24 August 2015
There has been a long-lasting relationship between GDP growth and real estate price action. In times of sluggish GDP growth, real estate prices have had slower or negative rates of appreciation, compared to buoyant economy periods. This relationship is witnessed across developed nations such as UK and USA. A closer look into Dubai’s GDP and real estate growth cycles reveal that Dubai has the same trend with UK and USA. This reinforces the maxim that Dubai’s history is essentially intertwined with that of real estate.
Real Estate has historically contributed 1/4th of Dubai’s GDP (Construction & Real Estate services), making it an essential component of its growth trajectory and engine for job creation. At the inception of freehold the construction sector accounted for 26% of the workforce, which almost doubled nearer to the peak of 2008. Keeping its importance to the economy, real estate’s contribution as a percentage of overall GDP is expected to rise significantly in the years ahead.
As Dubai real estate assets began its price revival in 2012 after the crash, developers have launched an array of mega projects in the areas of housing, entertainment and infrastructure. Between 2015-2020, an estimated 301 B dirham contracts will be completed, which on average is double of the current output of the construction sector. These large scale projects will create immediate demand in the work force, reducing the current occupancy rates of housing stock.
Using a per unit of value job creation metric, we extrapolate that the number of jobs created in the real estate sector will rise by approximately 60% in the next five years. We opine that as these jobs are created, there will be a mismatch between the sectors where the jobs are created (predominantly at the mid end) compared to the topography of the real estate, which is skewed towards the higher end. This projected demand is expected to translate into price activity in the medium term.
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