18 February 2016

Dubai: Price, Premia, and Profit

A dissection of Dubai current supply reveals that the housing stock is split nearly evenly between private sector developers and government sponsored developers. However, as Dubai undergoes its second construction frenzy, the topography of housing units will be highly skewed towards private sector, accounting for more than 70% of total supply. This structural change in the roll out of Dubai’s housing stock highlights the pivotal role of the private sector in coming years.

Historically, government sponsored developments act as a flight to safety, as witnessed in Dubai Marina. During the World Financial Crisis, government sponsored developers’ units contributed nearly half of all transactions, which otherwise on average accounted for 20%. In the current real estate dip, we witnessed that the ratio remained the same, signaling a paradigm shift of confidence towards private sector developers. Moreover, a price analysis between government sponsored developers and private sector developers reveals that in three out of four communities, private sector developers have outperformed, highlighting the shift in the structure of the market.

In real estate, the liquidity premium phenomena between government sponsored developments and private sector developments in Dubai has reduced. This trend is likely to continue as quality improvements and future supply is likely to be dominated by private sector developers. With a likely compression in expected developer margins, it is likely that prices in premium areas will drift lower, both in the off plan and the ready spaces. Relative price performance between the assets of government sponsored developers and private sector developers is likely to skew towards the latter.

To download the full report click here: http://blog.reidin.com/PublicReports/UAE160219.pdf