Drees & Sommer panel: RoI under threat if older assets are not revitalised
A recent panel discussion organised by Drees & Sommer (D&S), and moderated by MEFMA board member Ali Al Suwaidi, highlighted revitalisation as the solution property owners in Dubai should consider, in order to maintain returns on their assets in a competitive and evolving market.
Research presented at the event showed increases of 74% and 38% in commercial/residential buildings and hotel/hotel apartments respectively in the emirate in the last 10-years. These stats coupled with evolving building standards were put forward as reasons older properties in Dubai struggled to remain attractive in the market.
“A building’s value depreciates over time. The rate of depreciation is dependent upon three key quality factors, which will have been completed at the start of the project: design, materials and construction. Effective minimisation of depreciation can be achieved through regular maintenance of structure and MEP, as well as refurbishments. However, if we are to achieve renewed RoI, we must undergo a revitalisation project, ideally every 15 years,” said Peter Prischl, international and global head of Corporate Real Estate at Drees & Sommer.
Panelists noted Dubai now has more than 500 hotels that are over ten years old, which has forced the issue of finding a solution to the challenge of property depreciation and reduction in ROI.
“What we are now facing is the fast depreciation of many of the properties built during the downturn years, when cost-cutting was a must. We now find more and more buildings in dire need of fundamental repairs because of the low-quality materials used, built that way through necessity at the time. Couple that with the astronomical growth across hospitality and residential construction, and we are left with a highly competitive field within which developers are required to constantly innovate to ensure RoI,” added Prischl.
Alex Craine MRICS, executive director Real Estate Operations, Dubai Properties Asset Management added, “As a buy-to-let developer our average tenancy is five years. Revitalisation is even more important in the buy-to-let space because responsibility remains with us and RoI is much longer-term than off-plan and other properties for sale. On average, we carry out a revitalisation project every seven years.”
Panelists agreed that while revitalisation is up to ten times more expensive than a ‘facelift’, it may extend the average lease time from the national average for expats of three years.
“By undertaking revitalisation projects at the frequency we are, we have retained ROI. The long-term return has enabled us to make use of our developments for far longer than most of our competitors. Buy-to-sell properties, especially off-plan properties, have undergone what is termed ‘value-engineering’ and results in cost reduction at build but a shorter life span of the building, especially when it comes to MEP services,” Craine explained.