycle) actually foretells a period of further price rises as demand continues to rise on the back of an expansionary fiscal policy being adopted by the government.
However, this is also resulting in perpetuating the shortage of options in the mid-income space; In a mirroring of developments seen elsewhere in developed markets, the first response to a slowdown in the market has always been a holding back of mid-income offerings, even as incentives remain to continue to develop luxury developments on account of their higher margins.
However, this has accentuated the imbalance in the property market supply pipeline over time, and short of urban planning “quotas” whereby city planners incentivise developers to build mid-income developments, prices have continued to be out of reach for the average family.
In the US and UK, this has resulted in home ownership levels being at their lowest levels in nearly three decades.
In response, mid-tier developers in developed markets have resorted to a number of initiatives, from accessing community banks for regional REITs (real estate investment trusts) and tailor-made mortgages (linked to end-of-service payment benefits via their individual retirement accounts) to accessing the capital markets directly.
For the mid-income first time buyer, a credible delivery date is perhaps the most important factor when considering whether to make an off-plan investment as the household juggles to make rent payments as well as instalments for the purchase.
Off-plan sales have in markets that have revived have done so only under these criteria being met. In Dubai, this is perhaps the most critical factor for the development of this sector.
Low volumes of off-plan sales lead to delays in handover, and delays disincentivise prospective buyers from committing to these purchases. This consequently results in a number of these developments either not materialising or doing so with a considerable lag.
There thus develops a vicious cycle that serves only to perpetuate the shortage and the imbalance in the housing market. As Dubai gears up to host the annual Cityscape event, it is this challenge that is to be answered, by developers, investors and city planners alike.
The symbiosis between the capital and real estate markets that promises to address the needs of the first-time buyer in a credible manner that addresses this gaping shortfall presently in the marketplace.
— The writer is Managing Director of Global Capital Partners.