Dilemma for Dubai developers

Developers in Dubai are faced with tough decisions as prices in many neighbourhoods continue to slide.

Nakheel helped to cause a 10 per cent drop in sale prices in Discovery Gardens in the third quarter from the previous quarter, according to the latest report from Asteco. Bloomberg News

Falling sale prices and a glut of empty apartments are forcing Dubai developers to make some tough decisions.

If they release more flats on to the market, it is likely to drive down sale and rental prices. But they also need to release the apartments to generate revenue. "It is a dilemma," said Craig Plumb, the head of research for Jones Lang LaSalle. "They need the cash flow, which they can only get from releasing product.

"At the same time they recognise the market is oversupplied."

A 10 per cent drop in sale prices in Discovery Gardens in the third quarter from the previous quarter occurred after Nakheel released thousands of apartments into the rental market, according to the latest report from Asteco, a property research company. Owners have been unable to charge enough rent on their apartments to cover their mortgages, forcing them to sell, often at a discounted price, Asteco said. Discovery Gardens will eventually include more than 26,000 apartments.

"The sheer volume of property put into the market in the past few months must impact the market," said Elaine Jones, the chief executive of Asteco. "It is basic supply and demand."

Prices are stabilising or even rising for apartments and villas in the more expensive neighbourhoods such as Dubai Marina and Palm Jumeirah, property agents say. But prices and rents continue to slide at the lower end of the market, particularly with regard to partially finished developments. "There is a divergence in the apartment market," said Mujtaba Virani, a sales consultant with Better Homes, a property agency. "Most of the supply coming on to the market is at the lower end."

More than 42,000 homes are scheduled to be built in Dubai by the end of 2013, according to Jones Lang LaSalle. But not all of them will be built.

"In all likelihood there will be delays and scaling back," Mr Plumb said. Dubai Properties Group (DPG) has been releasing apartments for rent in Ghoroob Mirdif and the Executive Towers in Business Bay in phases, even though construction has been completed "for some time", Mr Plumb said.

The Ghoroob project has more than 2,900 apartments for rent; Executive Towers includes 10 residential towers, ranging from 28 to 52 storeys.

DPG has faced accusations that it is pushing buyers in its Remraam development in Dubailand to make their final payments and take possession of their apartments, even though the buyers say construction is not complete. DPG has already scaled back the project, which includes more than 3,000 flats. Of the 42,000 homes scheduled for development in the next two years, 20 per cent are in Dubailand, according to Jones Lang LaSalle data.

"We build and deliver to market need," a DPG spokesman said. "We have over 90 per cent occupancy rate." DPG does not discuss its strategy, added the spokesman. Nakheel plans to focus on 13 projects for delivery in the next two years, while delaying others, the company said in a prospectus for its recent bond sale.

The projects, primarily villa developments, were chosen for completion based on several factors, including expected completion date and the ability to "maximise Nakheel's potential returns" the company said.

Nakheel and other developers are choosing to put unsold homes into the rental market, rather than try to sell them at deflated prices. Rentals create recurring revenue and the developers can wait for sale prices to rebound before putting the homes up for sale.

"It's a catch-22 for [developers]," said Mr Virani. "Now they have a duty to investors. If they are not delivering on time investors get upset."

Those same investors may be discouraged by the decline in rents and try to sell their units at reduced prices, putting further downward pressure on sale prices.

That would be good news for buyers, however. "Potentially it's very positive," Ms Jones said. "It means people can afford to live here."