Modern Dubai’s founding father, Sheikh Maktoum, has always had big plans for his Persian Gulf emirate. His clan of hand-picked developer gurus has made bold comparisons, frequently calling their city the “Manhattan of the Middle East.”
Around the world, investors are buying into the oil-fed boom. Banks and companies, a virtual who’s who of international business, are flocking to Dubai to set up offices.
New Yorkers aren’t missing this party. The biggest real estate project launched by a New Yorker may be a Trump hotel-condo project called the Palm Trump International Hotel on Palm Jumeirah Island — a production between Trump and Dubai development firm Nakheel LLC.
The massive surge of construction in this emirate has many developers characterizing it as the biggest building boom in the world. For years, limited supply combined with intense demand for commercial and residential space has meant hefty returns on investment. These days, the vacancy rate for Class A office space in Dubai is below 1 percent, and the average asking rent is about $89 in the 14th most expensive city in the world, according to a Colliers survey.
Real estate developers are catering to the unyielding demand. Despite numerous construction delays, new projects are coming onto the market on a monthly basis, and inventory is spiking. But despite the giddy PR, the forest of cranes and the mountains of money and oil, lately analysts have been warning that Dubai’s real estate bubble may be on the verge of bursting.
For these property specialists, the ceiling for demand in both the residential and commercial property market is nearing.
“A mismatch between supply and demand is expected to soften the Dubai residential market, impacting the high-end apartment units (by 2008),” property specialist Asteco said in a mid-October report. “Oversupply is unavoidable by 2009, which will put downward pressure on prices. The extent of the oversupply situation will depend on the timeliness of deliveries.”
The situation in the commercial property sector is particularly glaring. Presently, Dubai has about 15.8 million square feet of commercial space. Yet in the next two to three years, nearly 44 million square feet is coming online, according to the Colliers Global Office Real Estate Review. While many businesses have indicated interest in some of that space, much of this building is speculative; brokers say a number of towers still have no sizeable anchor tenants.
Recently, Colliers wrote a withering report about Dubai’s market.
“Many developers have overlooked one of the most salient aspects of real estate: maximizing development returns is not purely a function of building as much as possible.”
While real estate is a cyclical business, concerns exist that Dubai’s hot residential market may also be emerging as something of a Potemkin village. High prices for individual units and spectacular subdivisions camouflage a different story.
“The reality is that it’s a minority of very wealthy Arab, Persian and Asian investors and businesspeople snatching up these places,” said Johnson Nandal, a real estate agent who has been working the United Arab Emirates markets for over 10 years. “Half these buildings are empty. The owners don’t even live in Dubai. They rent as many of their apartments out as they can, but at least 40 percent are empty. These kind of businessmen can afford these apartments; they are not putting all their savings into them. Even if they are vacant, with their kind of wealth, it means nothing to them.”
With prices soaring about 15 percent a year, Dubai seems like a shrewd investment. But for those more familiar with the local scene, buying is not an option.
“I would never invest in property here,” said Mahmoud Al-Qady, an Egyptian businessman who has made millions in Dubai over the past five years importing construction materials. “The problem with Dubai is that people come here to make money, not to settle down. When you don’t have a grounded culture or community, you are always at risk of extreme market fluctuations.”
Al-Qady said he has two more years in the emirate to make what he needs for early retirement. For his friends and associates, the sentiment is much the same.
“This is where we want to make our fortune,” said Moheb Ansari, a multimillionaire building contractor who travels among Saudi Arabia, London and Dubai. “But I wouldn’t put down any sort of roots here, and I wouldn’t invest what I have into a property here. Make your money and buy a house in Europe — Europe is forever. Dubai is a brand, and only a minority will make it home.”
The attitude of the likes of Ansari is mirrored in how much space is actually occupied. Property analysts said
that the combination of still-rising rents and increasing supply may put Dubai building owners in a fix in the
coming year.
For broker Nandal, that is already clear. He said, “There are always new projects, but I have much less demand than I used to. People are starting to look for cheaper space in neighboring emirates — that way, they can make and save the money they are here for.”
While the population is growing enormously, surveys indicate that yearly targets of 100,000 new residents aren’t being met. Between 80 and 90 percent of Dubai’s population is made up of foreigners. Illustrating Al-Qady’s point, statistics also indicate that males make up 67 percent of Dubai’s population.
There is still time, though, before the market levels out and some of the flash fades. “I think Dubai is still a novelty, and these developers can get away with oversupply for a while longer,” said Al-Qady. “But there is a limit to this. Foreigners are just here to make a living. For anything to survive, it needs roots.”
Others, like Donald Trump Jr., who is overseeing the construction of the Palm Trump International Hotel,
remain more optimistic.
“Dubai, for that part of the world, has done a good job in building up the tourism and the airlines,” he told The Real Deal last year. “It connects to Europe and the rest of the world.”
“Your only limits are your imagination,” Trump Jr. said, “and the laws of physics.”