Will Dubai property oversupply peak in 20 months?

Remarks by Emaar chairman Mohamed Alabbar at a Bloomberg roundtable in New York last week about the oversupply situation in Dubai property seem to have been misunderstood.

What he actually said was: ‘We need 20 months or so to go over the excess supply’. That is not saying excess supply will be eliminated in 20 months. It seems to imply that the oversupply will be at its maximum in 20 months.

Upcoming completion schedules

To any observer in Dubai that would appear a reasonable judgement. There are many large projects still coming up to completion within that timeframe, while the possibility of new ones starting between now and then is virtually zero, although Nakheel has promised to resume work on some villa schemes and Emaar has just placed two tower contracts.

You only have to look at the northern end of the Dubai Marina to see a clutch of 80-100-storey skyscrapers on the way to completion within the next 20 months. There are other big projects close to completion all over the city. So projecting this timeline out and you have the maximum supply within 20 months or thereabouts.

For this not to be the case you would have to believe that the take-up of property within the next 20 months will outpace the delivery of these new projects. It is hard to imagine this being the case.

Greenshoots of recovery

True certain sectors are showing a return to growth: aviation, tourism, trade and retail. The problem is that other sectors remain in deep recession – like construction, real estate and finance – and some other businesses such as media are still contracting in size. Even if the economy gains significant momentum in the next 20 months it is difficult to imagine this being enough to fill the property voids.

Arabtec CEO Riad Kamal is generally believed to be an optimist in suggesting that it will take five years for the oversupply in Dubai to be taken up. Even that rate of property absorption is asking a lot, especially for offices where half of available space is expected to be empty by the end of the year.

The logic then of the 20 month to the bottom argument is therefore an inevitable further fall in prices and rentals for property of all types. For only when oversupply is at its maximum can a true bottom in the marketplace be called. It will come but it is not there yet. Canceling more projects would help. Proceeding with any more now is sheer folly and can only make a bad situation worse.

Vacancy rates rising, rents slumping

Only last week Landmark Properties reported some huge rent falls in Dubai since this June due to landlords slashing rents in new developments to get their property let. International City apartment studios rents fell 38 per cent and Dubai Marina two-beds by 27 per cent.

Landmark estimates the Dubai vacancy rate of 15-18 per cent will increase to 19-24 per cent by 2012, with villa community vacancy rates varying from nine to 16 per cent depending on available facilities.

In this environment even the 20 per cent deposit and 6.01 per cent mortgage rate just offered to this author by an unsolicited cold-call from Standard Chartered Bank is not likely to bring out the buyers.