Sector Monitor Series

Dubai Real Estate Sector

Dr. Eisa Abdelgalil

Bader Al Deen Bakheet

Data Management & Business Research

2007

Published by:
DCCI Data Management & Business Research Department
P.O. Box 1457 Tel: + 971 4 2028410
Fax: + 971 4 2028478
Email: dm&[email protected]
Website: www.dcci.ae
Dubai, United Arab Emirates

All rights are reserved. No part of this publication may be reproduced,

stored in any retrieval or computer system, or transmitted in any form or
by any means electronic, mechanical, photocopying, taping or otherwise,
without the prior written permission of the publisher.

ISBN

Table of Contents

Table of Contents...........................................................................................................ii
.................................................................................................................... iii
Executive Summary ......................................................................................................vi
1. Introduction................................................................................................................1
1.1 Background ..........................................................................................................1
1.2 Objective ..............................................................................................................1
1.3 Research questions...............................................................................................1
1.4 Methodology and data..........................................................................................2
1.5 Outline of the study..............................................................................................2
2. Nature of the Real Estate Market...............................................................................3
2.1 Definition and functions of real estate market.....................................................3
2.2 Special characteristics of real estate ....................................................................5
2.3 Factors affecting the value of real estate..............................................................8
2.4 Demand and supply factors in real estate markets...............................................9
3. Supply of Dubai Real Estate ....................................................................................11
3.1 Government........................................................................................................11
3.2 Private sector......................................................................................................13
3.4 Residential units supply in Dubai ......................................................................14
3.5 Land prices.........................................................................................................14
3.6 Construction materials .......................................................................................16
3.7 Cost of financing................................................................................................16
3.8 Technology and innovation................................................................................17
3.9 Expectations.......................................................................................................17
4. Demand for Dubai Real Estate ................................................................................21
4.1 Population ..........................................................................................................21
4.2 Income................................................................................................................22
4.3 Cost and availability of financing ......................................................................23
4.4 Tastes and preferences .......................................................................................25
5.5 Expectations about the future.............................................................................27
5.6 Real estate market and changes in demand........................................................28
5. Dynamics of Supply and Demand in Real Estate Market........................................29
5.1 Model description and calibration .....................................................................29
5.2 Model baseline scenario.....................................................................................31
5.3 Policy simulations..............................................................................................33
5.3.1 Demand shift policy ....................................................................................33
5.3.2 Supply shift policy .......................................................................................34
5.3.3 Combination of demand and supply shifts policy .......................................35
5.3.4 Competition promotion policy ....................................................................36
6. Conclusions..............................................................................................................38
References....................................................................................................................39

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Executive Summary
The primary objective of this study is to analyze the recent developments and
the dynamics of Dubai real estate market and shed some light on the outlook
of the market for the coming years. The study has developed a dynamic supply
and demand model for Dubai residential real estate market, in which the real
estate price plays an important role in the adjustment process. There is no
single study on Dubai real estate market that has tried before to explicitly
bring real estate supply, demand and price together and study how they
interact over time.
The determinants of demand and supply are those factors within a defined real
estate market that cause demand and supply to shift and lead to price changes.
The primary determinants of real estate demand are population, income,
buyers' tastes and preferences, price changes of other goods, the cost and
availability of financing, and the expectations of buyers about the future. The
primary determinants of real estate supply are the costs of production inputs,
cost of financing, advances in technological know-how, and expectations
regarding future demand.
The demand for real estate can be boosted by encouraging people to come to
Dubai, whether as investors, business travellers, employees, tourists, attending
events and conferences and for health and education purposes. To do this,
more liberalization and simplification of laws, rules and measures are
necessary in the following areas: (i) immigration and residence laws and
procedures (ii) labour laws and procedures (iii) business and commercial laws
and procedures (iv) real estate and tenancy laws and procedures (v)
administration of courts and dispensing of justice.
Dubai Strategic Plan (DSP), which was recently announced by Dubai
government, has projected 11 per cent annual real GDP growth during the
time frame of the strategy 2007-2015. If Dubai long term population growth
rate of 7 per cent, which is based of its historical trend for the last 30 years, is
coupled with the DSP projected growth rate of real GDP of 11 per cent, then
this gives a real per capita income growth rate of 4 per cent during the years of
the strategy. Therefore, the past trend of per capita income growth is expected

vi

to be sustained into the coming years. This is good news for the real estate
market. Most of this income growth accrues to the upper and middle income
groups who are the primary targets of the real estate developers. Their rising
purchasing power is expected to fuel the demand for real estate.
The demand for real estate can be enhanced if the availability and cost of real
estate financing are further enhanced. Further opening up and liberalization of
mortgage financing markets is expected to promote competition in this market
and therefore bring more financial resources for lending and encourage more
product innovations that cater for the different needs of the customers. The
competition is expected to render the cost of financing and its conditions
affordable and therefore entice more people to be involved in the real estate
market as investors and buyers.
The demand for real estate can be promoted by developing and cementing of
the tastes and preferences of the people for Dubai. This can be done through
Dubai government aggressive promotional campaigns in other countries
through its Department of Tourism and Commercial Marketing and
investment promotion agencies. Successful promotional campaigns are
expected to develop peoples tastes and preferences for Dubai and
consequently people will scramble for Dubai.
The credibility of the government economic polices is extremely important
because people base their expectations about the future on those policies.
Generally speaking, Dubai government economic policies and measures are
credible and the public have faith in them. One stark exception to this
credibility is the inflation issue. In the past, people were not confident about
the official inflation figures published by the government because they did not
reflect realities on the grounds as they saw and experienced them daily.
Buyers of real estate need to correctly anticipate their financing cost based on
inflation figures provided by the government. To create positive expectations
that promote demand for real estate, the government needs to boost its
economic policy credibility in fronts such inflation, employment and
economic growth.
The model results show that the market dynamics will take time to adjust
supply and demand. Therefore, it is expected that it will take some time before
Dubai real estate market cools down. It is expected that the market will not
vii

cool down before at least 5 years from now, assuming that the government has
done nothing to promote the demand and supply of real estate. Any
government policy measures that boost the demand and supply of real estate
are expected to keep the market momentum on and push it further in time.
The model results show that the real estate price has increased by cumulative
annual growth rate (CAGR) of 10 per cent in the medium term. In the long
term, the price has increased by CAGR of 4 per cent. If the government is
looking for an objective criterion for setting a rent cap, then the 10 per cent
makes a lot of sense for the medium term. The long term real estate price
increase of 4 per cent is very consistent with some EU countries rent cap such
as the Netherlands. This means that when Dubai real estate market becomes
mature and reaches its steady state, then the annual price increase will just be
covering the inflation rate plus a small margin as real return on real estate.
The model policy simulation of a demand shift shows that if the government
would like to keep the heat in Dubai real estate market then demand boosting
policy measures are needed. Any policy measures that positively influence
population, income, cost and availability of financing, buyers' tastes and
preferences, and the expectations of buyers about the future will contribute to
the increase in real estate demand.
The model policy simulation of a supply shift shows that if the government
would like to take the heat out of Dubai real estate market and stabilize it then
supply boosting policy measures are needed. Any policy measures that
positively influence the real estate costs of production inputs, cost of
financing, advances in technological know-how, and expectations regarding
future demand will contribute to the increase of real estate supply.
The model policy simulation of promoting competition shows that the speed
of adjustment in the real estate market (i.e. the time that the market will take to
converge to equilibrium) depends on the competitiveness of the market.
Therefore, if the government would like the supply and demand for real estate
in Dubai to catch up relatively fast, then policy measures that promote
competition in real estate market are needed. These policy measures are more
opening up and liberalization of real estate market, information disclosure,
flexible land and real estate regulations, and more liberalization of labour and
capital markets, among others.
viii

1. Introduction
1.1 Background
Since early 2000, Dubai has witnessed a phenomenal growth in residential,
commercial, industrial and service real estate. This growth has been fuelled by the
economic boom in the region which is mainly driven by the rising world oil prices.
Rents and selling prices of all types of real estate have been skyrocketing as a result of
a relatively higher demand which is not met by the supply. Consequently, huge
investments by real estate developers, both government and private, have been put in
place with the view of reaping the benefits of this seemingly unending boom.
The real estate sector is a dynamic and a driving force for Dubai economy during the
last years. Whether it will continue to play that role in the coming years is an open
question that this study will shed light on.

1.2 Objective
The primary objective of this study is to analyze the recent developments and the
dynamics of Dubai real estate market and shed some light on the outlook of the
market for the coming years.

1.3 Research questions

This study will answer the following research questions:
1. How different is the real estate market from other product markets?
2. What are the recent developments on the supply side of Dubai market?
3. What are the recent developments on the demand side of Dubai market?
4. How supply and demand in Dubai real estate market interact through price
mechanism and how the market dynamics work themselves out?
5. What is the outlook of Dubai real estate market in the medium and long terms?

1.4 Methodology and data

Analytical and modelling approaches are used to study the dynamics of Dubai real
estate market and how the forces of supply and demand interact to determine the
prices in the market. The data used in the study is mainly collected from sources that
are relevant and involved in Dubai real estate market such real estate developers,
contractors, agents, landlords, buyers, renters and real estate research companies. In
addition, data is collected from Dubai Municipality Statistics Centre and UAE Federal
Ministry of Economy.

1.5 Outline of the study

The study is further divided into five sections. Section two discusses the nature of
the real estate market. Section three traces the recent developments on the supply
side of Dubai real estate market. Section four analyzes the recent developments
on the demand side of the real estate market. Section five shows how supply and
demand interacts to determine the real estate price and it sheds some light on the
outlook of Dubai real estate market for the coming years. Section six is the
conclusion of the study.

2. Nature of the Real Estate Market

This part of the study discusses the definition and functions of a real estate market;
the special characteristics of real estate as an economic good; the factors that affect
the value of real estate; and the demand and supply factors in real estate market. This
part is largely based on Assessors Handbook (Basic Appraisal, 2002). Each of these
topics is discussed below.
2.1 Definition and functions of real estate market
The real estate market can be defined as the interaction of individuals who exchange
real property rights for other assets, such as money. The study of a real estate market
should include all factors of supply and demand that affect the price and quantity
traded of the property. Real estate markets may be classified in several ways by:
(1) Geographic area: Real estate markets are often defined by broad geographic
boundaries, because the value of most real estate, due to its immobility, is strongly
influenced by local market forces. For example, one might refer to the real estate
market in Dubai or the market in Dubai Business Bay Area. A neighbourhood is an
example of a highly focused, geographically defined real estate market in which all
properties are subject to common value influences.
(2) Property type: Real estate markets may also be defined by the property type
traded. Real estate markets are often broadly described in terms of commercial,
industrial, agricultural, or residential market segments, each representing a broad type
of property. In turn, each of these broad property types may comprise several
subtypes. For example, the commercial category may include office and retail
properties, while the residential category includes single-family residences,
apartments, condominiums, and other subtypes.
(3) Scope of prospective market participants: Real estate markets may also be defined
by the scope of their participants. While the buyers and sellers of most houses reside
in the community in which the property is located, the buyers and sellers of some
properties, such as large office buildings and industrial properties, may be individual
3

investors or financial intermediaries from far outside the local area. Some properties
trade in markets that are regional, national, or even international in scope.
The real estate market performs functions similar to those performed in other
competitive markets. In particular, the real estate market:
(i) Establishes real estate price: Price is established in a competitive market through
market transactions. Price is established through the interaction of demand and
supply, and it responds to the forces affecting market demand and supply.
(ii) Distributes existing real estate resources among potential users: Real estate
resources are distributed, or allocated, among potential users through the price
mechanism. In a free, competitive market, real estate is allocated based on the ability
to pay, either in the form of rent or purchase price.
(iii) Contracts/expands real estate supply in response to changing market conditions:
In the real estate market, producers, i.e. developers, respond to increased demand, as
signalled by higher purchase prices/rents, by increasing the supply of real estate
through either remodelling or new construction. With a decrease in demand, the
opposite occurs. The market mechanism also allows a change in the character of
demand to bring about a change in the character of supply. For example, if there is
increased demand, as reflected in higher prices, for homes with three bathrooms,
developers will respond by constructing a greater quantity of homes with three
bathrooms. Supply thus reflects the wants and desires of consumers.
(iv) Determines land use: in a free market, competitive bidding among buyers and
sellers determines the utilization of each parcel of real estate. In general, the most
productive use of a parcel of land, subject to legal and physical constraints, will
prevail over other competing uses. This use, which is determined by market forces, is
referred to as a property's highest and best use. In the long run, this process of land
use determination at the parcel level also determines the patterns of land use over
much wider areas.

2.2 Special characteristics of real estate

Real estate has special characteristics that distinguish it from other economic goods.
These characteristics are namely:
(i) Immobility: real estate is immobile, i.e. it cannot be separated from its location. In
other words, real estate cannot be moved to a better market. Its value is closely related
to the current and future economic prospects of the community/neighbourhood in
which it is located. The immobility of real estate means that the value of a given
parcel of land is strongly affected by factors outside its boundaries. These factors
include the uses that are made of neighbouring parcels; the availability and quality of
off-site improvements or infrastructure (e.g., water, sewer, utility, and transportation
systems); and the quality of public services, including schools and police and fire
protection. All of these off-site factors exist outside of a particular parcel of real
estate.
(ii) Uniqueness: Each parcel of real property is unique, which often makes
comparison with other parcels difficult. For example, residential properties with
desirable views or water front may sell for much more than otherwise comparable
properties that lack such attributes, even if the properties are in close proximity.
Similarly, a house on a busy street may sell for significantly less than the same model
on a quiet street.
(iii) Durability: The durability of real property is apparent. New structures usually
have a long life expectancy, and land exists in perpetuity. Thus, real property yields
benefits over a long period of time.
(iv) Large transaction size: A characteristic of real estate related to its durability is its
large average transaction size. For most people, a home is their largest investment,
and investment-type properties typically require even larger outlays. The economic
size of most real estate transactions creates, in most cases, a large financing
requirement. Therefore, the cost and availability of financing has a strong effect on
the real estate market.
(v) Long development or production period: From conception to completion, real
estate projects often take years to complete. From a market standpoint, this means that
the supply of real estate is typically slow to adjust to an increase in market demand.
5

An increase in demand often results in rapid price increases in the short run.
Similarly, the supply of real estate is also slow to adjust to a decrease in market
demand. A significant decrease in demand leads to price decreases.
Thus, the real estate market departs significantly from the ideal of a purely
competitive market, largely due to the characteristics of real estate discussed above.
Specifically, in the real estate market:
(i) The product is differentiated. Each real estate parcel has special physical
characteristics and a unique location. This makes comparable sales and other data
difficult to obtain for some types of properties.
(ii) Buyers and sellers often have unequal information. Some buyers may not be fully
aware of the forces and trends which affect the value of and the full potential of a real
estate parcel. Complete information about all transactions is hard to obtain,
particularly for commercial and industrial properties.
(iii) There is long lead time for planning and building. This delays the supply
response to an increase in demand. In a perfectly competitive market, supply and
demand are rarely far out of balance. The long life of most building improvements
also means that supply cannot be reduced with a decrease in demand.
(iii) The large financing requirement for most real estate means that both real estate
demand and supply are significantly affected by credit conditions. The level of
interest rates affects the demand for real estate and real estate value. Interest rates also
affect the supply of real estate through the impact on new construction.
Table 2.2.1 below compares the characteristics of a typical perfectly competitive
market and a typical real estate market. The fact that a typical real estate market is not
perfectly competitive does not mean that the principles of supply and demand do not
work in the real estate market. On the contrary, supply and demand are still important
factors influencing the value of real estate, but the fact is that they work differently in
real estate market. In a perfectly competitive market, supply and demand react quickly
to changes in market conditions. However, in a real estate market supply is effectively
fixed in the short run and therefore cannot respond quickly to changes in market
conditions.

Table 2.2.1: Perfect market versus typical real estate market

Characteristic
Number of buyers and sellers
Product knowledge and market exchange

Perfect market

Typical real estate market

Many participants; no monopoly, oligopoly,

Few participants; seller controls during a sellers market and

or monopolistic competition.

buyer controls during a buyers market.

Buyers and sellers are highly

Buyers and sellers are not always knowledgeable; the

knowledgeable; the exchange takes place

exchange is legalistic, complex and expensive.

with ease.
Standardized products

All products are alike and interchangeable;

Each parcel of real estate is unique and separate from all

there is little difference between products of

others; now two are exactly alike.

different sellers.
Mobility

Products can be transported to capitalize on

The location is fixed; a real estate parcel cannot be moved to

more lucrative markets.

another more profitable location; a real estate market is local,

not regional or national.

Size and frequency of purchase

The item purchased is small and relatively

Real estate is purchased infrequently (rarely more than four or

inexpensive; it is purchased frequently.

five times in a lifetime); a home represents the largest single

investment made by the average family.

Government role

Government plays little role if any role;

Government plays a dominant role in encouraging or

laissez-faire prevails.

discouraging real estate development through the use of fiscal

and monetary tools and by use of other controls such as
zoning, environmental and health codes.

Prices

Prices are established by the smooth action

Prices are influenced by the interaction of supply and demand,

of supply and demand.

but this interaction is not smooth; a lack of knowledge by

either the buyer or seller can distort the prices paid.

Source: Mckenzie D. and R. Betts (2006), Essentials of Real Estate Economics, Thomson South West.
7

2.3 Factors affecting the value of real estate

Real estate markets at the neighbourhood, community, regional, and national levels
are subject to factors that affect demand and supply. The dynamic interaction of these
factors creates trends in the real estate market. These factors can be classified into
four main categories:
(i) Physical: Physical or environmental factors are the most noticeable because they
can be observed. On a macro level, these factors have played a large part in the
location of cities. On a micro level, their influence is felt down to the individual
parcel. Physical and environmental forces are either natural or man-made. Important
natural factors that affect real property value are topography; soil; climate; natural
resources such as water; scenic beauty or view; and flood or earthquake zones.
Important physical factors are the size and shape of a parcel; infrastructure; and the
accessibility of the parcel to other desirable destinations such schools, commercial
areas, recreation areas, employment centres, etc.
(ii) Demographic: Demographic factors are exerted primarily through the
characteristics and customs of people. Examples of these factors are general
population trends; attitudes toward household formation (e.g. living alone or with
others, having children, etc.); household characteristics (e.g., family size and age
groupings, etc.); changes in lifestyles and living standards; neighbourhood
characteristics; and attitudes of people toward government, property development,
ecological issues, and education.
(3) Economic: Economic factors strongly affect city growth or decline and therefore
property values. Examples of demand factors are trends in employment and income;
the availability of financing; the level of interest rates; and trends in a community's
economic base (e.g. industrial expansion or contraction). Examples of economic
factors that affect supply are the availability of vacant and improved properties; rental
and price patterns of existing properties; construction planned or in progress; and
construction costs.

(4) Governmental: These broadly include political decisions made by all levels of
government and by the courts. The demand for and supply of real estate, and hence its
value, are strongly influenced by governmental actions and controls. Governmental
influences

include

zoning

and

building

codes;

development

regulations;

environmental regulation; police, fire, and health protection; the construction of

physical infrastructure (e.g., utilities and transportation networks); and public school
systems. Specific legislation, such as rent control, may influence real estate markets.
Federal monetary policy and federal and emirate fiscal policies also influence real
estate markets.

2.4 Demand and supply factors in real estate markets

The determinants of demand and supply are those factors within a defined real estate
market that cause demand and supply to shift and lead to price changes. The primary
determinants of real estate demand are population, income, buyers' tastes and
preferences, price changes of other goods, the cost and availability of financing, and
the expectations of buyers about the future. The major three determinants of demand
are population, income, and availability of financing:
(i) Population: It is important not only in terms of its size, but also in terms of its
demographics such as age distribution, educational status, and size of household.
Equally important is the fact that population moves or migrates. Changes in
population are most often tied to employment opportunities. Increases or decreases in
population strongly influence real estate values.
(ii) Income: A growing level of income increases the demand for real estate, while a
declining level of income decreases demand. Income growth creates business
expansion and increased demand for commercial real estate. An increase in household
income increases the demand for residential real estate.
(iii) Availability of financing: Since most real estate transactions require a significant
level of financing, demand for real estate is strongly affected by the cost and
availability of financing. A significant increase in borrowing costs may slow down
demand. Because real estate markets are largely local, changes in population and

income are often more influential at the local or regional level than at the national
level. When income and population are increasing in a community or region, the
demand for real estate increases and values also tend to increase.
The primary determinants of real estate supply are the costs of production inputs, cost
of financing, advances in technological know-how, and expectations regarding future
demand:
(i) Costs of production inputs: Increases in the cost of production inputs reduce the
quantity of real estate supplied at a given price. Real estate production inputs include
land, labour and materials. If land is not available at a price that permits a profit, then
development cannot occur. Moreover, land is not useful for development unless a
suitable infrastructure is in place.
(ii) Cost of financing: The availability and cost of financing is a significant
determinant of supply as well as of demand.
(iii) Technological know-how: Advances in technological know-how affects the cost
of production. Advances which decrease costs tend to increase the quantity supplied.
(iv) Expectations: The expectation of developers regarding future demand is the
single most important determinant of supply. If developers are optimistic about future
demand, then the quantity supplied tends to increase and vice versa. Developer
expectations typically derive from forecasts regarding national, regional, and local
economic activity.
In part 3 and part 4 that follow, the factors of supply and demand are discussed in the
case of Dubai real estate market in recent years.

10

3. Supply of Dubai Real Estate

In Dubai, there are two real estate providers and these are namely the government and
the private sector. At first, the government was the sole provider of the real estate
(development), but through the time it passed this role to the private sector. At the
moment, the private sector is carrying out huge real estate projects. Part of these
projects was completed and the other part is planned for the short, medium and long
terms.

3.1 Government
The buildings under the control of Dubai Municipality are divided into three types.
These are namely villas and residential complexes; multi-storey commercial
buildings; and industrial recreational and service buildings. The total number of
completed buildings in Dubai increased by 16 per cent during the period 2000 2006
from 1,917 buildings in 2000 to 2,222 buildings in 2006. Villas and residential
complexes increased by 30.4 per cent during the period 2000-2006, but they
decreased by 6 per cent in 2006 from the previous year. The number of completed
industrial, recreational and services buildings declined by 16 per cent during the
period 2000-2006. However, they increased by 6 per cent in 2006 as compared to
2005. On the other hand, the completed multistorey commercial buildings increased
by 15.5 per cent during the period 2000-2006. Please refer to table 3.11.
Table 3.1.1: Completed buildings in Dubai, 2000-2006
Year

Villas & Residential

Complexes

2000

Multi-storey

Industrial, Recreational,

Total

Commercial
Buildings

& Services Buildings

1,098

330

489

1,917

2001

1,672

355

418

2,445

2002

1,558

412

289

2,259

2003

1,112

423

348

1,883

2004

1,436

393

290

2,119

2005

1,529

337

386

2,252

2006

1,432

381

409

2,222

Source: Dubai Municipality

11

In 2006, the total value of building projects under the control of Dubai Municipality
amounted to AED 11.2 billion. 22.2 per cent of this were used for the residential
purposes (Villas and Residential complexes), 43.2 per cent were used for Multi
storey commercial buildings, and 34.6 per cent were used for industrial recreational &
service buildings. Table 3.1.2 below shows the number of the buildings under the
control of Dubai Municipality and still under construction. The number increased by
11 per cent in 2006.
In 2006, the total number of completed flats within the buildings projects, under the
control of Dubai Municipality, was 14,889. While the flats under construction were
175,638.

Table 3.1.2: Under Construction Buildings in Dubai, 2005-2006

Multi-storey

Year

Villas &
Residential
Complexes

Commercial
Buildings

& Services Buildings

2005

15,386

3,079

2,851

21,316

2006

17,342

4,270

2,017

23,629

Industrial, Recreational,

Total

Source: Dubai Municipality

According to General Population Census, Housing and Establishment 2005, the total
number of housing units in Dubai totaled 205,518 units. 69 per cent were flats, 21 per
cent were villas, 8 per cent were Arabic houses, and 2 per cent were other types.

Table: 3.1.3: Housing units in Dubai by type

Type of housing unit

1993

1995

2000

2005

Flat

60,099

68,384

95,542

141,205

Villa*

15,033

16,200

21,290

43,424

Arabic house

14,959

15,181

13,455

15,930

Popular house**

3,959

4,002

4,397

Others

11,304

7,955

10,679

4,959

Total

105,354

111,722

145,363

205,518

Source: Statistic Center of Dubai

* includes villa supplements

** includes popular house supplements

12

It should be noted that the government has direct involvement in initiating real estate
developments. It is particularly active in the case of low income housing. For
instance, the government has initiated a housing programme1 for the UAE nationals,
which involves AED 8 billion to be spent in the next four years. Land will be granted
and a loan worth US$200,000 would be given at minimal interest for tenure of 25
years.

3.2 Private sector

The government of Dubai has established partly privately owned real estate
companies. The major companies (developers) are Emaar, Nakheel and Dubai
Properties. These developers are the major beneficiaries of the governments decision
to pass its responsibilities within the real estate sector. These companies receive land
from the government at subsidized rates.
The changing behavior of the tenants and the businesses in renting an apartment to
buy it has pushed the developers to use the pre-selling methods in providing new
properties. This behavior put the developers into pressure to provide more residential
units in order to meet the increase in the demand side. The availability of the property
selling and buying finance in addition to the property new law that allow expatriates
to own properties in Dubai has resulted in a dramatic increase in residential property
both supply and demand especially in the construction of high end properties. On the
other hand, this situation causes the problem of the lowend apartments which
affected a wide range of population. The high land prices and construction material
prices are the major reasons behind the shortage of the low end real estate
developments.
Most of the major projects had been initiated during the last two years, which means
that there are a number of large projects to be delivered in the medium and long
terms.

UAE Real Estate Sector, Global investment House, June 2006

13

3.4 Residential units supply in Dubai

The primary determinants of real estate supply are the costs of production inputs, cost
of financing, advances in technological know-how, and expectations regarding future
demand.
Increases in the cost of production inputs reduce the quantity of real estate supplied at
a given price. Real estate production inputs include land, labour and materials. If land
is not available at a price that permits a profit, then development cannot occur.
Moreover, land is not useful for development unless a suitable infrastructure is in
place.

3.5 Land prices

Land prices are one of the major factors behind the increase in the cost of real estate
developments in Dubai beside the cost of the construction materials and the
machinery costs. There are many reasons for the land prices to increase such as the
infrastructure provided and the land location.
According to data released by Dubai Land Department, there are two prices for land
per area. That is, the lower and higher prices. The lower price indicates the lowest
price a land been sold at in a specific area. The higher price indicates the highest price
a land has been sold at in the same area, keeping in mind the differences in the
features of each land.
During the period 2002 2006, the higher price seems to remain unchanged and no
changes had happened for the top areas that witnessed more sales transactions. On the
other hand, the lower price had increased almost in all top active areas except
Alnahda Second Area (refer to figure 3.5.1).

14

Figure 3.5.1: Land lower price by area, 2002- 2006

350.00

AED per square foot

300.00
250.00
200.00
150.00
100.00
50.00

Y2002

A
lM

hi
rd
ez
ha
rS
ec
A
on
lM
d
ez
h
ar
M
uh
Fi
rs
ai
t
sa
na
h
A
Th
lN
ird
ah
Em
da
Se
ira
co
te
sH
nd
ill
Em
sS
ec
ira
on
te
d
sH
ill
sT
hi
N
rd
ad
A
lS
hi
ba

ar

ar
qa
T

lW

A
lH
am

Th
ird
N

ar
sh
a

A
lB

ad

t
Se
co
nd

irs
aF

ar
sh
a

lB

ar
sh
A

lB

M
ird

if

0.00

Y2003

Y2004

Y2005

Y2006

Source: Dubai Land Department

During the period 2002 2006, the land lower price had witnessed a huge increase in
a wide range of different areas in Dubai. Table 3.5.2 below shows the cumulative
annual growth rate (CAGR) of price per area.

Table 3.5.2: CAGR of land lower price by area during 2002-2006

Area
Emirates Hills Third
Nad Al Shiba
Nad Al Hamar
Al Barsha Third
Al Barsha Second
Mirdif
Al Warqa Third
Al Mezhar Second
Muhaisanah Third
Al Mezhar First
Al Barsha First
Emirates Hills Second
Al Nahda Second

CAGR
196.79%
151.49%
120.30%
117.77%
104.40%
58.11%
47.65%
40.04%
39.62%
37.47%
30.68%
0.04%
-11.46%

Source: Dubai Land Department

15

It is clear from the above table that the land price in the Emirates Hills Third area
increased by a CAGR of 196.79 per cent during the period 2002-2006. It is followed
by Nad Al Shiba with a price increase of a CAGR of 151.49 per cent. Then Nad Al
Hamer with a CAGR of 120.30 per cent.
Al Nahda Second area is the only decreasing area in the lower price for the year 2006.
However, it witnessed and increases during the period 2002-2005 with a CAGR of 36
per cent, but it dropped in 2006 by 85 per cent.

3.6 Construction materials

During the last few years, most of the construction materials have witnessed great
fluctuations in production, consumption and mostly its price. Such price fluctuations
had affected a wide range of businesses such as the contractors, and real estate
developers.
The major problematic construction materials are steel, cement, aluminum and wood.
Through January to August 2006, stainless steel HR coils 316 prices increased by 44
per cent from US$ 4,000 in January to US$ 5,750 in August.
Cement price increased during the period 2002 2003 by 30 per cent while it
increased by 60 per cent during 2003 2004, however it decreased in 2005 but again
increased in 2006.
According to construction materials traders in Dubai, wood price increased by 23 per
cent in August 2006 over the average price in 2005.

3.7 Cost of financing

The availability and cost of financing is a significant determinant of supply. Real
estate financing has developed in the UAE over the past few years. It plays a major
role in supporting real estate developments, which comprises the construction of
commercial and residential multi-storey buildings. Amlak was an early leader,

16

followed by Tamweel. Commercial banks also entered the market, and all these
sources of finance offer their customers a wide variety of innovative finance products
that are compliant with Sharia, i.e. Islamic law.
Competition in the financial market had brought new facilities to the real estate
developers in terms of low interest rates, long payments periods and other payments
facilities.

3.8 Technology and innovation

Advances in building technological know-how affect the cost of construction.

Advances which reduce construction costs tend to increase the quantity supplied of
finished buildings. The evolution of the new technology in construction and that of
information technology are changing dramatically the way the real estate developers
do business. It helps in providing quality buildings with low cost and improves the
sales. Some of the developers mentioned that they are seeking quality substitutes to
the major problematic construction raw materials, such as cement and steel, in order
to reduce their cost.

3.9 Expectations
The expectations of developers regarding future demand for real estate is the single
most important determinant of supply. If developers are optimistic about future
demand, then the quantity supplied tends to increase and vice versa. Developer
expectations typically derive from forecasts regarding national, regional, and local
economic activity.

According to the comprehensive statistical surveys of Dubai in the years 1993 and
2000 and the Ministry of Economy census of the year 2005 and Dubai general census
of population and housing in 2005, the total number of housing units increased by 41
per cent during the period 2000-2005; from 145.4 thousand units to 205.5 thousand
units indicating the growth of the residential properties in Dubai. The number of villas

17

increased by almost 100 per cent, while the flats increased by 48 per cent during the
same period.
The decision to allow non-Gulf citizens to purchase freehold property in certain areas
has also played an important role in increasing the demand and supply too. By
allowing freehold ownership, Dubai government hopes to attract more skilled
professionals to stay in the Emirate. The Emirate is an attractive and competitive
place for a second holiday home, particularly for the Europeans (i.e. high income
people). Table 3.9.1 below shows the planned projects under construction that will be
completed during the coming five years. During this period, around 131 thousand
units will be supplied by the major market players while in the long run there are a
number projects that will be concluded till the year 2020 and these projects will
provide a large number of units (for example, Dubai land and the water front
projects). But some of these housing units may not be delivered on time due to
different factors and this may affect the supply.

Table 3.9.1: Residential units planned by the major developers in Dubai, 2006
Developer

Units number

Dubai properties

Expected supply Project name

3400

2008

Dubai land phase1

Emaar

14,000

2008

Dubai marina

Nakheel

4,900

2006

Jumeirah palm

Nakheel

8,000

2009

Palm Deira

Nakheel

6,400

2008

Palm Jebel Ali

Nakheel

15,000

2006

Jumeirah island

Nakheel

5,000

2006

Jumeirah lake towers

Nakheel

21,000

2006

International city

Nakheel

25,412

2006

Gardens of discovery

Nakheel

6,067

2006

Jumeirah village

840

2007

Green community west

21,000

2012

Festival city

Union properties
Futtaim group
Total

131,019

Source: Companies websites

18

Most of the new residential units will enter the market in the year 2008, and around
75 per cent of these units will be provided by the large developers, primarily Nakheel,
Emaar and Dubai Properties, so it is expected to be delivered on time.

Figure 3.9.2 below shows the annual flow of housing units that will be delivered to
the market during the period 2006 2010. It has been forecasted based on the number
of projects announced by the major developers. During the period 2006-2010, the
flow forecast of Dubai housing units is expected to reach 270 thousand units,
assuming that the announced projects will be delivered on time and no new projects
will be developed.

Figure 3.9.2: Housing units supply flow forecast, 2006 2010

160,000
148,949
140,000

120,000

100,000

80,000
66,779
60,000

40,000

20,000

29,940

10,909

13,423

2006

2007e

0
2008e

2009e

Source: DCCI market forecasts; EFG-Hermes, Dubai Real Estate sector, 2006

19

2010e

Table 3.9.3: Major new projects in Dubai, 2007 (value in billion dollars)
Project Name

Value

Limitless - Downtown Jebel Ali

Al-Murjan Real Estate - Community Development
Government of UAE - Inter-Emirates Rail Network
Emirates German Group - Dolphin City
Investment Dar/ Efad Holding - Oqyana
Al-Hanoo Holding Company - Nujoom Islands
IFA - Kingdom of Sheba (Palm Jumeirah)
Dubai Properties - Business Bay
Bait al-Khidmat - Infrastructure Works (Al-Reem Island)
Benaa Developments - Golf City (Dubai land)
Mizin (Tatweer) - Arjan
RTA - Dubai Metro System (Blue Line)
RTA - Dubai Metro System (Purple Line)
Al Sharq Group - Aqua Dunya (Dubai land)
High Rise Real Estate - Emirates Flag
Tatweer - Bawadi (Dubai land)
Mizin - Majan(Dubai land)
R Holdings - Emirates City
Elite Holding - AutoPolis Scheme Project
Dubai Properties - Tijara Town (Dubai land)
Emirates Sunland Group - White Bay
Fortune Group - Burj al-Alam Tower (Business Bay)
Al-Hashemi Group/ Al-Salem Group - Dubai Mountain City
Tanmiyat - Living Legends & Trade Legends (Dubai land)
Pearl Properties/ Aristocrate Holdings - The Palisades(Dubai Investments Park)
Others
Total projects in Dubai

$1,350

Source: MEED project database, available at www.meedprojects.com

20

$4,000
$2,500
$1,700
$3,500
$5,000
$1,000
$5,500
$4,000
$1,800
$5,000
$1,000
$1,000
$1,900
$1,900
$10,900
$4,100
$4,000
$2,000
$1,635
$2,200
$1,100
$3,400
$2,000
$3,500
$23,477
99,462

4. Demand for Dubai Real Estate

As we have seen in part 2, the primary determinants of real estate demand are
population, income, the cost and availability of financing, buyers' tastes and
preferences, and the expectations of buyers about the future. Each of these factors is
discussed below in the case of Dubai.
4.1 Population
For the last 30 years (1975-2005), the population of Dubai has grown by a cumulative
annual growth rate (CAGR) of 6.9 per cent. This rate is calculated using actual
population census data that was gathered during this period of time. This population
growth rate is used to extrapolate from the population size in 2005, which is 1.321
million, into the near future. Thus in 2006, Dubai population is estimated to be 1.413
million, using this procedure. By the year 2010, Dubai population is projected to be
1.845 million, given Dubai historical growth rate of the population. Please refer to
figure 4.1.1 below.

Figure 4.1.1: Poulation of Dubai during 1975-2010

(in million person)
1.845

Million person

2.0
1.5
0.862

1.0
0.5

1.321

0.371
0.689

0.183
0.276

0.0
1975

1980

1985

1995

2000

2005

2010

Source: Based on historical data from Dubai population censuses and authors projection

Therefore, Dubai population is expected to increase by 0.432 million people between

2006 and 2010. This gives an annual increase of 0.108 million during a period of 4
years. The later figure can be used to calculate the number of new residential units
that will be needed to accommodate the annual increase in Dubai population. In other
21

words, the additional demand for residential units. If Dubai is benchmarked against
EU countries such as Austria and Belgium, then a residential unit accommodates 2.5
persons. The number of persons per unit is obtained by dividing the number of
occupants by the number of occupied residential units2. Then 0.108 million people
will need 43,233 additional residential units annually to accommodate them. EGFHermes estimate is very close to this one, which is some where in the range of 40,000
to 50,000 housing units annually (EFG-Hermes, 2006).
It is possible to further promote the demand for real estate by encouraging more
population to come to Dubai, whether as investors, business travellers, employees,
tourists, attending events and conferences and for health and education purposes. To
do this, more liberalization and simplification of laws, rules and measures are
necessary in the following areas: (i) immigration and residence laws and procedures
(ii) labour laws and procedures (iii) business and commercial laws and procedures (iv)
real estate and tenancy laws and procedures (v) administration of courts and
dispensing of justice. The implementation of these measures is expected to sustain the
impressive historical growth of Dubai population and may even increase it further if
the people become confident of the system and its rules of the game.

4.2 Income
Income is an important determinant of real estate demand. Table 4.2.1 below shows
Dubai gross domestic product (GDP), population and per capita income in real terms.
GDP is measured in million AED (in constant prices of 2000) and population is
measured in million persons. During the period 2000-2006, GDP grew by cumulative
annual growth rate (CAGR) of 13 per cent in real terms while population grew by
CAGR of 9 per cent. Therefore, real per capita income grew by CAGR of 4 per cent
during this period. This is an impressive income growth that has positive implications
for real estate demand in Dubai. Similar trends in real per capita income growth are
found for UAE and other GCC countries.

UN Human Settlements Statistics

http://unstats.un.org/unsd/demographic/sconcerns/housing/comp2001/table03.pdf

22

Table 4.2.1: GDP, population and per capita GDP (constant prices)
GDP
Population
GDP per capita

2000
62,335
0.862
72,282

2001
65,669
0.910
72,137

2002
77,091
0.961
80,223

2003
88,766
1.014
87,508

2004
104,772
1.071
97,847

2005
116,879
1.321
88,447

Source: Dubai Economic Department

For the future, Dubai Strategic Plan (DSP), which was recently announced by Dubai
government, has projected 11 per cent annual real GDP growth during the time frame
of the strategy 2007-2015. If Dubai long term population growth rate of 7 per cent,
which is based on its historical trend for the last 30 years, is coupled with the DSP
projected growth rate of real GDP of 11 per cent, then this gives a real per capita
income growth rate of 4 per cent during the years of the strategy. Therefore, the past
trend of per capita income growth is expected to be sustained into the coming years.
This is good news for the real estate market. Most of this income growth accrues to
the upper and middle income groups who are the primary targets of the real estate
developers. Their rising purchasing power is expected to fuel the demand for real
estate.

4.3 Cost and availability of financing

There are two types of players in Dubai real estate financing market. First, there is the
group of the specialized real estate mortgage financing companies such as Amlak and
Tamweel who offer a number of real estate financing products. Second, there is the
group of commercial banks who are also engaged in mortgage financing by offering
different mortgage financing products and these are about 10 to 12 banks according to
the estimate of some observers.
These two groups of real estate mortgage providers have been offering a variety of
mortgage products that strive to meet the needs of the different customers. The
mortgage financing options are available for both UAE nationals and residents with
loan maturity period up to 25 years and loan-to-value mortgage that can be up to 100
per cent by some real estate financing companies. The mortgages rates are directly or
indirectly linked to the US interest rate due to the fixed beg of the UAE Dirham to the
US Dollar and therefore UAE monetary policy follows closely that of the US. During
the last years, the US interest rate has been relatively low and consequently the cost of

23

mortgage financing. Aided by the availability of mortgage financing and its

reasonable cost, the demand for real estate has been given a push.
Table 4.3.1 below shows the real estate mortgage loans extended by both the UAE
national banks and foreign banks operating in UAE during recent years. During the
period December 2004 and December 2005, the real estate mortgage loans for all
banks increased by a cumulative monthly growth rate (CMGR) of 4.5 per cent. And it
increased by CMGR of 5.5 per cent during the period September 2005 and September
2006. This is a clear indication of the availability of real estate financing for those
who are contemplating buying real estate in Dubai.
Table 4.3.1: Real estate mortgage loans (million AED)
2004
2005
2006
December September December
July
August
National banks (a)
9,711
13,845
15,388
23,627
23,955
Foreign banks
893
1,371
1,836
2,487
2,647
All banks
10,604
15,216
17,224
26,114
26,602
Source: UAE Central Bank Statistical Bulletin, Quarterly July-September 2006.
(a) Excluding overseas branches of national banks

September
24,194
3,113
27,307

Table 4.3.2 below gives the unweighted average interest rates of banks on personal
and business loans. Figures from the literature on Dubai real estate financing (EFGHermes 2006, Colliers 2006) indicate that the real estate loans belong to the business
category rather than the personal one. Figures from the literature show that
commercial banks charge a rate in the range of 7 to 8 per cent while mortgage
financing companies (such as Amlak and Tamweel) charge a rate in the range of 8 to
9 per cent, depending on the loan tenure and on whether the rate is floating or fixed.
From table 4.3.2, it is obvious that the cost of real estate financing is cheaper relative
to personal consumption loans. This is because it is collateralized by the property.
This relatively low cost of financing has fuelled the demand for real estate in Dubai.
Table 4.3.2: Average interest rates on personal and business loans (%)
Personal
Business

2005
11.44
7.19

April
2006
11.81
8.37

May
2006
11.55
8.03

June
2006
11.55
7.96

July
2006
11.78
7.98

August.
2006
11.82
8.00

September
2006
11.66
8.08

Source: UAE Central Bank Statistical Bulletin, Quarterly July-September 2006.

The demand for real estate can be further promoted if the availability and cost of real
estate financing are further enhanced. Further opening up and liberalization of
24

mortgage financing markets is expected to promote competition in this market and

therefore bring more financial resources for lending and encourage more product
innovations that cater for the different needs of the customers. The competition is
expected to render the cost of financing and its conditions affordable and therefore
entice more people to be involved in the real estate market as investors and/or buyers.

4.4 Tastes and preferences

The buyers tastes and preferences for buying a house in Dubai is obvious from the
number of the people who live in Dubai, being UAE nationals, GCC nationals, other
Arab nationals, Asians, Africans, Europeans, Americans, Australians, etc. A city with
more than 100 nationalities is a clear indication that people of different nationalities
and backgrounds prefer to work and live in Dubai and have taste for Dubai life. This
is in addition to those who just come for doing business, tourism, conferences, sports
events, etc. Therefore, peoples preference for Dubai and its taste of life has been
growing over years and has been reinforced and strengthened every day by the rapid
economic growth of the Emirate and the opportunities that it provides.
If the number of Dubai hotel guests and hotel apartments guests is taken as an
indicator of preference for Dubai life, then figures 4.4.1 and 4.4.2 show a clear
preference for Dubai over time. The number of Dubai hotel guests increased by
CAGR of 13 per cent during the period 2000-2005 while the number of hotel
apartments guests increased by CAGR of 8 per cent during the same period. These
guests are coming from UAE, GCC countries, other Arab countries, Asian countries,
African countries, European countries, American countries and Oceanian countries. In
other words, they are coming from all over the world.

25

Figure 4.4.1: Number of hotel guests (in million)

5.3
4.7

5
Million guest

4.1

4.3

4
3

2.8

3.1

2
1
0
2000

2001

2002

2003

2004

2005

Source: Statistical Yearbook: Emirate of Dubai, October 2005 and November 2006

Thousand guest

Figure 4.4.2: Number of hotel apartments guests

(in thousand)
1000
900
800
700
600
500
400
300
200
100
0

866

584

562

2000

2001

649

638

2002

2003

696

2004

2005

Source: Statistical Yearbook: Emirate of Dubai, October 2005 and November 2006

The demand for real estate can further be promoted by further developing and
cementing the tastes and preferences of the people for Dubai. This can be done
through Dubai government aggressive promotional campaigns in other countries
through its Department of Tourism and Commercial Marketing and investment
promotion agencies. Successful promotional campaigns are expected to develop
26

peoples tastes and preferences for Dubai and the consequently the scramble for
Dubai.

5.5 Expectations about the future

The buyers expectations are an important determinant of demand. These expectations
are about real estate supply, laws and regulations, financing cost and conditions,
inflation, employment and economic policies, etc. If buyers are optimistic about the
future supply of real estate, then their demand tends to decrease at the present in the
hope that they may get better bargains tomorrow when the real estate market is awash
with supply. If they are pessimistic about the future of supply, then their demand
tends to increase at the present thinking that what they get now are better bargains and
fearing that they may not get them tomorrow when the real estate market is short in
supply. It seems that Dubai real estate market has been operating under the later
expectations scenario where people have the feeling that things will be running out
tomorrow and therefore have the urgency of buying now or never.
The same applies to the laws and regulations and financing cost and conditions of real
estate. Whenever people are optimistic about the future of the regulations and
financing cost they will wait and whenever they are pessimistic about them they will
act now.
On the other hand, the opposite is true for the buyers expectations about future
inflation, employment and economic policies. If they are optimistic about the future of
inflation, employment and economic policies they will act now and if they are
pessimistic about them they will wait and delay their decisions till tomorrow.
Therefore, the credibility of the government economic polices is extremely important
because people base their expectations and decisions on those policies.
Generally speaking, Dubai government economic policies and measures are credible
and the public have faith in them. One exception to this credibility is the inflation
issue. In the past, people were mistrusting the official inflation figures published by
the government because they did not reflect realities on the grounds as they saw and
experienced them daily. The officially published inflation figures were far from
realities and seriously underestimating the true inflation level simply because they
were not based on real data but rather based on wishful thinking and uneducated
guesses. People are interested in knowing the true inflation level because they need to
27

plan their income and spending. In the case of real estate buyers, they need to
correctly anticipate their financing cost based on inflation figures provided by the
government. Recognizing this need, DCCI has recently prepared a consumer price
index (CPI) for Dubai based on real field data and internationally accepted
methodology.
To create positive expectations which further promote demand for real estate, the
government needs to boost its economic policy credibility in fronts such inflation,
employment and economic growth.

5.6 Real estate market and changes in demand

In the short run, changes in the current values of real estate are a result of changes in
demand since supply is effectively fixed in the short run. An increase in demand will
reduce existing vacancies in real estate market. This reduction in vacancies will be
followed by an increase in prices and rents as more people bid for the fixed supply of
real estate. As prices and rents go up, a point is reached at which real estate
developers (i.e. investors) and contractors (i.e. builders) are motivated by the profit
potential to start new construction projects. As construction starts, the supply of real
estate increases gradually. Eventually, the increase in supply will overtake the
increase in demand and vacancies start to appear in the real estate market. As
vacancies rise, prices and rents start to fall gradually. Price and rent declines may not
be apparent at the beginning but instead they show up as rent concessions and
favourable seller-aided financing. With falling prices and rents, profits are squeezed
and/or disappear due to accelerating construction cost and falling real estate prices
and rents. With falling prices and rents, buyers and renters can now obtain good
quality and spacious space at no more cost and this may absorb the existing vacancies.
Otherwise, the continued vacancies may eventually force real estate owners to
abandon, foreclose and/or demolish them. The real estate market will remain in this
state until demand picks up again for one reason or another.
In part 5 that follows, these dynamics of supply and demand are applied for Dubai
residential real estate market. A dynamic model of supply and demand for Dubai real
estate market is used to forecast the future of the market and understand its dynamics.

28

5. Dynamics of Supply and Demand in Real Estate Market

This part of the study develops a dynamic supply and demand model for Dubai
residential real estate market. The real estate price plays an important role in the
adjustment process in this model. There is no single study on Dubai real estate market
that has tried before to explicitly bring together real estate supply, demand and price
and study how they interact over time. This gap on Dubai real estate market is filled
by this study.

5.1 Model description and calibration

This section describes the model and how it is calibrated. Please note that the supply
and demand in this section are flows and not stocks. In other words, they are the net
additions to supply and demand over time. This is because these supply and demand
flows are the ones that influence the price over time. The supply, demand and price
equations for Dubai residential real estate market and how they are calibrated are
shown below:

(1) Flow supply:

Qs = 10908 + P

(2) Flow demand: Qd = 36488 - P

(3) Price change P: Pt+1 = P + a*(Qd - Qs) = P+ 0.1*(25580-2P)
Where Qs is flow supply, Qd is flow demand, P is price and Pt+1 is price in the next
period. P is normalized to 1 in the base year 2006 so that the flow quantities of supply
and demand of the base year are reproduced by the model. Please note that the price
here is not an absolute value in Dirham, but it is an index. The parameter a assumes
the value of 0.1 to ensure the global stability of the model so that it converges to
equilibrium over time. The change in price P is taken as a function of excess
demand over supply, where a is a parameter that determines the speed of adjustment
between supply and demand (Shone, 2001). When there is excess demand, price rises
by proportion a of this excess demand. Similarly, if there is excess supply, i.e.
negative excess demand, price will fall by this proportion and will continue to fall
until market equilibrium is attainted. The value of a depends on the sensitivity of the

29

price to excess demand. If price is sensitive to excess demand then a will take a
higher value and therefore the market dynamics will take less time to restore market
equilibrium. If price is insensitive to excess demand then a will take a smaller value
and therefore the market dynamics will take more time to restore market equilibrium.
Therefore, it is expected that a relatively competitive real estate market to adjust very
fast while a relatively monopolistic one to take longer time to adjust. As it is shown
in table 2.2.1 in section 2.2 in part 2, the real estate market is by its nature less
competitive relative to other product markets. Therefore, the small value that the
adjustment parameter a assumes can be justified on this ground.
The above specification of demand and supply equations (1) and (2) gives an inelastic
demand and supply with respect to price; both have price elasticity of less than unity
in the base year. This specification does justice to the real estate market realities of
being less responsive in the short term. The data used to calibrate these equations are
actual figures and estimates using the best available data and recent figures from the
literature on Dubai real estate market.
The flow demand for residential units in the base year 2006 is estimated to be 36,487
units. This is calculated using the change in Dubai population between 2005 and
2006. In 2005, Dubai population was 1,321,453. Using Dubai long term population
growth rate (average for the period 1975-2005) of 6.90282 per cent gives a population
of 1,412,671 in 2006. Then the net population change between 2005 and 2006 is
1,412,671 1,321,453 =91,218 persons. This population flow is divided by the
number of persons per a standard household unit, which is 2.5 using the standards of
some EU countries such as Austria and Belgium (refer to section 4.1 in part 4). This
gives flow demand for residential units of 36,487 in 2006.
The flow supply of residential units in the base year 2006 is estimated to be 10,909.
This is calculated based on the estimate of EFG-Hermes for 2006. EFG-Hermes
estimated that about 10,000 residential units were added to the market in the first 11
months of 2006. This gives an average of 909 units per month in 2006. If we add the
909 units for the remaining month of December 2006, then the total of residential
units that were delivered to the market in 2006 was 10,909 units.

30

5.2 Model baseline scenario

Plugging the above mentioned values for flow supply and demand into equations (1),
(2), and (3) of the model and normalizing the price to unity in the base year 2006,
then the model is solved for a baseline scenario. Figure 5.2.1 below shows the
baseline solution of the model over time. The model baseline solution has reproduced
the flow supply and demand for residential units in Dubai in the base year 2006.
Please note that these are supply and demand flows and not stocks, that is, annual
changes in supply and demand of residential units. This model baseline solution
scenario is based on the current conditions in Dubai real estate market in terms of
population, income, cost and availability of mortgage financing, costs of production
inputs, state of technology, real estate regulations, tastes, preferences, and
expectations of buyers and sellers about the future. If these factors change over time,
then either supply or demand or both will shift and this will lead to price change. Such
possibilities are discussed in the next section under policy simulations.

Figure 5.2.1: Supply and demand in Dubai real estate market

39,000

Housing units

34,000
29,000
24,000
19,000
14,000
9,000
2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050
Demand

Supply

Source: Authors calculations

As figure 5.2.1 shows, there is excess demand in Dubai residential real estate market
and it takes time for the market to converge to equilibrium. The process of adjustment
works through the price increase. The price increase causes demand to fall and supply
to rise over time till they converge to equilibrium. Here, we can think of two

31

equilibrium points in time one is medium term equilibrium and the other is long term
equilibrium. The medium term equilibrium is defined here as that point in time where
there is an almost but not exact and complete convergence between supply and
demand in the market. The long term equilibrium is defined as that point in time
where there is an exact and complete convergence between supply and demand in the
market. According to these definitions, the medium term equilibrium is reached
around the year 2023 and the long term equilibrium is reached in the year 2052. For
the medium term equilibrium, the price has increased by CAGR of 10 per cent during
the period 2007-2023. For the long term equilibrium, the price has increased by
CAGR of 4 per cent during the period 2007-2052. If the government is looking for an
objective criterion for setting a rent cap, then the 10 per cent makes a lot of sense for
the medium term. The long term real estate price increase of 4 per cent is very
consistent with some EU countries rent cap such as the Netherlands. This means that
when Dubai real estate market becomes mature enough and reaches its steady state in
the long term, then the real estate annual price increase may just be covering the
annual inflation rate plus a small margin as real return on real estate investment. If it
is assumed that the inflation criterion for the members of the GCC monetary union
will be 3 per cent, just like that of the EU members, then 4 per cent annual price
increase will guarantees a real positive return of 1 per cent above the inflation rate.
It should be noted that if the market is relatively more competitive (i.e. the adjustment
parameter a assumes a relatively higher value), the market equilibrium between
supply and demand could have been reached much earlier than the time horizon
mentioned above. The time horizon of 2023 should not be taken literally, but it should
be understood to mean that the market dynamics will take time to adjust supply and
demand. Therefore, it is expected that it will take some time before Dubai real estate
market cools down. It is expected that the market will not cool down before at least 5
years from now, assuming that the government has done nothing to promote the
demand and supply of real estate. Any government policy measures that boost the
demand and supply of real estate are expected to keep the market momentum on and
push it further in time. This possibility is discussed below under policy simulations.

32

5.3 Policy simulations

If it is agreed that the baseline scenario of the model is a fair representation of Dubai
residential real estate market, then a number of policy simulations can be run to see
how the market reacts to policy shocks over time. These policy simulations are
demand shift, supply shift, combination of demand and supply shifts and promotion of
competition. As it is discussed in section 2.4 in part 2, the determinants of real estate
demand and supply are those factors within a defined real estate market that cause
demand and supply to shift and lead to price changes.

5.3.1 Demand shift policy

The first policy simulation that is run is a demand shift through pro-demand policy
measures. Please remember that in the baseline scenario of the model only the price
variable influences demand, assuming other variables are not changing. As we have
discussed in part 4, these other variables are population, income, cost and availability
of financing, buyers' tastes and preferences, and the expectations of buyers about the
future. These are called shift variables and change in any one of them leads to
increase in demand for real estate and this causes the demand curve to shift upward.
In this policy simulation, it is assumed that pro-demand government policy measures
to influence the shift variables has resulted in a 10 per cent increase in demand for
real estate. This is shown in figure 5.3.1 by the shift of the demand curve from the
green curve to the red curve, with supply remains the same. This means that the
excess demand is maintained over time and hence it will take longer time for the
market to converge to equilibrium. The policy lesson here is that if the government
would like to keep the heat in Dubai real estate market then demand boosting policy
measures are needed. Any policy measures that positively influence population,
income, cost and availability of financing, buyers' tastes and preferences, and the
expectations of buyers about the future will contribute to the increase in real estate
demand.

33

Figure 5.3.1: Demand shift simulation

39,000

Housing units

34,000
29,000
24,000
19,000
14,000
9,000
2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050
Demand

Supply

Demand shift

Source: Authors calculations

5.3.2 Supply shift policy

The second policy simulation that is run is a supply shift through pro-supply policy
measures. As we have discussed in part 2 section 2.4, the primary determinants of real
estate supply that cause the price to change are the costs of production inputs, cost of
financing, advances in technological know-how, and expectations regarding future
demand.
In this policy simulation, it is assumed that pro-supply government policy measures to
influence the determinants of supply have resulted in a 10 per cent increase in the
supply of real estate. This is shown in figure 5.3.2 by the shift of the supply curve
from the pink curve to the red curve, with demand remains the same. This means that
the supply catches up with the demand relatively faster (as indicated by the
convergence of the red supply curve and the green demand curve) than in the baseline
scenario (as indicated by the convergence of the pink supply curve and the green
demand curve) and therefore it takes shorter time for the market to converge to
equilibrium. The new medium term equilibrium is established at a lower price and a
higher level of trade relative to the baseline scenario. The new medium term
equilibrium is reached in a 5 year time shorter than the in baseline scenario. That is, it
is reached at the year 2017 in the policy simulation compared to the year 2023 in the

34

baseline scenario. The policy lesson here is that if the government would like to take
the heat out of Dubai real estate market and stabilize it then supply boosting policy
measures are needed. Any policy measures that positively influence the real estate
costs of production inputs, cost of financing, advances in technological know-how,
and expectations regarding future demand will contribute to the increase in real estate
supply.

Figure 5.3.2: Supply shift simulation

39,000

Housing units

34,000
29,000
24,000
19,000
14,000
9,000
2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050
Demand

Supply

Supply shift

Source: Authors calculations

5.3.3 Combination of demand and supply shifts policy

The third policy simulation is a combined policy of demand and supply shifts that are
shown in the previous two simulations. As we have seen in the demand shift policy,
the market does not converge to equilibrium, and my take a very long time to happen,
if it happens at all (refer to figure 5.3.1). In the supply shift policy, the equilibrium is
reached sooner than latter (refer to figure 5.3.2). The combined policy of shifting
demand and supply at the same time, takes an intermediate position and the
equilibrium is established somewhere between the demand shift and supply shift
(refer to figure 5.3.3). The combined policy medium term equilibrium is established
further in time and at both a higher price and a higher quantity compared to the
baseline scenario and the supply shift scenario. The policy lesson here is that if the

35

government would like to maintain the current momentum of Dubai real estate market
and push it further in time, then policy measures that promote both supply and
demand are needed. Any policy measures that will positively influence population,
income, cost and availability of mortgage financing, costs of production inputs, state
of technology, real estate regulations, tastes, preferences, and expectations of buyers
and sellers will contribute to this policy scenario.

Figure 5.3.3: Demand and supply shifst simulation

39,000

Housing units

34,000
29,000
24,000
19,000
14,000
9,000
2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050
Demand

Supply

Demand shift

Supply shift

Source: Authors calculations

5.3.4 Competition promotion policy
The fourth policy simulation is promotion of competition in Dubai real estate market.
As it is discussed in section 5.1, the speed of adjustment in real estate market depends
on the relative competitiveness of the market, as reflected in the value of the
adjustment parameter a. In this policy simulation, the value of the adjustment
parameter a is changed from 0.1 to 0.2 to reflect an improvement in the market
competitiveness. As it can be seen from figure 5.3.4, the market takes less time to
converge to the medium term equilibrium. In the baseline scenario, the market reaches
the medium term equilibrium in the year 2023 and in this policy simulation it reaches
the medium term equilibrium in the year 2014. That is, the adjustment time is reduced
by 9 years. This fast adjustment is brought about by a relatively higher price,
compared to the baseline, which checks demand and stimulates supply. The policy

36

lesson here is that if the government would like the supply and demand for real estate
in Dubai to catch up relatively fast, then policy measures that promote competition in
real estate market are needed. These policy measures are more opening up and
liberalization of real estate market, information disclosure, flexible land and real
estate regulations, and more liberalization of labour and capital markets, among
others.

Figure 5.3.4: Promoting competition in Dubai real estate market

39,000

Housing units

34,000
29,000
24,000
19,000
14,000
9,000
2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050
Demand

Source: Authors calculations

37

Supply

6. Conclusions
The primary objective of this study is to analyze the recent developments and the
dynamics of Dubai real estate market and shed some light on the outlook of the
market for the coming years. The study has developed a dynamic supply and
demand model for Dubai residential real estate market, in which the real estate
price plays an important role in the adjustment process.
The model results show that the market dynamics will take time to adjust supply
and demand. It is expected that Dubai real estate market will not cool down before
at least 5 years from now, assuming that the government has done nothing to
promote the demand and supply of real estate. Any government policy measures
that boost the demand and supply of real estate are expected to keep the market
momentum on and push it further in time.
The model results show that the real estate price has increased by CAGR of 10 per
cent in the medium term. In the long term, the price has increased by CAGR of 4
per cent. If the government is looking for an objective criterion for setting a rent
cap, then the 10 per cent makes a lot of sense for the medium term. The long term
real estate price increase of 4 per cent is very consistent with some EU countries
rent cap such as the Netherlands. This means that when Dubai real estate market
becomes mature and reaches its steady state, then the annual price increase will
just be covering the inflation rate plus a small margin as real return on real estate.
The model policy simulations show that demand boosting policy measures that
positively influence population, income, cost and availability of financing, buyers'
tastes and preferences, and the expectations of buyers about the future will
contribute to the increase in real estate demand. Supply boosting policy measures
that positively influence the real estate costs of production inputs, cost of
financing, advances in technological know-how, and expectations regarding future
demand will contribute to the increase of real estate supply. Policy measures that
promote competition in real estate market such as more opening up and
liberalization of real estate market, information disclosure, flexible land and real
estate regulations, and more liberalization of labour and capital markets will
increase the speed of adjustment in Dubai real estate market and hence the market
will take less time to adjust.

38

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Collier International (2006), Residential Market Overview: United Arab Emirates,
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Dubai Government (2007), Highlights: Dubai Strategic Plan 2007-2015, The
Executive Council, Dubai.
EFG-Hermes (2006) Dubai or Not to Buy: Dubai Real Estate, Dubai, 18 December
2006.
Mckenzie D. and R. Betts (2006), Essentials of Real Estate Economics, Thomson
South West,
Shone, R. (2001), An introduction to Economic Dynamics, Cambridge University
Press.
Statistics Center of Dubai (2006), Statistical Yearbook: Emirate of Dubai 2005,
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UAE Central Bank (2006), Statistical Bulletin, Quarterly July-September 2006.
United Nations Statistics Division (2001), Human Settlements Statistics, online at
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39