Fixing supply and demand in Dubai real estate
The decision to establish a “Higher Real Estate Planning Committee” by His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice-President and Prime Minister of UAE and Ruler of Dubai, has already sparked a lively debate across the emirates about what the committee’s first steps should be. No one, however, is debating the need for this committee, which was established to find ways to strike a balance between real estate supply and demand, make sure launches of “me-too” projects are avoided, and ensure launched projects add real value to the national economy.
Two years of falling property prices caused by an oversupply of projects and completed homes has necessitated the need for some oversight from the government. The sector as a whole has welcomed the decision.
But regulating the market will not be easy. The end goal here cannot be simply to support — or prop up — property prices. To focus solely on that would create other problems, both in the construction industry and on local stock markets. The committee, whatever it decides, must move carefully and avoid causing excessive and unnecessary economic complications.
It will not be an easy task and will require both political will and an informed understanding of local market dynamics
It will not be an easy task and will require both political will and an informed understanding of local market dynamics.
The first task will have to be the balancing of supply and demand. The oversupply must be reduced, a process that could take longer than many developers are prepared for. Obviously, projects cannot just be stopped, so a sustainable, long-term plan that merges growth with supply have to be created.
Second, private developers have to be assured that they will be allowed to compete. Currently, government-backed developers dominate the market, and while they have provided stability and steady dividends to their investors, the market should be opened up in such a way that it allows private players also to thrive.
Third, the committee should thoroughly examine the role of banks and the lending practices that have helped drive the current imbalance in the market place. Low interest rates and a highly competitive banking sector have created an environment that caters not to families looking for a home, but also to investors looking to make profits by “flipping” properties.
The high rate of lending combined with the oversupply of properties has the potential to create problems that could easily spread to the banking sector. The committee faces a daunting challenge, but a challenge that must be addressed quickly to ensure Dubai’s continued economic growth.