Is there room for more homes?
As developers deliver in time for the Expo-led demand onslaught, we examine the expected supply

Market estimates as to how many units will be handed over vary, but analysts agree that the key questions are: location, segment and sentiment. Core areas with sufficient demand for supply that is in tune with the demand will continue to see growth. Whereas demand will peak during the six months of the World Expo 2020, in the long term the need for staff and worker accommodation will dominate.

Calculating supply based on project announcements, Manika Dhama, senior consultant in the strategic consulting and research department at Cavendish Maxwell, tells PW there is a lot deliveries expected. “According to the Property Monitor supply tracker, there are more than 100,000 units scheduled for delivery over the 2018-20 period,” says Dhama.

The figure roughly tallies with other estimates. Haider Tuaima, head of real estate research at ValuStrat, tells PW, “Our current estimate stands at 100,000 apartments and 30,000 villas and town houses scheduled for handover from 2017-20.”

However, analysts factor in the materialisation rate — comparing actual handovers in the past year to planned completion dates — to arrive at a more realistic estimate. David Godchaux, CEO of Core-Savills, tells PW, “While there are many inflated numbers doing the rounds in the market, our conservative forecast is at 70,000 units due to the historic mismatch between announced and delivered volumes.”

Dhama says that the number may even be lower. “Given the materialisation rate over the last 2-3 years, with 12,000-15,000 being handed over each year, the handovers over the next two years could also be within this range, thus totalling around 40,000–50,000 units between 2018 and 2020,” she says.

Meanwhile, the bigger question is how the supply will be absorbed. Analysts say the nature of demand generated by the Expo will be a key factor. However, the biggest demand in the short term is expected from the influx of tourists. “The biggest demand will come from visitors to the event and beyond; this is why we are seeing an exponential number of hotels being built,” Tauima says.

Residential demand during the Expo is expected to be primarily for accommodation for visitors during the six-month event as well as in months leading up to it, says Dhama, and this will include hotels, hotel apartments and various lodging facilities.

In the medium and long term, economic activity is expected to peak, buoyed by business and infrastructure growth brought in by the big event, but it may not create an immediate impact on real estate. Godchaux says, “We believe that the Expo as an event in itself is not going to drive up the number of homebuyers significantly. However, it will more likely be a catalyst for overall uptick in economic indicators that will trigger positive effects on real estate.”

Economic growth is closely tied to generation of jobs long after the event is over. As such, Dhama says the Expo’s impact on residential demand will depend on the ability of the event to generate long-term jobs. “Thus, the impact of the Expo on white-collar workforce will be the key driver of residential demand and this parameter will determine the demand-supply gap,” says Dhama.

It’s crucial to create supply for the segments that are likely to see demand, although a huge chunk of it will not be coming from the higher end of the income bracket.

“In terms of residential demand we expect a high percentage of demand would come from blue-collar workers and staff earning less than Dh5,000 per month,” says Tuaima. “These people would require adequate supply of labour and staff accommodations. This is followed by engineers, project managers, technical, marketing, financial, HR, IT and others required to help build the project and later work in it.”

Addressing fears of oversupply, Godchaux says that it is not necessarily justified. “There certainly is widespread fear of oversupply in the market, as evidenced by the results of our last survey by a large majority of respondents,” he says. “Whether the fear is justified or not is not the only important question, as to a certain degree there is a risk that the fear may become self-fulfilling, with resulting negative pressure on demand from investors, and resulting relative oversupply across many market segments.”
One of the ways to counter this, says Godchaux, is by “educating the market on risks and opportunities, by refusing oversupply blanket statements”. However, he adds that the supply and demand absorption will focus largely on specific segments.

“I do not believe the overall market to be generally oversupplied, but there are worries to be had in a few segments. Equally importantly, assessing demand from end users rather than just investors is a critical part of the issue,” says Godchaux.

“Prime and upper mid-market segments in core locations should see robust price levels in the mid to long term, with limited absorption issues. On the contrary, driven by high yield levels, low entry price stock is well absorbed by robust investor demand in the short term, aided by accommodating payment plans. But a lot of the inexpensive units launched and acquired these days will be handed over in outer areas at the same time, and could face absorption issues on the rental market if end-user demand is insufficient to absorb them in a short period of time. Resulting falling rental levels and yields could drive some of the initial investors away from the affordable segment of the market over the next few years .The current pace of entry-level product launch may not be sustainable in the medium term.”

For Tuaima, the larger issue is not delivering to the right segments. “The bigger concern is the supply-demand mismatch,” he says. “This basically translates into too many high-end properties and not enough mid-affordable options to meet the increasing demand. Developers are addressing this problem, but more needs to be done.”

Post-Expo momentum

However, developers are also looking beyond the Expo as they deliver new supply into the market. “We expect that most of the lower-end jobs would no longer be required after the event, but more importantly, we also expect a longer term ‘legacy benefit’ of Expo, part of which would market Dubai’s various offerings such as business, trade, hospitality, and tourism in a much wider global scale, resulting in sustained growth in demand for commercial and residential property,” says Tauima.

Dubai is also learning from various cities that have recently hosted large events, such as Brazil and London, which hosted the last two Olympics.

Godchaux says, “With construction activity gathering pace and a growing number of contracts being awarded to prominent players in the construction industry for the Expo, Dubai is on track to build iconic infrastructure to showcase the UAE on the global stage during the Expo. Optimising built infrastructure for the event with a sustainable legacy plan after the event becomes imperative and we expect the District 2020 development to address this issue.”

District 2020, the legacy development initiative for the Expo, is giving the industry more reason to be optimistic. Tuaima says, “We think that Dubai is very unique in its demographics and economic status when compared to other cities. Given the safe haven that Dubai is, demand will continue to grow; Dubai will succeed in creating a new city, namely Dubai South, catering to a new generation of demand that would provide a much-needed balance with the city’s current northern areas. And like any landmark event, re-purposing the Expo site into the recently announced District 2020 provides a clear vision to the legacy of this major event: new office buildings, new convention centre, new attractions and a Metro line that connects all this to the airport and the rest of Dubai.”

Staggered delivery

While developers stagger deliveries to maintain stability in prices, holding back supply and releasing it only in time for the Expo can, in fact, be counter-productive, analysts say.

“We need to remember that more than half of the projects that were supposed to be delivered in 2015 and 2016 were delayed, so this is one of the reasons why we are in a situation where there will be a sudden glut of supply coming our way during the next three years,” says Tuaima. “This temporary glut impacts rents and capital values in some pockets of Dubai. Bearing this in mind and understanding that we now have a population that’s growing at an accelerated rate as compared to the past five years, a third of whom live in the northern emirates, and many of whom would consider the move to Dubai when feasible, we expect that oversupply would only be a short-term issue and this is assuming that all projects are delivered on time.”

The strategy is not useful when delivery needs to be timed to an event, as Godchaux says, “Historically, developers in Dubai have been using the strategy of phasing their deliveries as a measure to match supply and demand levels as delay penalties aren’t always enforced. We expect the same spillover of deliveries to continue over the next two years. However, we see a bottleneck forming during the end of 2019 early 2020 as many developers would want to deliver in time to capitalise on peak demand levels caused by the Expo. With this timeline, any further phasing or failing to deliver in the run-up to 2020 may be metaphorically considered by many as missing the bus.

“This sentiment is expected to create a glut in the market and we suggest developers to carefully consider their target audience, unit mix and limit supply volumes to avoid this scenario.”

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Is there room for more homes?