Analysis

UAE lacks reliable developers, research reveals

The emirates of Dubai and Abu Dhabi are rife with developers that tend to overpromise and under deliver, according to Landmark Advisorys Q1, 2010 Mind the Gap market report

Landmark Advisorys, Jesse Downs A deficit of ‘grade A’ developers in Dubai and Abu Dhabi means that the majority of units delivered between 2010 and 2012 will not meet clients’ expectations, according to Landmark Advisory’s Quarter One, 2010 Mind the Gap report.

“Only 25% of the new supply expected to be delivered in the next three years will be from master developers. The remaining 75% will be delivered by individual developers with much of this supply delivered by small and less-experienced developers,” Landmark Properties director of research & advisory Jesse Downs told The Big Project.

The Landmark report surveyed 52 developers in Dubai and nine in Abu Dhabi, identified as the UAE’s primary developers. These companies had at least five projects either delivered or under construction, with the exception of several companies which had large or niche developments.

The evaluation was based on three basic criteria; product quality (based on the developer’s track record and ability to deliver the quality promised during marketing of the product), customer service and overall perception. “The panel included senior real estate executives from property management, fund management, research, consultancy, valuation and brokerage.

The panel also included senior real estate agents, who interact directly with owners and tenants who buy and work or live in the spaces built by these developers,” said Downs.

“The average experience in the local market is approximately five years. Considering that the freehold market started about seven years ago, this average experience in the local real estate market is representative.” The results uncovered a shortage of high-performing grade A developers in both emirates.

Making the Grades

In Dubai, the highest grade awarded was A-minus, achieved by three developers (6%). However, 37 developers (71%) were rated C-plus or lower. Within this, 48% received a C-minus, C or C-plus, 17% were rated as D and 6% received a fail.

The developers graded in this survey will be delivering just over half of all developments in Dubai by 2012. Of these developments, the majority (64%) will be delivered by developers rated in the C range, while developers rated A-minus will deliver 9% of projects and only 0.3% of developments will be handed over by developers who received a fail grade.

Downs said that while most projects in Dubai faced delays, grade A developers either delivered within a reasonable timeframe of the anticipated completion date or, if more significant delays were faced, these developers would communicate well with their customers providing regular updates.

In Abu Dhabi, only freehold/leasehold developers with five projects or more in development were surveyed; nine in total. Out of these developers, six received B-minus and above, with two reaching the highest grade in the emirate of B-plus. Two companies were graded as D.

Failing to meet expectations

“Grade A developers typically build tangible real estate products that match up with the units marketed.

“In other words, these developers deliver units that meet expectations in terms of size, layout, quality of fit-out and amenities and facilities available,” Downs explained.

“It should be noted that developer grading does not always correlate with the grade of the building. For example, a grade A developer can build standard quality assets, but it would have marketed and sold these units as standard quality,” added Downs.

On the other end of the scale, Down defines grade C developers as those that have delivered assets, but the tangible product does not fully meet expectations. Examples of problems are units that are smaller than the off-plan unit purchased, units with changes to the layouts and units with lower quality fit-out than promised. “A typical issue is that a developer sells a ‘luxury’ unit, but only delivers standard quality. These developers can provide decent customer service, but generally this is not a consistent service” asserted Downs.

She said a developer receiving an F is typically one that has not yet delivered a project. Usually these developers have launched one to three projects, but they are either not out of the ground or still in very early stages of construction. Most of these projects are either on hold or unofficially cancelled. Usually these developers do not want to cancel the project because they would then be obliged to payback part or all of the purchase price back to the owner.

Boom Consequences

“The current deficit of grade A developers is a function of the irrational exuberance of the real estate boom. Investors were purchasing units based on short-term plays and were often not interested in the quality of the unit or reputation of the developer.

“Additionally, many of these developers had no track record to evaluate at that time and investors often did not care. Developers did not have to consider quality because they knew it would sell out,” said Downs.

In real estate, there is often a two to- three-year delay for trends to filter through to the product. This is simply because a development typically takes two-to-three years to build from launch to handover without any significant delays. So those developments handed over now and in the coming few years are a product of the irrational exuberance that peaked in Q2/Q3 2008, according to Landmark. The negative impact of market events over the past 18 months, including credit downgrades and Dubai World financial issues, is the increased risk premium that investors apply to this market, the company said.

As a result, investors are expected to be more cautious and require higher returns in future, which will limit investment activity, especially from private and institutional international investors. This will also limit transaction volumes of assets under construction as there is increased uncertainty about the ability to complete the projects in a reasonable timeframe.

However, the current market conditions can also lead to opportunities; there is still room for niche players, either for smaller high-quality niche developments or renovation of existing assets and possibly communities, said Downs.

“We also think there is a significant opportunity for a coordinated and well-designed urban regeneration plan. Ideally such a plan would take a holistic approach to city planning and improve existing building quality and integration of communities.”

Standard Solutions

Looking ahead, Downs said the “real issue” is the evolution of regulations and enforcement. “The challenge is finding a balance because there is always the substantial risk of over regulation.

“There is currently a number of relevant existing regulatory features that should help tackle these issues, but because of lack of clarity on interpretation or enforcement, the regulation has been ineffective to date,” she concludes.

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