Overstocked Dubai real estate market eyes Israeli investors for rebound

Developer pitching project to new market opened by normalization says home prices can only go up after falling 30%, with yields still far outstripping anything Tel Aviv can offer

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

A general view of Dubai is shown from the Burj Khalifa tower, the world's tallest building, in Dubai, United Arab Emirates, November 8, 2016.  (AP Photo/Jon Gambrell/File)
A general view of Dubai is shown from the Burj Khalifa tower, the world's tallest building, in Dubai, United Arab Emirates, November 8, 2016. (AP Photo/Jon Gambrell/File)

Indian-born real estate tycoon Puthan Naduvakkatt Chenthamaraksha Menon sat in the Dubai headquarters of his Sobha Realty firm, pitching a group of Israeli reporters on why their countrymen should buy a home in his sprawling $4 billion Hartland project.

In the next building stood a model showing off the 183-acre (743-dunam) project, with sleek residential towers, modern low-slung apartment buildings and row after row of villas and duplexes being built near the heart of Dubai.

“In Dubai, more than 200 nationalities live peacefully, next to each other,” the 72-year-old Menon, who goes by his initial P.N.C., told the reporters, whom the firm flew out to and hosted in Dubai earlier this month . [Full disclosure: This reporter was a guest of Sobha Realty in Dubai.] “There is great cultural diversity, religious tolerance and this is now, by far, the safest place in the world to live in.”

“I invite them to invest here as their second home,” he said, talking up the city’s quality of life and safety.

The owner of Sobha Realty, which has set up development projects in the UAE, Oman, Bahrain, Brunei and India, wanted Israelis to know that “the UAE property market offers an excellent opportunity for Israeli investors looking to diversify their real estate holdings and achieve a good rate of return.”

The Abraham Accords signed by the United Arab Emirates and Israel in September have been touted as opening a business gateway for Israelis and Emiratis. Dozens of planes shuttle Israeli tourists and investors between Tel Aviv and Dubai every week, fostering bilateral business in tourism, healthcare, technology, and, Menon hopes, real estate.

Menon and his Sobha team invited the Israeli journalists, including this reporter, to Dubai to sell Israel on his project, and on investing in Dubai in general.

The close geographic proximity — just a three-hour flight from Tel Aviv — will be appealing to investors, he said, along with the city’s “excellent infrastructure and strong regulatory framework,” which creates a good environment for investors.

Real estate in Dubai is regulated by the Real Estate Regulatory Authority (RERA), which is a “strong” authority, Menon said. “The interest of the investor is always protected. This is an investor-friendly country.”

Dubai, with 3.75 million inhabitants, is the most populous city in the UAE. A global trade, finance and aviation hub, it has long been seen as among the most attractive place in the world for investors, albeit one inaccessible to Israelis who did not have a second passport. Until now.

Sobha Realty’s founder PNC Menon (Courtesy)

Menon himself has experience with choosing Dubai as a new home and a place to invest in. In 1974, at the age of 26, he set out from India to Oman with just $7 in his pocket. He started off as an interior decorator and soon established his firm as one of the largest interior solutions providers in the Gulf region. In 1995 he set up Sobha Ltd. (Sobha in Sanskrit means light and is also his wife’s name) in Bangalore.

Sobha Ltd. has a market capital of almost 32 billion rupees ($435 million). Menon, who now resides in Dubai, set up Sobha Realty in Dubai in 2011. In 2019, Forbes estimated his net worth at $1.1 billion.

In Israel, a Sobha spokesperson said the project is being marketed through a partnership with the NY Koen Group, owned by Israeli-Ukrainian dual national Naum Koen, a Jewish businessman in the UAE. Koen Group, under the names NY Development and NY770, also marketed Hartland in the past in Kyiv, Ukraine, and in Baku, Azerbaijan, according to a Koen group website.

Koen, who in the past has done business under the name Nakhshon Nakhshonov, is closely connected to the city’s Chabad house and helped broker a deal for Sheikh Hamid Bin Khalifa, a member of the UAE royal family, to buy an ownership stake in the Beitar Jerusalem soccer team.

Beitar owner Moshe Hogeg, left, and Naum Koen in Israel on November 27, 2020. (Courtesy of Moshe Hogeg via JTA)

“Koen Group is one of the main partners of Sobha Realty in Israel. They are promoting Sobha Realty projects to reach the Israeli investors who are looking to buy a home or invest in real estate projects in Dubai,” a Sobha Realty spokesperson said.

An Israel-based spokesperson for Koen said he uses a different name in the Emirates because he found locals had difficulty pronouncing Nakhshonov, so “he decided to use Koen as his last name due to his family origins of the Jewish priestly caste known as Kohanim (a plural of Kohen or Koen).”

Good for business, bad for pandemics

Menon, who wants the business relationship between the UAE and Israel to run both ways, said in the meeting with the journalists that he was uncertain how trade ties with Israel would develop, describing them as in an “exploratory stage.”

In a year, he predicted, there will be a lot more clarity about where things are going.

That uncertainty extends to Dubai’s property market, which has cratered this year, creating both opportunities and risks.

The city has seen residential real estate prices decline by some 30 percent since 2014, prompting the Emirates’ largest developer, Emaar Properties PJSC, to declare on December 7 that it was halting temporarily new projects amid a property surplus, compounded by the coronavirus pandemic.

Residential prices in Dubai slid by 8.1% in 12 months to September 2020, according to data from REIDIN, a data analytics firm, as reported in a Q3 UAE Residential Market Review by Knight Frank.

Over this time, apartment and single-family home prices fell by 8.4% and 6.4% respectively. While demand has returned, the Knight Frank report said, primarily to established communities, the continuing influx of supply will mean that average home prices are expected to remain “under pressure in the short to medium turn.”

Many of the things that have traditionally attracted investors to Dubai — including tourism, high-end shopping and dining, and a flourishing business community linking Asia to the West — have also made it among the hardest hit among its Emirati peers by the lockdowns and travel restrictions brought about by the COVID-19 pandemic.

Unlike other emirates, Dubai does not rely heavily on oil and gas, which have also seen prices fall due to the pandemic. Hydrocarbons made up just 1% of the gross domestic product of the Dubai Emirate in 2019, the lowest amount in the UAE, according to an S&P November 2020 report. In the UAE capital Abu Dhabi, by comparison, the hydrocarbon sector accounted for 41% of GDP in 2019.

People visit an exhibit at the GITEX technology summit in Dubai, United Arab Emirates, Dec. 7, 2020. (AP Photo/Jon Gambrell)

Dubai’s economy is expected to contract this year by over 10% according to S&P estimates, compared to a contraction of over 8% for the whole of the UAE.

Subha’s Menon downplayed the pandemic’s effect on prices in the city, calling it a “temporary phenomenon.”

“Prices have touched the bottom,” making it a good time to invest, he said, expressing hopes that the COVID-19 vaccine would send prices skyward again as travel and tourism resume.

Prices may also be boosted by Expo 2020 Dubai, which has been pushed to October 2021. The fair is set to promote Dubai as a major tourism destination, potentially translating to increased economic output, population and employment growth, and further increasing residential demand and consequently investor interest in the sector, Menon said.

“There are investment opportunities in real estate in Dubai, and the prices are at the moment low,” said Doron Peskin, head of the Tel Aviv-based Concord MENA consultancy which focuses on providing insights about the Middle East and North Africa region. Even so, he said, Dubai has been dealt a hard blow by COVID-19, and its economy is on a “slippery slope.”

Dubai and its sister emirates are considered attractive places to do business and invest in: the World Bank’s Doing Business 2020 report ranks the UAE 16th out of 190 economies —  Israel is ranked 35th — for how regulations allow freedom of doing business, including those related to starting businesses, obtaining construction permits, getting electricity, registering property, paying taxes and getting credit.

The UAE came ninth in the IMD World Competitiveness ranking 2020, –down from 5th in 2019 — one notch above the US and one below Canada. Israel came in at 26th. The ranking rates economic performance, government efficiency, business efficiency and infrastructure.

Despite taking up just a tiny slice of the Middle East in terms of space and population, the UAE attracts 36% of the total amount of foreign investment flowing to the Arab world, making the region very attractive for foreign investors, according to a report by Israel’s Ministry of Economy and Industry regarding the economic potential of Israel-UAE ties.

The real estate sector is something of an indicator for the Dubai economy, according to S&P, and even though demand has picked up recently, no major rebound is expected yet.

Given the weaker economic situation and the increased supply of homes, average rents declined 12.7% in the year to Q3 2020, the Knight Frank report said, and are likely to stay soft well into 2021.

“We may see the rate of decline moderate slightly as economic activity gradually recovers over the course of the coming year,” the report said. “This trend is already in its nascent stages where circa 37% of major rental areas tracked by REIDIN have seen a moderation in year-on-year declines in Q3 2020 compared to Q1 2020 declines. However, to date, this moderation has been relatively immaterial.”

As of September 2020, average gross yields in Dubai’s mainstream market — mid-range homes as opposed to luxury homes — were at an average 6.2%, down from 6.5% a year earlier, the report said.

An illustration of one of the homes built by Sobha in the Heartland project in Dubai (Courtesy)

Still, residential properties in Dubai offer investors returns they would be hard-pressed to find in Israel. With over 7% rental returns on average, the UAE is among the most lucrative locations to invest in, according to a report by Property Finder. The figure is light years beyond other world-class cities such as London (2.9%), Hong Kong (2.35%), Sydney (2.85%) and Singapore (3.3%). Toronto, with average returns of 3.9%, comes close.

The price per square meter in the UAE averages some $5,918. That’s a steep discount from Tel Aviv, where the price per square meter is $17,149. Even with the higher prices, Tel Aviv only gets an average annual rental return of 2.68%, compared with the 5.19% investors can bank in the UAE, according to the Global Property Guide website.

An illustration of one of the villas built by Sobha Realty in the Heartland project in Dubai (Courtesy)

Israelis looking to get in on the Sobha Hartland development have a choice ranging from luxury studio apartments in high rises to spacious homes with yards.

The gated community, when completed, is set to house 25,000 residents, a mosque, international schools, commercial spaces, playgrounds and pools. Sobha, which does everything in-house — from design engineering to contracting and even manufacturing the tiles and kitchens — has already handed out the keys to phase I of the project, which is 25% of the total development. Phase II apartments and villas will be delivered shortly, with the whole of the project slated for completion by 2025, it says.

Studio apartments ranging in size from 472 to 644 square feet, run from 755,000 Emirati dirham (AED), or the equivalent of $205,559, to AED 1 million ($273,000). Three-bedroom apartments ranging from 1,459 to 3,371 square feet run from AED 2.1 million to almost AED 5 million. A four-bedroom house of 2,963-3,300 square feet will cost around AED 5 million, while a larger four-bedroom home of up to 6,434 square feet can be yours for a cool AED12 million.

Buyers in the project have been a mix of international and UAE residents, Menon said.

It’s sound, but is it safe?

Israel and the UAE are on a honeymoon in their relationship today, but investors may worry about what will happen to their assets if changing political winds sour the marriage and ties are cut.

The UAE has a “fairly developed institutional framework and legal system,” said Christian Esters, senior director, analytical manager, Sovereign and International Public Finance Ratings, S&P Global Ratings, in an interview with The Times of Israel earlier this month.

“There is always a risk” of politics causing changes to the business environment, he said.

“It is difficult to say” how eventual political disputes, if they arise, would play out, Esters said, “but generally speaking, the UAE is a country with a fairly stable and advanced legal framework” in which foreign investors should be protected.

Peskin said he saw relations between the UAE and Israel as “stable,” and thus does not see any particular risk to Israeli investors in the region.

He did have word of advice, however: “I suggest patience.” Israelis should get acquainted with the business culture, meet with local businesspeople and figure out each sides’ needs.

“What we are seeing now is an Israeli invasion,” he said, referring to the tens of thousands of Israelis who have been visiting the UAE since the striking of the Abraham Accords. “We need to be attentive” to the needs of our new partners, he recommended.

((Editor’s note: A Sobha Realty spokesperson initially denied any knowledge of a partnership with the NY Koen Group, but the company later confirmed the partnership after the story was published. The story has been updated to reflect the change.))

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