Nomura gives grim property outlook

Nomura predicted some 20 million square feet of commercial space will be completed in Dubai by 2011 along with 10 million sq ft in Abu Dhabi.

Office complexes set to open in Abu Dhabi and Dubai over the next two years will be seeking occupants in an oversaturated commercial real estate market and 150,000 workers to staff those businesses from a declining population, analysts say. The Japanese bank Nomura Holdings predicted some 20 million square feet (1.9 million square metres) of commercial space will be completed in Dubai by 2011 along with 10 million sq ft in Abu Dhabi.

"We estimate around 100,000 white-collar jobs at least would need to be created in Dubai and 50,000 in Abu Dhabi alone to satisfy oncoming supply," said Chet Riley, a Dubai-based analyst at Nomura. "This is in an environment where jobs are being cut." The warning comes as brokers predict a decline in Dubai's expatriate population as people return to their home countries after losing their jobs. The emirate could experience as much as a 10 per cent decline in population this year, said the real estate firm Jones Lang LaSalle. The UAE's overall population could contract by 5.5 per cent according to estimates from EFG-Hermes Holding. There are no official forecasts available.

About a quarter of Dubai's office space is currently empty compared with less than 5 per cent in Abu Dhabi, according to Nomura. The vacancy rate is expected to rise over the next two years as projects that are already under construction reach completion. Brokers predict that half of Dubai's offices may be empty by 2011 as new supply doubles existing stock. Dubai home prices have tumbled by about 50 per cent from their peak and may drop a further 20 per cent this year, Deutsche Bank said in June. The market's collapse followed a construction boom that created thousands of homes just as demand began to evaporate.

"We see 65,000 additional residential units entering the Dubai market and 15,000 in Abu Dhabi," said Mr Riley. The 11 executive towers in Dubai's Business Bay development will by itself contribute 2,150 units to the glut. The analyst also predicted a further 10 per cent decline in rents. The residential market is just as bleak. As many as 70,000 surplus new homes could be delivered next year, said the property consultancy Landmark Advisory, which would account for about 20 per cent of the total supply in Dubai.

"Over the next 10 years prices will be coming back only to about 70 per cent of the 2008 levels," said Charles Neil, the chief executive at Landmark. "This is what happened in Hong Kong and Singapore, for instance, and they are similar cities in many ways to Dubai." Meanwhile, developers are struggling with a rising number of defaults from investors who hold property worth less than the mortgage as more unsold homes are completed and prices decline.

"Two years ago, developers were initiating fanciful developments at the peak of the market, which they are now delivering into the trough," said Mr Riley. "This has increased the likelihood of defaults and smaller developers do not have the luxury of consolidating development pipelines." Nomura estimates the default rate could be a high as 60 per cent on new developments in Dubai and about half that in Abu Dhabi. That is attracting so-called 'vulture funds' targeting distressed properties across the country.

A number of funds with ready capital are waiting on the sidelines with about Dh6 billion (US$1.63bn) already committed, an amount unlikely to be enough to absorb surplus apartments. "We still forecast an oversupply situation in both residential and commercial space, which may further depress pricing into 2010," said Mr Riley. @Email:[e-mail]