Property developers look to rentals to secure revenue

With a slowdown in sales anticipated, other avenues of long-term income are being explored.

Angela Giuffrida and Nathalie Gillet As property developers reassess their strategies in anticipation of a slowdown in sales, some are looking to the residential rental market to secure long-term revenue. Developers are also focusing more on accelerating the delivery of pre-sold property, while some are taking a more measured approach to project launches. Until now, major developers have mainly built property to sell.

"There will be a shift to rental property," said Gurjit Singh, the chief property development officer at Sorouh, an Abu Dhabi developer, told a conference organised by events manager IQPC on Sunday. "For better earnings visibility you need to have a very balanced mix of sales and rental property." Mr Singh referred to the "tipping point" issue, where people working in Abu Dhabi are forced to rent on the outskirts of the emirate or in Dubai because of the shortage and expense of rental property.

"In today's context, a developer will need to deploy money into something that will give revenue for three to four years after the building is complete." He added that Sorouh would focus on faster project delivery. "In these trying times, it is known that property purchasers and investors will go to developers who have delivered and who are able to fulfil their obligations." John Bullough, the new chief executive of Aldar Properties, said the company planned to launch more projects for rental.

"It's something we should all be looking at now. In Abu Dhabi, for example, there's an undersupply of residential accommodation for rent. Buildings have mainly been constructed to sell," he said. "Aldar is now in the delivery phase. We will launch more projects, and in a measured way. We will have to be careful about the assumptions we make and be more cautious." Union Properties, a Dubai company, plans to fall back on its rental business if sales slow.

The company's rental portfolio is worth about Dh2.5 billion (US$680 million) and generates between Dh180m and Dh200m in profit each year, according to Zaid Ghoul, the chief financial officer of the firm. "Our business model is different from that of others because we already have a rental side to the business," he said. "We only started accommodating sales when the freehold decree came out. If for any reason we decide not to sell because of market conditions, then we can always rent. We have the capacity to rent, we've done it before and plan to continue doing it."

While demand and rates for rental property continue to increase, some developers believe such a shift might not be the answer to riding out a slowdown in sales. "Renting is not the solution for not selling," said Abid Junaid, the chief executive of ETA Star, a Dubai company. "Typically, developers have some inventory as rental stock, but for office or retail space. The strategy for residential would be to sell."

Amer Saeed, of the property broker Remax, said: "There is a lot of demand for renting in Abu Dhabi and it is really good business for us, but developers can't afford to go just for rental business because they need the sales money to build the projects." Firms that struggle to find accommodation for workers are also calling for more rental property to be built. "We're having huge problems in attracting people to work for us because of rent," said Khaldoun Tabari, the chief executive of Drake and Scull, a Dubai engineering firm.

Riad Kamal, the chief executive of Arabtec Construction, said: "I think there's going to be a major shift from sales to property rental. Banks will then have to give extended loans, maybe over a 10-year period, linked to rental." [e-mail] [e-mail]