25 June 2018

Dubai: To Build or not to Build?

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The replacement cost ratio is a telltale indication used by developers to ascertain the viability of a project. It helps ascertain the profitability of a project by comparing the sale price to its cost (land + construction). If the ratio is more than 1 then it’s viable to build and vice-versa. This ratio provides an insight for developers and investors alike, indicating where there is distress likely to build up, although the variable is itself “reflexive”, it nonetheless serves as the most pertinent indicator for the health of the development and real estate market.In the apartment segment the mid-income communities such as Dubai South and JVC have a higher replacement value compared to the luxury segment (Downtown and Business Bay). This phenomena explains the rush of development in this segment as developer margins seem to be highest, unlike from 2012-2014 where supply was concentrated in the higher end.

In addition to ascertain the viability of a project, the replacement value ratio helps developers and city-planners to understand the supply dynamics.

Areas with a low ratio have either had marginal increase or a decrease in the change of supply (as witnessed in Business bay). The largest increase in supply has been witnessed in Dubai South, which also has the highest replacement cost.

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