Government support and demand to help realty growth in UAE

Strong government support and healthy end-user demand for real estate in the UAE will help maintain a positive long-term growth for the sector, according to a report. “Real estate sector fundamentals remain strong even discounting near-term weakness,” says Abu Dhabi Commercial Bank (ADCB) in a report titled ‘UAE: Macro Economic Update’. According to the bank, on Dubai Financial Market and Abu Dhabi Securities Exchange, real estate sector indices have fallen by 80.5 per cent and 62.3 per cent so far this year. Due to the continuing economic slowdown and cautious approach of banks to lend to the real estate sector, the report expects the sector demand to weaken in coming quarters. Certain banks have reduced their loan-to-value ratio to 60-75 per cent from the earlier 85 per cent. “As a result, a larger down payment is required, possibly forcing potential buyers to postpone their purchasing decisions, and hurting real estate demand.” In an effort to kickstart the mortgage business, Abu Dhabi Finance, a mortgage finance joint venture, was set up recently by Aldar and Sorouh in partnership with ADCB and Mubadala Development Company. However, rental demand is likely to remain robust as potential property buyers defer decisions to buy and move into rental properties. “We believe unavailability of cheap credit could also compel realty companies to postpone launches of new projects and delay ongoing developments. Although the government has taken steps to ease liquidity by extending more credit lines to banks, those institutions in turn seem reluctant to lend to real estate companies,” the bank said. Rental yields expanded in October on the back of lower asset prices and a tight supply market, as gross yields increased to 6.3 per cent from 4.7 per cent in September, according to HSBC Holdings. “Rental demand is likely to remain robust as we sense potential buyers are deferring their plans until there is better visibility in the credit markets,” it said. ADCB also expects construction costs to come down due to decline in prices of major raw materials such as cement and steel. “Further, a relatively stronger dirham is likely to reduce the cost of imported raw materials in the near term. All these factors should largely offset expected lower profitability resulting from weaker sales prices,” it said. Demand for residential units in Abu Dhabi will outstrip supply until the end of 2011 as population grows and household size shrinks in the UAE, Citi Investment Research said recently. “Population growth and shrinking household size should drive a shortage of at least 30,000 units in 2012,” it said. Real estate projects announced in Abu Dhabi till date, including those under planning and development, are estimated to cross $466bn (Dh1.71trn) when completed, according to the latest update. Parag Deulgaonkar