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STRICTLY CONFIDENTIAL
The Invisible Hand: The Evolution of Dubai Communities
This document is provided by Unitas Consultancy solely for the use by its clients. No part of it may be circulated, quoted, or reproduced for distribution outside the organization without prior written approval.
Office No. 103, The Palladium, Plot No. C3, Jumeriah Lake Towers, Dubai, UAE
Unitas Consultancy (A GLOBAL CAPITAL PARTNERS GROUP COMPANY) Q4 2015
Executive Summary
• The inception of freehold in 2002 sparked a construction frenzy which led to Dubai’s population and housing stock to double within the decade. This expansion resulted in massive infrastructure projects (i.e. Metro, Airport, entertainment centers) to roll out within the emirate paving the way for it to become 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 the developed mid-income areas in freehold areas have been from government sponsored developers (International City and Discovery Gardens). Whereas frontier mid-income communities, where private sector developers dominate the space such as Arjan, Majan and Liwan area 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’s 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. 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 was affordable by 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 purchase price 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.
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1 Home-Ownership in Other Cities
2 The Invisible Hand in High-End Communities
3 The Development of Affordable Housing
4 Conclusion
Contents
Home-Ownership in Other Cities
“Home-ownership is not for all. That’s all we saying” – Ben Jackson
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Tier 1 Cities Home Ownership Rate is Below National Average
REIDIN & Unitas
USA: 65% New York: 32% China: 90%
Hong Kong: 48%
A global analysis of home-ownership rates reveals that tier 1 cities are consistently lower than their national average. For example in New York, 32% of the residents are owner-occupiers, which is 50% lower than the rest of United States. Due to the superior infrastructure, demographics and other various factors, tier 1 cities have higher real estate prices, constraining the purchase power of the populace. Furthermore, tier 1 cities are global in nature, and in light of their desirability as destinations of international capital, asset prices tend to be much higher, thereby restricting home ownership to all but a select few.
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Germany: 46% Berlin: 14%
England: 64% London: 50%
Once Upon a Time in Dubai
2,500,000
Average Selling Price (2003 till Date) Versus Affordability by Pay Scale
Studio One Bed Two Bed
2,000,000
1,500,000
1,000,000
Salary 15,000 Aed
500,000
Amount 790,000 Aed
-
REIDIN & Unitas
The above chart depicts the average selling price of various types of units across Dubai since the inception of freehold. At the initial stage of the price cycle a salary of AED 15,000 would allow end-users to mortgage a two-bedroom. However, as Dubai began to evolve into a tier 1 city, rapid price appreciation caused property prices to double in the first 5 years. This surge in prices made the average two bedroom unaffordable to a median salary person. Given the prices that are prevalent across the city, we opine that Dubai will follow a similar trajectory of home-ownership levels to that of other tier 1 cities.
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2003
-01
-01
2003
-06
-01
2003
-11
-01
2004
-04
-01
2004
-09
-01
2005
-02
-01
2005
-07
-01
2005
-12
-01
2006
-05
-01
2006
-10
-01
2007
-03
-01
2007
-08
-01
2008
-01
-01
2008
-06
-01
2008
-11
-01
2009
-04
-01
2009
-09
-01
2010
-02
-01
2010
-07
-01
2010
-12
-01
2011
-05
-01
2011
-10
-01
2012
-03
-01
2012
-08
-01
2013
-01
-01
2013
-06
-01
2013
-11
-01
2014
-04
-01
2014
-09
-01
2015
-02
-01
2015
-07
-01
The Invisible Hand in High-End Communities
“The invisible hand of the market always moves faster and better than the heavy hand of the government” – Mitt Romney
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Higher-End Properties Create More Incentive
120%
100%
80%
60%
40%
20%
0% Majan International City Downtown Marina
An analysis of developer margins across high-end and mid-income communities reveals that the latter offers a higher return on investment. Using the metric of profitability, we can infer that developers would be more incentivized to build high-end projects in order to maximize their returns.
*Analysis conducted by Unitas Consultancy using market sources 8
Developer Margins by Area*
REIDIN & Unitas 111% 112%
84%
74%
High-End Developments Develop Quicker
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
IMPZ Majan Arjan DSO Liwan Business Bay Sports City Dubai
Marina
JLT
An analysis of plot utilization across various communities in Dubai, shows that luxury areas have a higher rate of utilization compared to mid-income developments. This difference in development growth rates of communities is inline with their objective to maximize profits, consequently focusing on the high margin projects which is the luxury segment of the market.
*Analysis conducted by Unitas Consultancy using market sources 9
Plot Utilization by Area*
REIDIN & Unitas 84% 86%
26% 29%
20% 20%
4% 8% 8%
Stopped in the Wake of the Financial Crisis
2001 2002 2003
LA U N C HE D & CO MP L E T E D
2004
LAUNCHED
2005 2006
STALLED
2008 2014 RE-LAUNCHED
AS CREEK HARBOR
LAUNCHED & RE - LAUNCHED
LA U N CHED & STA LLED
LAGOONS Arjan
LAGOONS LAGOONS
LAUNCHED & SLOW DEVELOPMENT
LAUNCHED
INTDERUNBATAIOI AL
MACRITIYNA
PALM DEIRA
LAUNCHED
LAUNCHED
LAUNCHED
Majan
PARTIALLY RE-CLAIMED
PALM DEIRA
RE-LAUNCHED AS DEIRA ISLANDS
PALM DEIRA
LAUNCHED
LAUNCHED
DDUUBBAAII MMAAARRIINNAA
FIRST UNITS
DUBAI
MARINA
LAUNCHED
DUBAI WATER FRONT
STALLED
DUBAI WATER FRONT
PALM BE JUMEIRAH HANDED OVER PALM
JUMEIRAH
PALM JEBEL ALI
FIRST UNITS HANDED OVER
FIRST UNITS HANDED OVER
PALM JEBEL ALI
LAUNCHED
INTERNATIOAL
CITY
RE-CLAIMED
REIDIN & Unitas
A time-series analysis of high-end projects shows that communities that were launched in the initial phase of the boom had a higher completion rate compared to launches closer to the financial crisis. Mega projects such as Palm Deira, Palm Jebal Ali, Lagoons and Waterfront were either launched later or the lack of basic infrastructure in the community was not sufficient for developers to begin work. However, it is worthy to note that mid income communities launched in the same time zone have not developed nearly as fast as the high end districts.
The Development of Affordable Housing
“Laissez Faire was very good sauce for the goose, labor, but was very poor sauce for the gander, capital” – Benjamin Tucker
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Affordable Housing in Other Cities
New York London Singapore Hong Kong
Public housing in the United States is administered by federal, state and local agencies to provide subsidized as s i s t a n c e for l ow -i n c o m e households
Council Housing is a form of public housing built by local municipalities. You are usually eligible to apply for council housing if you are a British citizen or a citizen who has the right to stay in the UK for an unlimited time
The public housing of Singapore is managed by the HDB (Housing and Development Board). The majority of the resident ia l hous ing developments in Singapore are publicly governed and developed.
Public housing is mainly built by the Hong Kong Housing Authority and the Hong Kong Housing Society. Rents and prices are significantly lower than those for private housing and are heavily subsidised by the government,
When looking at other cities such as Singapore, New York, Hong Kong, and London, the creation of the affordable housing segment has had some type of government intervention; either in the form of subsidies or government built schemes. For example recently New York’s mayor announced a comprehensive plan to build and preserve 200,000 affordable units over the next decade.
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Mid-Income Communities: GSD’s Vs. PSD’s
Frontier Emerging Mature
Government Sector Built Developments
Private Sector Built Developments
REIDIN & Unitas
When analyzing Dubai’s freehold mid-income segment, a clear pattern can be witnessed. The communities that were built by government sponsored developers are predominantly in their maturity stage, where as areas where private sector developers dominate the landscape area in their early stages. We opine until the margins are not equalized between both the segments, private sector developers will continue to focus on projects with a high aed square foot rate into order maximize profits
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Sports City
JVC
DIP
Al Khail Heights
International City
Discovery Gardens
Remraam
Liwan
IMPZ
DRC
Majan
Conclusions
A global analysis of home- ownership rates reveals that tier 1 cities are consistently lower than their national average
An analysis of developer margins across high-end and mid- income communit ies reveals that the la;er offers a higher return on investment
Home-ownership is known to be the cornerstone of a developed community. However, a comparison between tier 1 cities and the national average reveals that the latter has a much lower home-ownership rate
The creation of freehold in Dubai, led to a construction frenzy developing it into a tier 1 city. During this transformation prices accelerated, making the average one and two bedroom not possible to mortgage for the median salaried individual.
As Dubai continues on this trajectory we opine the housing stock will be dominated by renters
A global look at affordable housing in other tier 1 cities, reveals that some form of government intervention was needed to roll out these projects. The governments involvement could vary from polices to subsidies to building their own projects
A closer look into Dubai reveals that Government Sponsored Developments such as International City and Discovery Garden are mature communities, where as communities such as Dubai Residential Complex and Liwan, where private sector dominate the landscape are still considered frontier markets
As private sectors rushed to launched projects to capitalize in Dubai’s booming real estate market, they focused on high-end projects as it had the highest margins.
This can be reflected in the plot utilization rate of luxury and affordable communities. Areas such as Marina and JLT have reached their saturation point, whereas Arjan, Majan and Liwan are in their infancy stage despite being launched at similar times.
The lower pace of development is as a direct consequence of these areas having lower profit margins for developers.
As Dubai’s population continues to grow at 5% per annum, the mid-income segment being the majority creates a dire need for true affordable housing.
Until government intervention or initiatives to private developers to build mid-income housing units, a deficit in this segment will remain putting pressure on existing affordable units
If the deficit of affordable units continues to widen, we opine that the migration from Dubai to neighboring emirates that serve as a catalyst for growth for satellite cities.
Conclusion
Home ownership in other cities The invisible hand in high-end communities
The Development of Affordable Housing
GCP believes in in-depth planning and discipline as a mechanism to identify and exploit market discrepancy and capitalize on diversified revenue streams.
Our purpose is to manage, direct, and create wealth for our clients.
GCP is the author for these research reports
Indigo Icon, 1708 Jumeirah Lake Towers, PO Box 500231 Dubai, United Arab Emirates Tel. +971 4 447 72 20 Fax. +9714 447 72 21 www.globalcappartners.com info@gcp-properties.com
REIDIN.com is the leading real estate information company focusing on emerging markets.
REIDIN.com offers intelligent and user-friendly online information solutions helping professionals access relevant data and information in a timely and cost effective basis.
Reidin is the data provider for these research reports
Concord Tower, No: 2304, Dubai Media City, PO Box 333929 Dubai, United Arab Emirates Tel. +971 4 277 68 35 Fax. +971 4 360 47 88 www.reidin.com [email protected]
2015
Mystery and Variety of Mid- Income Housing
Research Library
Mansions and Maisonettes Cuvology Size Matters
tomorrowland Dollars and Sense Curious Case of Payment Plans
The Signal and the Noise
Killing them Softly The Ramadan Phenomena Sell in May and Go away The Metro Effect
Renters Ball Path to Symbiosis Boom-Bust-Ology
2014
Shocks, Shift & Return
to First Principle
Research Library
Hunt for Yields Amidst a Slowdown, Underlying Strength
Cityscape Effect
Tale of Two Markets
A Closer Look into 2013
Real Estate Value Guide
Trophy Buying
phenomena
The New Normal Paradox of Affordable housing
Road Ahead Buy Land Where the City
Ends
Where to Build
Research Library
2013
What Now? If you Build it they will Come
The City is Built upon its
Commerce
Road to Prosperity
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Our Aspiration and Motto
“No barrier can withstand the strength of purpose”
HH General Sheikh Mohammed Bin Rashid Al Maktoum The Ruler of Dubai and Prime Minister of UAE