Dubai just can’t kick its building habit.
Construction sites are buzzing with work across the Persian Gulf sheikdom more than two years after the financial crisis set off a real-estate slump that caused values to fall by more than 60 percent. In the next two years, tens of thousands of new properties will come onto a market where about 40 percent of homes and offices are empty.
Developers have chosen to complete projects started before Dubai’s property market collapsed rather than canceling them and facing a legal obligation to return all advance payments to customers. Falling construction costs and low interest rates also provide an incentive to build now rather than waiting for property values to increase.
“The cost of walking away from these projects is much higher than completing them,” said Ahmed Badr, head of Middle East real estate research at Credit Suisse Group AG. “Developers would rather continue to build and get some of their investment back than stop and be forced to pay buyers back while their projects stand half-built.”
Homebuyers in Dubai typically pay 10 percent up front and make further installments based on how much work is completed. That means a developer that sold a home before the crash and collected 50 percent of the price so far would have to pay back more than the property’s current value if the project was cancelled. Average prices in the emirate have dropped 62 percent since the peak, Deutsche Bank said this month.
Thousands of Homes
As many as 48,000 homes will be completed in the next two years, increasing current supply by 12 percent, Landmark Advisory estimates. London-based real estate broker Cluttons LLC predicts that 35,000 will be completed through 2012, prolonging the price slump for another 18 months.
Around 12 million square feet (1.1 million square meters) of commercial space probably will be completed in Dubai this year, according to Jones Lang LaSalle Inc. Office vacancy rates stood at 41 percent in the fourth quarter and may exceed 45 percent over 2011, the property broker said on Jan. 23. Average rents dropped by 30 percent during the fourth quarter.
“Developers who launched projects and took money have entered into contracts with purchasers and those contracts have timeframes,” said Michael Lunjevich, a partner at Dubai-based Hadef & Partners. “If a developer doesn’t deliver, the buyer can sue and ask for the contract to be terminated and the money returned.”
The new homes are coming onto a market that’s being shunned by buyers. Residential transactions declined 53 percent by volume and 65 percent by value in the year through September, according to Jones Lang.
Political turmoil in Middle East and North African countries including Tunisia, Egypt, Libya and Bahrain may prompt companies to move staff to more stable places like Dubai, said Matthew Green, head of United Arab Emirates research at CB Richard Ellis Group Inc. That could boost housing demand in the sheikhdom, he said.
“The longer the instability in the region goes on, the more attractive Dubai will be for companies,” he said. “Demand for housing will only be revived on the back of expansion in the commercial sector.”
The backlog of unfinished projects is a legacy of Dubai’s rapid rise and fall. The sheikhdom had the world’s fastest-growing property market from 2006 to mid-2008 because of rising demand from a growing expatriate workforce and speculation fueled by borrowing. Prices quadrupled in the six years following the 2002 decision to allow foreign ownership of property in designated areas.
That ended after Lehman Brothers Holdings Inc. collapsed in September 2008, setting off the global financial crisis. Banks across the U.A.E. soon stopped lending and two months later, shares of the country’s two biggest mortgage lenders, Amlak Finance PJSC and Tamweel PJSC, were suspended.
Speculators caught with multiple properties and little chance to turn a profit fled the market and defaulted on purchases. Other buyers continued to honor their contracts, often paying installments even after work was halted in the aftermath of the crisis. About 50 percent of Dubai real-estate projects were canceled or suspended after the collapse.
Mehdi Nosratlu says he already paid 65 percent of the 3.1 million dirhams ($844,000) he owes on a property purchased in April 2008 in the 29 Boulevard project. The 55-year-old German citizen heads a group of almost 400 investors who agreed to buy homes in the two towers and are trying to reach a settlement with developer Emaar PJSC. So far, the buyers have paid 30 percent to 65 percent of the purchase price, he said. The buildings, originally due for completion in March 2010, won’t be finished before 2013, Emaar said a year ago. Work restarted in September after a two-year suspension.
Under a 2007 law, advance payments are held in an escrow account overseen by Dubai’s Real Estate Regulatory Agency to ensure the money is spent on the project that investors are paying for. Payments made prior to the rule went straight to developers without restrictions on which developments they funded.
The typical contract allows developers to miss a property’s delivery date by as much as 12 months, Lunjevich said. Buyers trying to recoup their investments can make claims against any of the company’s assets, including performance bonds or even advanced payments made to contractors.
Finishing the Job
Nakheel PJSC, which along with Emaar spearheaded the building boom in Dubai, said it will restart work on seven projects in various stages of completion after halting construction in 2008. The developments, which include hundreds of homes in places such as Al Furjan and Jumeirah Park, are scheduled for completion by mid-2012.
“There is a reputation factor here,” said Mala Pancholia, a Dubai-based analyst at NBK Capital. “If you finish a project in a down market, there is a trust factor that you can build with customers and that can have a cash impact when a developer decides to work in other countries.”
Emaar halted all its Dubai projects following the crisis except the Burj Khalifa, the world’s tallest skyscraper. The company said that it’s focusing on completing developments that have been started and sold and may consider new ones “in view of the improved economic conditions and demand for properties especially in downtown Dubai.”
Cheaper to Build
Building costs have dropped by more than 40 percent from their peak in 2008, giving developers another motivation to restart work now, Pancholia said.
“Since construction costs are so cheap, it makes sense for the developer to finish the project at the lowest possible cost now, rather than wait until there is a recovery,” she said.
Drops in U.A.E. interest rates have also been an incentive to move forward on projects and collect further payments from buyers. The U.A.E.’s 3-month interbank offered rate or EIBOR dropped by more than half to about 2.13 percent from its highs in October 2008, Bloomberg data shows.
Many developers that took short-term loans at interest rates of 7 percent or more are seeking to repay those debts to get new loans at lower rates of around 4.5 percent.
“With the lower interest rates now, it makes sense for developers to go for new loans, which they can only pay by collecting money from buyers,” Pancholia said. “To do that, they must show that construction is progressing.”
Some work is restarting as developers find that some of Dubai’s prime locations held their value even as the rest of the market declined. In March, privately owned Damac Properties started building the 49-story Burjside Boulevard apartment tower across the road from Burj Khalifa, which opened in January.
“We are not adding to current supply, but simply completing and delivering to customers the projects that we have already committed to building,” Niall McLoughlin, senior vice president of Damac, said by e-mail. “Like all global developers, the financial crisis has forced us to reassess our timelines for delivery.”