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Al Mazaya Report: Slump and recovery indicators should be the basis for setting the number of delivered units

Price drop will whet appetites for real estate units and thus increase investment

This week, the Al Mazaya Holding weekly real estate report covered the range of laws and regulations designed to govern the realty market, which are put in place to prevent bubbles and control negative practices, as well as to ensure that the real estate projects and units are sold at fair prices across the board.

As the supply and demand may vary in the region’s property markets, so too will the solutions vary from one market to another. While some markets in the region have managed to control the negative indicators, actions are underway in other markets to address issues that have come to light. All laws and regulations that are currently in place are continuously monitored to keep track of their positive impacts and to make any necessary amendments where they may not be working sufficiently.

Vacant properties

This week’s Al Mazaya Holding Real Estate Report states that one of the major challenges currently being faced in the market is the increasing number of vacant apartments in some of the regions. In the current state of recession driven by local and international financial and economic pressures, empty units make controlling the high selling and rental prices difficult. To regain control over the sale and rental market, it is necessary to control the unfair prices by supplying more units for sale and rent at fair market prices – this means that prices need to be reduced to enable new income groups enter the market and access properties at affordable prices.

The Al Mazaya report added that identifying viable solutions to control the number of vacant residential units in the region’s real estate market will positively impact all factions involved, as well as the market itself. Landlords and developers will receive fair prices for their units in all conditions, while property seekers will be able to buy or rent units at affordable prices.

Creating solutions will have a positive effect on the real estate market in terms of the level of liquidity, transparency and competition at the local, regional and international levels. This will better position the region’s markets to capture a larger portion of the total foreign investment, which seeks high returns. Success in this regard will depend on the industry’s ability to address the obstacles and challenges that exist in the markets from one business cycle to another.

Al Mazaya Weekly Real Estate Report said that there are no direct tools in place by authorities to put pressure on the owners of empty properties to offer their units in the rental market. Alternative options that are still available to control this situation include: imposing taxes on empty units or reactivating the cap on rental rise upon lease renewal.

Reasons behind the empty properties

The reasons behind the increase or decrease in the number of empty properties may vary from one country to another. Some property markets, like the UAE, have an accelerated pace of construction and regular entries of new projects to the market, enabling them to target all areas of local and foreign property seekers, attracting the attention and meeting all demand indicators. Most often, such markets have more empty units available for sale or rent. This situation is due to the accelerated pace of completion and delivery of ready-to-go units.

Abu Dhabi

Abu Dhabi’s real estate market has a higher level of empty properties, with an estimated 37% of the units available for lease standing vacant. The reason for the units remaining vacant is that real estate companies and landlords are controlling the market, choosing not to offer the vacant units for rent in order to keep the price levels up. To remedy the situation, a new real estate law in the emirate is expected to regulate the activities of real estate brokers and push over 25% of the existing brokers out of the market. Authorities plan to reduce unoccupied properties to only 8% by 2020.

Saudi Arabia

According to Saudi market data, the number of vacant residential units in the KSA real estate market is estimated at 12% of the total number of the ready-to-move-in residential units. This situation comes in a period of a continued housing crisis for the country, coupled with high selling and rental prices. This is  despite the availability of vacant residential units, which offer one of the quickest and most effective solutions when the fact that 60% of Saudi citizens live in rented apartments is considered.

The situation in Saudi Arabia is different from that of other property markets in the world, which may have high rate of empty residential units in period of economic downturn due to falling demand – in KSA, there is a good growth rate shown in the economic indicators. Therefore, it can be surmised that the primary cause for the housing crisis is the high costs of housing, which should be proportionate with income levels, particularly after the taxes imposed on undeveloped land plots. All market statistics show an increasing supply of residential units in all locations, with no real demand due to the exaggerated prices in many places.

Al Mazaya Weekly Real Estate Report revealed that the delivery of more properties is not the right solution for the increasing number of empty residential units, even if these new properties were varied and offered at fair prices. The positive effects of new properties will disappear if those delivered properties are luxury units. In this case, the new supply will not bring the high prices down to fair levels.

The report added that the recovery and recession indicators should be the basis for setting the number of units that should be offered or handed over in the market, taking into consideration the nature and sources of demand. While the demand is for middle and low income housing, the supply of luxurious residential unit will complicate the problem in the market.  If developers and owners delay the handover of projects in order to deny the market access to the residential units, the market will see negative results, as the high selling and rental prices will encourage owners of empty units to offer their units again. This will lead to the realisation of the fair indicator of demand and supply.

Conclusion

There is a noticeable trend in the region’s real estate market to delay the buying decision of all segments of properties, particularly in the KSA and Dubai market. This is because it is expected that the current selling prices will drop, and the prices in the Dubai market will correct following the 2012 upsurge. The attractive market, combined with an anticipated price drop, will whet appetites for real estate units for buyers, sellers, landlords and renters. This will regulate the activities in the market.

In addition, the Saudi market is set to correct, especially after the taxes are imposed on undeveloped land plots – this is because they undermined buying and investment sentiment with those seeking to own or invest in real estate market preferring to wait until market indicators are clear and prices holding steady at low levels. These trends within both markets will cause a further increase in the number of empty houses, which will continue until the recovery and high demand is restored. Once the market achieves a balance and the high demand returns, the losses incurred due to the market downturn will be recovered.

Al Mazaya Report stressed the importance of putting in place measures and regulations to achieve fair prices, as well as identifying methods to track the real demand and supply levels in all conditions. It must be noted that the increasing supply of real estate units and the high number of empty units will damage supply and demand and the fairness of prices. This will decrease the weight of the laws and regulations put in place to increase transparency and integrity of the region’s real estate markets. Finally, the report also stressed the importance of measures taken by the concerned authorities to decrease the number of empty real estate units.

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