Empty promises

Commentary: U.A.E.’s sky-high office vacancy rates and empty apartments

ABU DHABI (MarketWatch) — Eighteen months ago, I was standing by a window in
the Marina Mall, looking out toward Lulu Island’s sandy beaches. A new
acquaintance was standing by my side. He said, “A year from now you won’t
recognize it.”

Behind us, work was still going on in the enclosed space that would
eventually house a bunny slope, maybe about a third the size of the ski hill at
the Mall of the Emirates in Dubai.

Christian himself had been in Abu Dhabi less than a year at that point,
working on a sewage-treatment plant. He pointed out road and housing
construction behind the mall. “All of this is new from when I arrived.”

He was right. Things do change fast here.

In the short time I’ve lived in Abu Dhabi, I’ve seen buildings come down and
a lot more go up. The F1 Grand Prix race is to be run Nov. 1 on Yas Island. When
I first arrived, the Abu Dhabi race was still a Montreal race. Six months ago,
it seemed construction would never catch up, but it has. It surpassed
expectations, I guess you could say. At the height of construction, more than
41,000 people worked on Yas Island, logging more than 184 million hours to
finish the project. The local Guggenheim and Louvre are to open in 2013, and I
have no doubt someone will throw enough labor at them to see that the museums
are built on time.

Although the financial crisis has shelved many projects, construction on
other projects, not just F1-related, has continued apace. Apartments that were
hard to come by when I first moved here are now easier to find. If you’re
willing to pay the rent. In fact there are enough buildings going up in our own
neighborhood of Al Manasir that my wife and I, craning our necks to look out the
windows of our little Honda Jazz, wonder aloud: “Who’s moving into these
things?”

Indeed, who?

The office vacancy rate in Abu Dhabi right now is a pretty healthy 5%. In
Dubai, however, the vacancy figure is closer to 25%. And those rates will
probably go up between now and 2011 when those buildings that are going up
around us finally are completed. In fact, some brokers think half of the office
space in Dubai might be empty in two years’ time.

A similar phenomenon is in evidence in Dubai’s residential-property sector.
The reason apartments and houses are easier to find right now is that there are
more of them — and fewer people to take them. With foreign investors packing up
because of the financial crisis, the construction boom of the past six years has
found itself alone in the room. There’s a lot less demand for apartments, a
situation that can only get worse when tens of thousands of additional units
come on to the market. Colliers International, a property consultant, figures
there’ll be 34,000 additional new homes in Dubai alone in two years, an
oversupply that means whatever recovery one might have expected in property
prices is that much farther away.

In Abu Dhabi the situation is different, and some analysts are even
predicting a housing crunch in the capital in the next four years because the
financial crisis has meant there’s less coin to build needed housing.

Referring to the situation in Dubai, Colliers’s director of research, J.P.
Grobbelaar, was quoted in the the National newspaper as saying: “We see no
reason to believe this will improve; it should actually worsen. Unless there’s a
significant increase in population over the next two years, we expect these
vacancy levels to increase.”

That there are fewer people in Dubai and in the capital is the result of
layoffs and job cuts amounting to a population shift away from the U.A.E. of
about 5.5%, EFG-Hermes Holding estimates. In Dubai, Jones Lang LaSalle, a
real-estate firm, and UBS, the Swiss bank, both said that figure could be as
high as 10%.

All of this means lost revenue for developers and landlords, of course. Dubai
home prices have gone down 48% since their peak last year, Deutsche Bank
reported in June. A further drop of about 20% is now expected by the end of
2009.

Tallest among those empty towers is syringe-shaped Burj Dubai, which will
apparently be standing alone for some time, and not just because it’s the
world’s tallest tower. Investors in the Burj Dubai complex, which the
government-owned developer Emaar had hoped would include 13 other high-rises,
have moved their down payments, through the bizarre trade of property credits in
Dubai, to other Emaar projects that have a better chance of being built.

If there’s a silver lining in this cloud, it’s that the expected new square
footage of office space and apartments and houses is actually lower than what
had been planned. If developers had gone ahead with their projects — global
financial crisis be damned — can you imagine where they’d be in two years?
That’s a question that’s being asked nevertheless.

And some analysts are not worried. Yes, there might be an office vacancy rate
of 50% in two years, agreed Nicholas Maclean, managing director of CB Richard
Ellis, but the quality space, the top-dollar space, will be filled. It’s also
possible that when office rental prices drop low enough, foreign companies will
return looking for cheap places to set up shop — and with them will return the
people needed to run the companies and fill all those empty houses.

Neat how cycles work, eh?

Except this cycle seems more like a roller coaster, and, for a lot of people,
this phase is the stomach-in-your-esophagus part of the ride. It’s easy enough
to understand why, particularly in Dubai, which is saddled with outstanding debt
to the tune of $85 billion. Rating agencies don’t take too kindly to such debt
when they can’t see through that cloud. Mid-October, Standard and Poor’s said
Dubai had only $4 billion to support its government-related entities (most of
them involved in property) with a $3.5 billion bond repayment due in the middle
of next month. “From our point of view, that’s insufficient,” S&P credit
analyst Farouk Soussa said.

For other people, though, it seems things are just looking up, up, up — and
I don’t mean the heights of empty towers or the mountains of debt. Toward the
end of October, some representatives of the finance department in Dubai went on
a meet-and-greet to attract potential investors to an international bond sale.
There’s a good chance Dubai will manage to sell new bonds, considering the high
yield of emerging-markets debt, and because it has managed to refinance or pay
off all the bills that have come due this year. Most of this, however, is
because of loans from the Abu Dhabi-supported Central Bank. The operative word
being “loans.”