The economic scenario of Dubai was boosted in 2013 as a result of better revenues, higher sales and increased profit margin in various industries, leading to a 4.7% growth in GDP for the year. The key sectors of Dubai’s economy include retail, transportation, hotel, and tourism industry, among many others. The real estate industry of Dubai is no exception to this phenomenon. In the last quarter of 2013, the real estate industry reported an impressive growth owing to the increased demand for office leasing space and the increasing number of malls and community centers. Moreover, the increasing demand for hotels due to growth of tourism have inflated the hotels’ average daily rate (“Dubai Real Estate Market Overview,” 2013).
Dubai’s real estate growth post-2000
The growth of real estate in Dubai depends on new entrants in the market, liberalization, demands of urban houses as well as household income. The real estate market is also dependent on owners, renters, developers, valuation agencies, banks. Dubai’s prolonged political stability, low taxes, efficient government, flexibility to adopt foreign cultures have garnered a positive business environment. Dubai’s real estate boom started at the time of oil crisis in 2002. The increased price of oil per barrel, ranging from USD 25 to USD 147, is a stimulator factor for Dubai real estate properties. Dubai’s real estate boom, however, turned to bubble in 2006 because of the presence of short term investors and this financial inflow increased liquidity pressures on the entire economy as well as real estate. Gulf and UAE oil producers also appreciated this development.
However, with the advent of the global economic recession in 2008, the prices of real estate started falling and by the last quarter of 2008, property prices had been devalued by up to 40%. During that period, Dubai’s economy faced four types of financial crises comprising of stock market crashes, banking crises, currency crises and property crises. In Dubai, an official real estate community was established in the form of Real Estate Regulatory Agency (RERA) in 2007 that had the legal authority to set all real estate activities. RERA established the Trust Account Law to protect investors from developers in terms of collection of payments, assistance in monitoring system to control buyers’ money towards the construction. The Trust Accounts Law of 2007 says that a developer should apply to the specific department while selling off property and there will be a written agreement between the developer and the Account Trustee regarding payments of buyers or banks. A special register has been prepared in the name of “Register of account Trustee” for registration of the names of Account Trustees (NAINI, 2011).
There are several factors that determine the performance of Dubai’s real estate industry. Firstly, the global credit boom and the liquidity inflows are the key elements to the expansion of this sector. Secondly, participation of foreign investors in real estate has led technological advancement. Thirdly, the oil price rise has provided the investors the much-needed confidence in this sector. Finally, the absence of corporate governance in the state-owned real estate corporations creates a potential for error and embezzlement, thereby giving the new privately-owned corporations a much needed advantage (Alestalo, 2014).
The road ahead
According to Arab Investor (2011), UAE’s real estate industry grew at the rate of 60% on year-on-year basis during 2010, and Dubai alone contributed to 47% in this respect. The World Expo 2020 in Dubai is expected to invite measures to tackle another such downturn in the likely future. Some of these measures include reducing flipping activity to utilization of macro-prudential and fiscal toolkit (Irwin & Shukurov, 2014).
- Alestalo, H. (2010). “Reasons Behind a Real Estate Bubble in a Developing Country Case: Dubai.” Aalto University School of Business. [online]. Available at https://noppa.aalto.fi/noppa/kurssi/31e99904/lisatty14053/31E99904_paper___alestalo.pdf Last accessed on 23rd January 2015
- Arab Investor (2011). “From Bust to Boom?” [online]. Available at http://arabinvestor.ae/wp-content/uploads/2014/05/Arab-Investor-February-Final.pdf Last accessed on 23rd January 2015
- Irwin, T., & Shukurov, B. (2014). UNITED ARAB EMIRATES. International Monetary Fund.
- Naini A. (2011); Assessment of Dubai Real Estate Trust Accounts Law and Issues of Business: Evidence from Ontario and Utah; The Journal of Business Inquiry. Vol. 10 (1), 120-134.