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Supply and demand and Dubai real estate

To the casual observer Dubai real estate is confusing: rents are rocketing and re-sale property available to buy is in short supply. But at the same time huge building projects make it appear that a large supply of property is about to flood the market. What is the reality?

Like any property market Dubai is cyclical and the cycle is constantly changing. But being the newest international property market in the world does give a special dynamic to this market.

At the present moment in time the Dubai property market is undersupplied. There are not enough villas and apartments available for rent, so rents have gone up by an average of 37% according to Dubai Municipality statistics.

There are also not enough re-sale properties actually completed and available for re-sale (Please note a completed property whose owner purposely leaves it vacant is not an available property, and must be discounted from the supply of real estate in Dubai, and there are a large number of such properties right now).

On the other hand, the outlook for future supply is for a considerable expansion. Local agent Asteco reckons 84,000 new units over the next three years.

Now 16,000 new residents arrived in Dubai in the first quarter of 2005, according to the latest figures. That would imply an annual demand for around 20,000 units, assuming that everyone was accommodated in a new unit, or resulted in somebody else moving into one.

Property in short supply
However, the twist in this simple calculation is that the supply of new units will not really begin in large volumes until the end of next year. Thus the market has to cope with an undersupplied situation until then.

What will happen between summer 2005 and the end of 2006? Any market is governed by the laws of supply and demand. Therefore, even if buyers take a summer break, the likelihood is that the autumn will see a very strong market both for rentals and re-sales.

For the supply side will not become a serious issue until early 2007, which is a long way off. By then even more new residents may be arriving in Dubai – and to be fair huge employment projects like the Dubai International Financial Centre have hardly got off the ground yet.

So it is still possible that by the time these 84,000 units begin to appear in the market that the demand will have increased sufficiently to absorb them.

With oil prices still rising and many massive projects that will employ many thousands of people, it is perfectly possible that the supply of Dubai real estate will be absorbed more comfortably than many predict.

However, as in any real estate market there will come a point when supply outstrips demand. It is just that the point when this happens could be rather further out than many people think.

Perhaps those who continue to pay higher and higher rents will be the last to buy, and therefore get the worst of both worlds. It is a feature of marketplaces that those who take the longest time to be convinced often make the worst decisions.

Source: AME Info

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