Core Savills’ David Godchaux on the state of the UAE real estate market

Although the common perception is that the prime market has seen a lot of supply coming in over the last decade, Godchaux says this isn’t necessarily true

While there are several top-tier real estate analysis firms operating in the UAE market and hundreds of real estate brokerages across the country, it’s rare to find a firm that offers both services. This has always seemed a little odd to David Godchaux, CEO of Core Savills, a real estate provider with a difference. Not only does the firm act as a broker for completed projects, it also looks to be a one-stop shop for its clients, providing analysis, data and research to go along with its many other services.

“From the very beginning, the vision has been to try and provide a very integrated solution for different types of clients, in terms of all real estate services,” Godchaux tells Big Project ME during an interview at the firm’s Dubai offices.

With four offices in the UAE between Abu Dhabi and Dubai, Core Savills has grown over the last 18 months to almost 100 employees covering the entire gamut of the regional real estate sector, with residential, commercial and international real estate, while also offering investment sales services, project and sales marketing, and property management, among others.

“The integrated offering goes from the purely transactional services, through to the investment services – the property and asset management – as well as all these professional services, the research and development consultancy, it’s all integrated with the transactional part.

“It’s something that is unique in many places around the world, and it’s certainly unique in Dubai. If you look at our competition in Dubai, you have a lot of very good and talented brokers in the market, but they’re just brokers. They don’t have the development consultancy; they don’t have the analysts to crunch the data and make conclusions as to where the market is going.

“Then you have the professional services, the global ones. They’re doing a fantastic job of crunching the numbers and analysing the market and making recommendations for clients. But the data they rely on is public data, it’s not data that is coming from transactions. They’re advising with something that is good enough, but in an emerging market nothing replaces transaction data, which is what we get from our brokers. Having these two worlds work well together is one of the USPs that we’ve been trying to have from the beginning for our clients,” he asserts.

Godchaux adds that this is just one part of the overall vision for Core Savills as a business. The second part is to integrate all these services and offerings with the back office, he explains. While competitors have branches in Dubai and the rest of their support systems spread around the globe, he insists that the best way forward is to have everything in-house.

“It does cost us a lot, but it’s a service that we offer our clients, it allows us to be very reactive and lets us mobilise when we must mobilise. We don’t need to say that we must involve the IT or research departments somewhere else in the world. We can mobilise very quickly on a project over here and handle it from A to Z, right from the early consultation down to the pricing strategy and marketing plan for the next two or three years, to bring the project to market. We do all the transaction management processes, down to the snagging and the final details, all on behalf of the client.”

Furthermore, this approach also covers the global marketing plan for the project, the PR plan, even the after-sales if needed. Godchaux says the firm can even offer certain end users property management services or resale services if needed.

“That applies to all our offices across the region. We’re also transacting in the wider region, while also supporting clients in other GCC regions with this philosophy and through our head office in Dubai. But that’s not the same as any other Savills office around the world, because typically, in most offices you don’t have commercial and residential under the same roof. That’s a choice we’ve made and it does cost us, but we believe in it.”

Having spent ten years in Russia prior to moving to the UAE, he points out that this model works particularly well in emerging markets.

“In the Middle East, you typically don’t have a very well defined line between what’s institutional and corporate, and what’s private wealth. It’s not so defined here. You don’t have a lot of pure institutional money. Recently, we’ve seen more projects coming to the market, but it’s still very limited in the Middle East. Most of the money is owned by private people, and I think having this full service under one roof allows us to provide solutions.”

However, the primary Core Savills area of focus remains the larger developers, he says. The company worked recently with Meraas on both the CityWalk and Bluewaters Island, and Godchaux says that because it was fully embedded on both projects from the start, Core Savills was able to put in place comprehensive plans for the marketing and selling of units, creating a 360-degree vision of how the projects are positioned.

“Developers need to understand that their area of expertise is to develop projects, which they’re very good at. It makes much more sense for them to externalise all these services to companies who have offices around the world, who have done it for years and who are transacting locally. It’s not only the research part, it’s also the local transaction part. We take ownership of everything, and that means that if we succeed, then we can say that we succeeded because we put everything in place. And if we fail, it’s not because of someone else. We take ownership [of the project].”

When asked about the Dubai real estate market, Godchaux splits the commercial and residential real estate markets into different segments, all with different drivers. When it comes to the commercial market, that comes down to two key sub-markets, he says. These are the prime sub-market, approximately 30% of total stock, and the grade B and C stock, 70% of total stock.

“The prime sub-market has really been left behind by developers in the last ten years. As a result, while Dubai has established itself as a global hub and as a place to be for international players, that market has largely become under-supplied. Rents have been going up for several years, but when the market started being less active in the last 24 months, rents have continued to stay where they are because there’s such an under-supply of quality stock.

“Then you’ve got the grade B and C market, which is completely the opposite story. The market has been flooded with grade B and C stock over the last 10 years, and as a result, we’re seeing much more supply that has been difficult to absorb by very different types of occupiers.”

What this means is that the lower-priced segment of the market tends to attract smaller companies that are much more sensitive to market dynamics. When the economy is booming, these commercial units tend to see a strong uptake; however, when the economy contracts, as it has for the last 24 months, these spaces also tend to see a high vacancy rate, while rents also fall rapidly.

“We did a research report recently where we were analysing this, and we did a simulation where the economy was booming again – the best two years of the last ten years, with that happening again for the next two years. Even in this type of scenario, if you take the absorption rates of the grade B and C markets, it’ll take three years for half the stock available to be absorbed. That means it’s not going to recover anytime soon,” Godchaux says pessimistically.

A similar picture emerges when you look at the residential sector. Here the market is divided into three sub-sectors – the affordable to bottom mid-market, the upper mid-market and the prime market.

Although the common perception is that the prime market has seen a lot of supply coming in over the last decade, Godchaux says this isn’t necessarily true.

“We’re not in a situation where we’re very worried, as there’s still a lot of quality supply coming consistently, but if you look at the figure, roughly 50% of what has been announced has been delivered, and it continues to roll over. In the past ten years, almost every single year, only 50% of the amount announced has been delivered. Why is that? Because the developers don’t have any incentives to terminate on time, and so that’s actually a very healthy adjustment mechanism.

“If the market is not there, then they delay the units until the remaining stock is absorbed. This doesn’t exist in the Western world, because they would get highly penalised, but here it’s possible. Of course, for those who have bought off-plan and not had their units delivered while they’re still paying for it, that’s an issue the Land Department will have to address, but until now this mechanism has served the market well. It has stopped the market from having an over-supply that will lie empty. So as a result, we don’t have that much quantity of grade A stock in the market today.”

However, Godchaux adds that he’s also quite positive about the outlook for the grade A market because of the supply figures coming through. He predicts that investors are monitoring the market closely and waiting to see what the rest of the market is doing before deciding to invest or reinvest their money.

Conversely, the mid-market segment is something he is quite concerned about, pointing out that it has suffered a lot over the last 36 months, with prices dropping 15-20%. While approximately half of this market has shown signs of recovery over the last 18 months, the rest continue to struggle as they are in areas of Dubai that aren’t in as high demand.

This concern also ties in with the third segment of the residential market – the affordable or bottom mid-market. Three or four years ago, governments and developers both realised there was a huge need for affordable housing in Dubai. As a result, the last year has seen a lot of stock coming into the market. However, in order to keep prices down, developers have had to build on less expensive land, and as a result a lot of projects are coming up in the outer areas of Dubai.

“There is something that is a little bit dangerous with what’s happening right now, and it’s certainly a reason for concern for the next five or ten years in Dubai. If you look at the total stock that will be delivered, realistically the total number of units delivered over the next four or five years will be 60,000 units – that’s by 2020, so it’s not even four or five years.

“I think out of the 60,000 units, 80% of those – which is a lot – are going to be priced below the AED 1.2 million range, so you’ve suddenly got a massive supply coming. The problem is that the Central Bank has not changed the mortgage regulations, so it still costs you around 31% down payment if you want to buy a unit. Now, especially for the affordable segment, these people don’t have enough money to make that down payment, and if you buy off-plan, then it’s a 50% down payment that you have to make, while also continuing to pay rent.

“So while creating affordable housing might have started out with the best intentions, due to the financial restrictions that the target market faces, the existing affordable stock is bought up by investors who then flood the market and look to generate high yields. This needs to be addressed, because that generates a big systemic risk to the system,” he warns, explaining that because the market is cyclical, these investors will then look to sell when things are not going so well, creating a crash in the market segment.

“Unfortunately, this market doesn’t have a very large pool of end users that would make it more stable when something goes wrong. It’s a market that’s not very well established. I believe that there are a lot of potential reasons to be concerned about it, and it needs to be addressed.”

Another market Godchaux is quite interested in is the Abu Dhabi real estate sector, which has also seen tremendous change over the last 18 months or so. Due to the UAE capital’s dependence on oil prices, he says its real estate sector has been hit a little bit harder than that of Dubai.

“Adjustments happen all over the world, and there’s nothing to be worried about,” he asserts. “Actually, they’re trying to structurally reform the way real estate works over there. They’re changing the laws and it’s a nice time for them to see what’s working and what’s not.”

“But there are a few issues. Obviously, there’s a lot of vacancies in the residential and office markets, and just like in Dubai, there’s not enough quality office space generally. On the residential front, we’ve noticed some migration from the city areas to the outer areas because people can’t afford the rent any more.

“And that’s something interesting about the culture in Abu Dhabi. In Dubai, landlords generally tend to react faster to the market. When rents are going down, they will more often than not adjust the rents fairly quickly, rather than keep their units empty for a year.

“This hasn’t been the case in the Abu Dhabi City area for the past 12 months. A lot of landlords have decided that they would rather keep the headline rent and leave their unit empty. What has happened is that people have left to the outer areas, where landlords are a little bit more flexible, or where there are more new properties, which then gives the impression that the outer areas are very healthy. It’s going to be interesting in two or three years, or maybe earlier, when the market starts recovering and we’ll see if those areas are actually that healthy,” he warns, bringing the interview to a conclusion.


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