4 November 2015

The Invisible Hand: The Evolution of Dubai Communities

The inception of freehold in 2002 sparked a construction frenzy which led Dubai’s population and housing stock to double within a decade. This expansion resulted in massive infrastructure projects (i.e. metro, airport, entertainment centers) to be rolled out within the emirate paving the way for becoming a tier 1 city.

When looking at other cities such as Singapore, New York, Hong Kong, and London, the creation of the affordable housing segment has had some form of government intervention; either in the form of subsidies or government built projects.  We witness this trend within Dubai as well, where developed mid-income communities in freehold areas (International City and Discovery Gardens) have been formed by government-sponsored developers. On the other hand frontier mid-income communities, where private sector developers dominate the space such as Arjan, Majan and Liwan areas, are still in their infancy stages. This attests to the fact that the pace of development of mid income communities is at a much slower rate than that of premium housing.

The development of Dubai communities has been skewed largely towards premium projects as they have higher margins compared to mid-income communities. This is reflected in the plot utilization rates of different communities. For example Dubai Marina has a plot utilization rate of 86%, whereas areas such as DSO, Arjan and Liwan are close to or below 20%.

Globally tier 1 cities have a much lower home-ownership rate compared to their national average. Dubai seems to be following the same trajectory since the median salaried individual can only manage to mortgage an average one bedroom unit. As Dubai continues to expand, we opine that renters will continue to dominate the housing stock compared to owner-occupiers.

In 2003, the average selling price for a 2 bedroom unit was affordable for an individual earning 15,000 AED. However, as prices began to accelerate, the median income first-time buyer could no longer afford a 2 bedroom unit, which is the target unit to purchase in Dubai as well as globally. Indeed, unless prices drift further south, the first-time median income buyer will not be able to transact in most of the existing communities in the freehold space.

To download the full report click here: http://blog.reidin.com/PublicReports/AE151105.pdf