Emaar and Nakheel may well have been the first mass developers of real estate in the region, but globally that accolade first went to Realty Associates in New York, which by the early 1920s was marketing itself as ‘The largest homebuilders in the world’. At one point, their brokers were selling more than 30 houses a day.
As financial conditions started to tighten in the late 1920s, Realty Associates innovated the concept of ‘move in now, pay later’ by offering payment plans for upto 10 years with a mere 5 per cent deposit. As wealth started pouring in from thousands of single families throughout the greater New York state area, and even across the country, residential communities, both horizontal and vertical, started sprouting, with Realty Associates declaring that homes would be built “on the same principle that Henry Ford developed his automobile”.
However, unlike the automobile industry, real estate has and always will be fragmented. Even prior to the crash of 1929, residents who had moved in found that upkeep costs of the community often were more than half of their monthly housing instalments. As the costs of maintaining the community were high – higher still after the establishment of housing associations – neighborhoods largely moved in two ways over time. As default rates started to rise, they either fell into disrepair and taken over by slumlords, or they were snapped up by other investors leading to a further escalation of prices.
Upward bound price-wise
As Manhattan shows some 100 years later, the majority of the communities moved towards the higher income strata. The nature of maintenance costs have a tremendous impact on the path dependence of prices in real estate. In Dubai, as rents fell over the last five years, lower yields caused investors to skimp on homeowner fees, leading to a cascade effect on particular communities.
With prices and rents on the rise, it is apparent certain communities like JLT will stand to benefit as the structural cost base is higher in high-rise communities, which, over time, will lead to higher rents and better upkeep. Individual developers will aid in the process with “infill” developments, by renovating certain buildings and/or apartments and thereby creating a virtuous cycle as capital mobilizes to lift the area as a whole.
We saw the process play itself out in the 2008-14 bust-boom cycle in JLT, where the price gap between JLT and Dubai Marina widened, and subsequently narrowed to low single-digits. A rerun is now in store, paying heed to the adage that history will continue to repeat until it is noticed. This “urban displacement” process is an accelerated phenomena in Dubai as newer mid income communities sprout, allowing for rent smoothening to occur.
Filtering out
JLT’s case for a price rise is further strengthened given it is a supply-constrained zone. Nonetheless, the process of the community gravitating to the higher income strata will likely play out over the next few years as a new breed of investor-developers start to enter to play the role of ‘filtering’, by refurbishing apartments, floors and buildings that were built within the first few years of the freehold law enactment in 2002.
In this sense, the timing of the pandemic has been flawless, for it has allowed the mountains of capital to mobilize and infuse value into community after community in Dubai. Despite the economic pain that the fallout has caused, the real estate landscape (which has thus far benefited the luxury sector the most), is now primed for the next stage of price growth in high-rise areas like JLT.
Anchored to high-rises
Capital in search for value discovery will naturally gravitate towards the ready spectrum of high-rise communities like JLT and Business Bay, particularly where upkeep has become an issue, even as it fights for competition from the offplan and the horizontal community space, where service charges have been lower. In the mid-1920s, the CEO of Realty Associated marveled at the rapidly evolving landscape of Greater New York, stating, “simply, far as the eye can strain, no end to the city and opportunity”. Likewise, in Dubai, the vista of buildings in supply-constrained areas and streets of gilded living are sufficient to paralyze all conjectures, other than to state that the path of prices in these areas is pointed, inexorably, higher.
Sameer Lakhani
The writer is Managing Director at Global Capital Partners.
