Funds turn to Dubai as property rush subsides

Funds turn to Dubai as property rush subsides

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DUBAI (Reuters) – Property funds see growing opportunities in Dubai as the speculative rush in the emirate’s property sector subsides and new supply begins to stabilise the market.

Funds had difficulty accessing suitable properties in Dubai when the boom kicked off four years ago because developers would immediately sell individual unit or whole floors off plan to speculators to earn a quick return.

Funds, which prefer to buy entire buildings, have benefited as the market cools and more developers wait to sell completed developments to funds.

“That’s where the market is starting to evolve slowly,” Tim Rose, senior real estate fund manager at Emirates Bank, told Reuters in an interview this week. “Developers are seeing the opportunity in being able to hold on to a property and sell it to a fund which is looking for a steady cash flow from rental income.”

Funds have also benefited from new laws clarifying foreign ownership and allowing collective investment.

Dubai, one of the seven emirates in the UAE federation, kicked off a regional property boom four years ago by allowing foreign investment in real estate. But until this year foreign investors had no clear legal title.

As the property market slows, Dubai is also looking to attract institutional investment. The emirate has approved rules allowing real estate investment trusts (REITS) and is amending laws to give foreigners limited freehold ownership and formal 99-year leases.

Most REITS generate income by renting out land or buildings to commercial or residential tenants.

“TOE IN THE WATER”

“There is a large number of Asian and European entities putting their toe in the water trying to understand the dynamics of the market and the players in it,” Rose said.

With an economic boom drawing more expatriates each year, property prices are rising rapidly and have quadrupled in some sectors over the past few years.

But in some ways the property market could be hindered by Dubai’s success.

With prices rising so fast, businesses may choose to hold on to real estate instead of selling and leasing back property as they do in other markets. That could hinder development of REITS, Rose said, which generate income from rent.

“It’s going to be hard for REITS and funds to access completed properties occupied on long-term leases because a lot of these companies have done well on property returns so they prefer not to sell it and take a leaseback,” Rose said.

Developers have ploughed money into new projects and the large number of properties poised to come on the market have raised concern that the property boom will soon run out of steam.

But Rose said there was little sign of any impending correction in Dubai, especially with interest rates in the Gulf Arab region nearing their peak and easing pressure on a fast-expanding mortgage market.

“The commercial market is very strong,” he said. “Occupancy is near 100 percent and there is little (commercial) space being delivered in the next 18 months.”

Rose said even in the residential sector, into which developers have poured most of their money, accommodation was in short supply and demand for villas remained strong.

With many developments running behind schedule the market will only stabilise towards the end of 2007.

“We’ll definitely see a soft landing,” he said. “Project completions are delayed, population growth is still strong, the range of product is segmented to meet the varied types of users, and there are additional buyers coming to the market in funds.”

Source: Reuters UK