Real Estate Industry in the UAE: Meraas Holdings

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Table of Contents

Brief About the Firm
Challenges that Face the Real Estate Industry in the UAE
Brief about the Industry
The Industry Cost Structure
Industry’s Demand Drivers
Industry Attractiveness
Macroeconomic Factors and Government Policies
Conclusion
References

Brief About the Firm

Meraas Holdings Profile

Meraas Holdings is one of the leading real estate companies in the United Arab Emirates. Based in the capital, Dubai, the company was founded in 2007 as a way of enhancing the potential and prestige of the city of Dubai (Meraas 2019). For this reason, the company has partnered with other leading global stakeholders in the real estate field to transform Dubai into the modern city that it is today. This is notwithstanding the fact that Meeras entered an industry that had giant incumbents like Emaar who had already established themselves in the sector with the intention of being number one in the field.

Products and Services

Meraas deals in real estate development, sales, and marketing. The real estate products include residential houses, offices, hotels, and restaurants. In the recent past, however, the company has diversified its operations into other sectors such as healthcare, destinations, hospitality, ventures, leisure, and dining (Meraas 2019). These sectors complement the company’s ventures in the real estate industry.

Challenges that Face the Real Estate Industry in the UAE

Like any other field, the real estate sector is not free of challenges that make it vulnerable to economic hick-ups both within the region and on the global stage. The five major challenges the sector faces include changes in oil prices, fluctuations in foreign exchange rates, forces of demand and supply, mortgage rates, and rent revenues (Gulf 2019). These factors are likely poised to negatively affect the profits that accrue from the sector.

Particularly, experts project that the increase in mortgage and US interest rates are likely to make leading real estate stock markets such as Emaar Properties and Meraas Holdings to record negative results until the end of this year (Gulf 2019). The possible consequence of these downward trends in rent revenues is the closure of properties by real estate developers. Such an outcome would destabilize the real estate industry in the United Arab Emirates adversely.

Brief about the Industry

Main Players

Indeed, it is correct to infer that the real estate sector in the UAE is booming. Many people are migrating to the urban areas in search for greener pastures and better standards of living. As a result, the demand for real estate infrastructure is increasing. Accordingly, more developers are venturing into the sector to try and tap onto the vast market. Therefore, there are thousands of real estate companies that are registered in the country (Gulf 2019). Even so, the industry is dominated by nine major companies, most of which were established within the last three decades and are in the two major cities – Dubai and Abu Dhabi.

Moreover, since these companies have a big share of the real estate market, the government has shares in their ownership, hence, regulates their operations in the sector. This is not to say that the activities of the other companies are not regulated. All real estate transactions are controlled by the Ministry of Lands and the Real Estate Regulatory Agency (RERA). The top players in the field include Emaar Properties, Nakheel, Meraas, Damac Real Estate, Dubai Properties, and Deyaar Properties located in Dubai. Additionally, Mubadala Investment Company, Al Dar Properties, and Tourism Development and Investment Company are based in Abu Dhabi.

The law of demand states that the demand for goods and services increases when prices decrease and vice versa. Given the trend in reduced rent revenues and increased mortgage rates, companies such as Meraas Holdings have been compelled to diversify into other sectors that are more profitable but closely related to the real estate sector (Zhuge et al. 2016). The implication here is that other small companies are likely to establish themselves in the industry and expand their market share. This move could threaten the profitability of the nine main firms mentioned previously. Moreover, the fact that these major players are based in the urban areas, highlights an opportunity for other companies to develop in the sub-urban regions of UAE.

The Products

As highlighted earlier, the real estate industry is lucrative in the region as it is in any other modern country today. Part of the reason for this is that there is a ready market for the products developed and sold in the sector. Essentially, there are four main products that are associated with the real estate industry in Dubai. The foremost product includes residential houses and apartments (Wealth Monitor 2019). This is expected because of the large population of people seeking out life in the cities, with most of them looking for residential property to either rent or buy. While analyzing the elasticity of demand for residential products, it is important to also consider the price changes that have taken place in the sector.

Elasticity of demand and supply are measurements that are used to determine the percentage change in quantity demanded and supplied relative to the percentage change in prices. One of the major applications of elasticity of demand and supply in the real estate industry is to determine the output levels. The residential segment, which is arguably the largest, can indeed be used to analyze the profitability of this industry over a given period. In the UAE, it is worth noting that market analysis and calculations do not include labor camps and Emirati housing projects that are undertaken by the government.

Offices form the second largest market for the real estate industry. The demand for offices is high because there are thousands of organizations in the UAE in need of commercial space to operate their businesses. Most offices in the UAE are located in major cities like Dubai and Abu Dhabi because majority of multinational companies have their regional branches located in these cities as well. The offices are rented or sold by the real estate developers. Meraas Holdings’ property is mainly based in Dubai (Wealth Monitor 2019). The revenues they obtain from these properties is often used for expansion and diversification of products and services.

It is also important to note that the real estate industry in UAE provides retail spaces for business. These mainly include big malls that are offered for rentals. For example, the Dubai Mall is the second largest retail outlet in the world. The mall was developed and is partly managed by Emaar Properties, the leading real estate agency in the UAE (Wealth Monitor 2019).

The last category of products offered by the UAE’s real estate industry are hotels. These are closely linked to the tourism industry in the country. The overflow of tourists from all over the world has made the hotel sector worth venturing into because of its high returns. In 2017 alone, reports indicate that 15.8 million people visited Dubai. These visitors would require several types of hotels to stay in during their travels. Indeed, since Dubai is still on the verge of growth, a lot is still expected regarding the development of the hotel and real estate industries (Wealth Monitor 2019). Investors have, however, been warned that climate change and global warming are likely to affect the tourism industry. This would result in a lower demand for hotel facilities.

The Consumers

Consumers are arguably the most important stakeholders in any industry because they are the users of the produced goods and giving services. Therefore, before venturing into any business or investment, it is important to not only consider availability of the market, but also to assess the ability of the consumers to purchase the goods being produced or services being offered. This is because demand involves both the will and the ability to buy.

In the real estate industry in UAE, one can confidently conclude that there is a readily available market that can fulfill all the tenets of demand (Wealth Monitor 2019). In the United Arab Emirates, the real estate customer segment is divided into either Emiratis or Expatriates. Also, the customers can buy or rent real estate property either as groups or individuals. Additionally, the products consumed range from offices to retail shops and houses or apartments.

The Industry Cost Structure

Fixed and Variable Costs

A company’s cost structure is important in determining the profitability of the business. For a venture to qualify as a business, the costs incurred must be less than the revenues obtained. In short, there must be a profit (Wealth Monitor 2019). As such, no business entity would survive if it makes losses for a long period. It is the profit obtained by Meraas, for example, that enables the company to diversify into other sectors of the economy.

Financial analysis is an essential tool for determining the viability of a business in the long-term because it distinguishes fixed costs from variable costs and compares them with the total revenue obtained from the business. Fixed costs are defined as the costs that must be incurred by an organization that are not related to the final output. This implies that these costs must be incurred whether the company makes profit or not, and whether it operates or not (Wealth Monitor 2019).

Examples of such costs include property tax, electricity, and office rent. Looking at electricity as an illustrative example, it is common practice that a company will have to pay a minimum charge of their electricity bill, whether it is in operation or not. Although the ultimate cost of power could vary depending on the operations undertaken by the company, it is impossible to completely evade paying for electricity.

On the other hand, variable charges are costs that are determined by the output of the business. They are directly proportional to the final product. Examples include capital, utilities, and wages of sales representatives (Wealth Monitor 2019). The materials needed for production purposes vary directly according to the total output. More of the final product would obviously mean that extra raw materials and other factors of production have to be considered.

Sunk Costs, Entry Costs and Scale Economies

Apart from variable and fixed costs, there are other expenses that any organization seeking to venture into the real estate industry must consider. These include the sunk costs, entry costs, and scale economies. Sunk costs, also known as retrospective costs, are costs that are incurred by the organization which cannot be recovered by any means (Zhuge et al. 2016). For example, the costs incurred by Meraas Holdings in developing its website can be defined as a sunk cost as it was incurred once.

Economists have unanimously agreed that these costs are neither variable nor fixed because the former categories are recurrent or regular costs that are incurred by an organization (Zhuge et al. 2016). As a result, while making pertinent decisions regarding the cost of production, it is important not to make decisions based on the sunk costs. Instead, decisions can be guided by prospective costs that are likely to be incurred by the organization after establishment. They are the costs that determine long-term profits or losses.

Second, entry costs which are the total expenses incurred when venturing into a new business venture are to be considered. Real estate is a large industry with established incumbents, most of whom have attained the status of MNCs. The implication here is that entry costs are essential for determining business decisions at the beginning of the business. For example, when Meraas entered the UAE’s real estate industry in 2007, it had to weigh the cost of entry and sustainability in the industry (Zhuge et al. 2016). This is because the incumbents at that time such as Emaar and Nakheel had already established themselves in the sector, and had all the financial might needed to leverage competitive advantage. As such, Meraas designed its business strategy by incorporating diversification.

Finally, economies of scale. This means the reduction in production costs that arises from an increase in units of production. Hence, the higher the output, the lower the cost of production, and the more profitable the business. In the real estate industry, economies of scale are applied, albeit in limited proportions. The cost of producing quality houses, apartments, offices and retail shops is at a constant high (Zhuge et al. 2016).

For example, the Dubai Mall used a total of $1.3 billion to construct the infamous Dubai Mall. Going by the increasing fuel prices, Meraas has no option but to incur similarly high costs in its production. Although most firms leverage on economies of scale as an operational strategy, it can be inferred that the impact of economies of scale on the cost of production in the real estate is still vague, and the information available from literature is equally scanty.

Structure of the Market Based on the Cost Structure

As highlighted earlier, Meraas has engaged in a lot of diversification into other areas of the economy. While doing so, the company has employed economies of scale as an operational strategy towards implementing its business objectives. The firm target market is based in Dubai. Studies reveal that the company’s move in this aspect is catalyzed by the fact that people living and working in Dubai have higher disposable income than those in other parts of the country (Wealth Monitor 2019). The diversification of products and economies of scale have enabled the company to develop a competitive advantage against its rivals, especially new entrants into the industry.

Industry’s Demand Drivers

Consumers’ Purchasing Decisions

Although real estate developers avail many products in the market, the decision to purchase is a reserve of the customer. Purchasing decisions are often in tandem with the law of demand and supply because the type of product supplied into the market will determine if it will be bought by the consumer. The implication here is that there these purchasing decisions are influenced by different factors. To begin with, consumer purchasing decisions are greatly influenced by price (Carbaugh 2016). The price of the property on sale could prevent transactions from taking place if the buyer has no ability to buy. In addition, while bargaining, sellers might reject the price quoted by the buyer for being lower than expected.

The law of demand and supply is highly applied in the purchasing decisions made by consumers. Essentially, consumers tend to buy more of the product when prices are low, except for the goods of ostentation which are more demanded at high prices because of the common belief that high prices are directly related to high quality (Carbaugh 2016). On the other hand, suppliers will be more excited to avail their products in the market if prices are favorable, and reluctant to do so when prices are low (Wealth Monitor 2019). The implication here is that the decisions consumers and sellers in the real estate industry, like in any other industry, are determined by market prices.

Secondly, purchasing decisions are influenced by the location of the property. This is one of the reasons why Meraas is strategically situated in the heart of Dubai. Many people consider the location of a real estate product before committing to it. For example, the security of the place, potential future growth, the population and approximate incomes of the residents, and so on (Carbaugh 2016). Clearly, the considerations made in terms of location depend upon the type of property in question. For instance, people seeking to buy Meraas’ hotels and retail shops would consider population and security to be the most important factors. On the other hand, purchasers of residential property would also consider the availability of social amenities such as schools and hospitals.

Lastly, purchasing decisions are affected by interest rates. According to economists, interest rates have a more adverse impact on purchasing power than fluctuation of mortgage rates in either direction (Carbaugh 2016). This is partly because interest rates affect the demand and supply of funds as well as the return on investments. As a result, developers will be discouraged to invest in sectors such as real estate because of uncertainty in revenues and profits.

Market Segmentation

Marketing segmentation can be defined as the process of aggregating customers according to shared characteristics or needs (Carbaugh 2016). For example, customers living in Dubai are believed to be wealthier than those living in rural areas of UAE. As such, real estate companies try to ensure that the products made suit the requirements of the target market. When Meraas ventured into the hotel and hospitality industry, for example, the company made products that would benefit tourists flocking Dubai every year (Wealth Monitor 2019). In this case, the company ensured that the quality of the products made suit global standards and the basics of consumer satisfaction.

Overall, market segmentation ensures that consumers get the right products, at the right location, and at the right time. Marketing experts contend that managers must carry out market segmentation way before the production process is commenced to avoid incurring unnecessary costs that might not translate into the returns on investment. Meraas Holdings seems to have got it right by strategically centralizing its operations within Dubai because it is relatively easy to understand the urban market (Wealth Monitor 2019).

Trends in Demand that Effect Revenues

An analysis of the forces of demand and supply of real estate products reveals that prospects look even better for the industry. This is because of the projected rise in demand after the 2020 expo, which will pile pressure on developers to up their game in the supply of quality products. After the 2020 expo, economists are foreseeing a situation where new business will emerge and existing one expand to deal with the high demand that is expected to hit the industry (Wealth Monitor 2019).

Opportunities and Threats

Just like there are many opportunities in the lucrative real estate industry, there are also numerous threats that could jeopardize the growth of Meraas holdings in the sector. Analysis of threats and opportunities of an organization is essential because it helps the firm to strategically position itself in the industry and leverage competitive advantage that can help it compete effectively with its rivals.

Opportunities

Notably, there are three main opportunities for Meraas limited which are likely to increase the prospects of the company in future. To begin with, the 2020 Expo in Dubai is expected to open businesses by increasing demand levels. This will provide an opportunity to showcase its products and stump authority in the market (Investopedia. 2019). Furthermore, the expo is supposed to enlighten Meraas holdings on the best practices in the industry and highlight the areas that need improvement.

Secondly, the tourism industry is expanding daily. UAE is poised to double the number of tourists coming into the country by 2020 (Investopedia 2019). The entertainment industry is also expected to increase at the same rate, meaning that there is an opportunity for Meraas to gain more fortunes from the industry.

Lastly, the education system in Australia is turning out to be among the company’s prospective customers because of the expansion projects that are ongoing. All over the UAE, new schools and colleges are being built, and the old ones are being renovated. Therefore, Meraas is expected to take a place in the industry and provide the required services and products (Investopedia 2019). Even so, given the large number of firms in the industry bidding for similar tenders, Meraas is expected to show aggression towards this end.

Threats

Threats in this context are the factors that are likely to hinder Meraas from attaining its goals. In most cases, threats are external factors that impact both productivity and profitability. Some of the threats include rising inflation, the legislation to increase rent rates by 5%, introduction of VAT in 2018, and reduced government spending on sector (Wealth Monitor 2019). All these factors are likely to affect Meraas’ operations if proper measures are not put in place.

Industry Attractiveness

Investors do not just enter an industry blindly. There are many factors that must be considered before deciding to venture into an industry such as real estate. For example, the investor should find out the needs of the target market segment and weigh in on the possibility of meeting the needs (Wealth Monitor 2019). Most importantly, the attractiveness of the industry in which the company lies must be checked.

For example, how many people are entering the industry yearly? Porter was the first economist to investigate the issue of industry attractiveness. He inferred that any industry would be affected by Porter’s 5 forces: rivalry, threats of substitutes, buyer power, supplier power, and barriers to entry (Carbaugh 2016). Even so, this paper looks at other factors that are likely to determine the attractiveness of the real estate industry, especially in the United Arab Emirates: price competition, threats of new entry, and industry performance based on cost and demand.

Price Competition

In economics, price competition is a term that is used to refer to the pricing of similar commodities in an industry. The common practice is that most companies will use pricing as a competitive advantage to expand their market share (Carbaugh 2016). However, this is a strategy that could backfire if the company is compelled to lower its prices to an extent of making losses. The implication here is that an investor must investigate the level of price competition in the industry because it would be unviable to venture into the industry and produce goods and/or services at prices higher than the present market price.

Meraas Holdings found itself in such a situation. However, the advantage of the real estate industry is that most customers are not only concerned with the pricing of property but also the designs (Wealth Monitor 2019). The way in which an apartment is designed and the place in which it is located could be the most important factors to be considered by a section of customers. This is perhaps what made Meraas establish its real estate portfolio in Dubai.

Threats of New Entry

New entrants into the industry can destabilize the market and displace the incumbents if they have the higher ability. As such, the barriers to entry into an industry such as stringent government policies and the cost of the entrance are some of the factors that determine the competitiveness of an industry. In the real estate sector, the threats of new entrants are relatively high because of the low cost of entrance (Wealth Monitor 2019).

Even so, the threat is not so high for established companies like Meraas and Emaar due to their financial might, having been in the sector for more than a decade. Since regulations in UAE are not very restrictive, new companies are venturing into the industry every year. The major repercussion of this high rate of new entrants is that the prices of real estate products are likely to go down due to the increase in supply. Ultimately, the demand for cheaper products is likely to increase, thus delving a blow to giant incumbents in the industry.

Industry Performance Based on Cost and Demand

The performance of any industry is influenced by the relationship between cost and demand. In the real estate sector, developers weigh between the cost of production and the available market for the products. For Meraas, the cost of production in the city of Dubai is generally high. However, given the increasing demand for its high-end products in the capital, the cost of production does not affect its performance in the industry (Wealth Monitor 2019). The most important thing for the company is that it is availing quality products to the market and making a good profit from that.

Macroeconomic Factors and Government Policies

The real estate industry in the UAE is also impacted by macroeconomics. These are factors that govern national and regional economics such as inflation, unemployment rate, and gross domestic product.

Inflation

Inflation is a very big concern for most countries in the world because it affects the nation’s overall economic performance. It is characterized by an increase in prices of goods and services and reduction in the value of the currency. Statistical data available for inflation rates in the United Arab Emirates indicates that the rate of inflation was the highest in 2015 at 4.07%. In 2018, the inflation rate dropped to 3.2%.

Experts attribute this decrease in the increasing fuel prices and stabilization of the UAE currency against the US dollar. Despite this, the inflation rate is expected to increase to 3.5 by 2020 due to the introduction of Value Added Tax (VAT) earlier last year (Wealth Monitor 2019). The major blow of inflation on the real estate industry is the high cost of production because of the increase in the cost of construction materials.

Unemployment rate

For the real estate industry, High unemployment rate means inability to buy the products availed into the market. In the United Arab Emirates, the levels of unemployment are relatively low compared to other countries in the region. During the great recession that almost brought the global economy on its knees, the unemployment rate in UAE shot to a record high of 4.6% (Wealth Monitor 2019). The figure dropped to 3.71% in 2018 and is expected to drop even further after the 2020 expo.

Gross Domestic Product (GDP)

Gross Domestic Product is the parameter that is used by economists to measure the size of a country’s economy. In general, UAE’s GDP has been growing steadily over the last decade, with the highest being recorded in 2014 ($399.45 Billion). The economy witnessed slow growth between the mid-2014 and January 2016 mainly because of fluctuations in global oil prices. Within the South Asian region UAE boasts as one of the top three countries with the largest GDP (Wealth Monitor 2019). Experts attribute UAE’s healthy economy to the success of other sectors such as tourism and hospitality which have recorded a substantive growth in revenue over the years.

Government Fiscal and Monetary Policies

Government policies are a prerequisite for a healthy economy. At least all national authorities around the world have policies that ensure that the activities of business people do not affect the normal consumers – especially through price controls. In addition, the government is responsible for ensuring that there is a favorable business environment for industrial players which fosters healthy competition.

The UAE is one of the few countries in the world that did not rely on revenue from taxation of its citizens. However, in 2016, the country’s president Sheikh Khalifa constituted a Federal Tax authority in 2016, whose mandate is to oversee the collection of tax revenue from different sectors of the country’s economy (Gulf 2017). Perhaps this decision was made after the revenue from oil proved to be unreliable in the future, thanks to the fluctuation of prices in the global market.

In 2018, the UAE authorities officially imposed value added tax (VAT) on most of the goods sold in the country. However, this move was received negatively by most players of the economy because it would easily lead to inflation and suppress the spending rate of the people.

One of the government policies that touches on real estate in UAE is the property transfer fees. The Dubai Land Department increased the property transfer fees from 2% to 4% of the total value of the property (Gulf 2017). The implication here is that the buyer cannot be able to register their property if they fail to pay this amount. The main aim of this policy is to ensure that there is fairness in the industry and no company uses unscrupulous means for short-time benefits.

Conclusion

From the above discussions it can be concluded that the real estate industry in the United Arab Emirates is doing relatively successfully. Meraas Holding, located in Dubai, has seen tremendous growth since its inception in 2007. Thanks to favorable business environment and government policies, the company has managed to diversify into other sectors such as hotel, hospitality, and health. The study has revealed that the fluctuation in oil prices, introduction of VAT, and strengthening of the US dollar are some of the challenges facing the real estate industry in UAE.

The findings of the report also reveal that the real estate industry in the UAE has 9 major players including Meraas. However, there are thousands of other companies seeking to penetrate the industry. The advantage of Meraas and other established firms is that they have a financial advantage over the new entrants, making them enjoy a good market share in the country, and particularly in Dubai. The main products availed to the market include houses, apartments, offices, and retail spaces such as malls (mostly for renting).

The consumer purchasing decisions in the UAE’s real estate market is mostly driven by pricing and location of the property. Whereas some people search for the cheapest properties, others look for locations that suit their interests. For example, tenants of retail shops often target places with high populations and busy economy. This implies that any company that seeks to venture into the industry must undertake market segmentation to ascertain the specific needs of the target market.

Finally, it can be concluded that the real estate industry in the United Arab Emirates is attractive to investors, both foreign and domestic. This is mainly because of favorable price competition that does not guarantee any firm competitive advantage using price reductions. The barriers to entry into the industry are also minimal because of the small starting capital that is needed. Given that the market is already flooded with thousands of firms each trying to gain foot into the market, the main challenge for new entrance would be to keep up with the stiff competition from giant incumbents such as Meraas and Emaar.

Limitation of the Economic Research

Even though the scope of the study was exhaustively covered, there are several challenges that surfaced in the process, and which hindered the precision of the research. To begin with, there is very little to no information freely available online for the Meraas financial statement. The company’s website does not provide its annual financial reports as would be expected for a company of its caliber. Perhaps, this is a business strategy to conceal valuable information from its major competitors.

Secondly, the study found it difficult to analyze the competitiveness of the industry in Dubai because there is no database providing the exact number of developers and their respective market shares. Again, this made the research vague and more general. Going forward, the Land Department of the country should be able to update such vital information and make it available to economists for analysis.

References

Carbaugh, R. 2016. Contemporary economics: an applications approach. London, UK: Routledge.

Gulf News. (2017). UAE Inflation to pick up in 2017 on higher fuel and utility prices. Web.

Gulf News. (2017). UAE: President establishes Federal Tax Authority. Web.

Investopedia. 2019. How does the law of supply and demand affect the housing market?Web.

Meraas.com. 2019. Web.

Wealth Monitor. (2019). 2019 UAE Real Estate Market: Opportunities & Risks. Web.

Zhuge, C., Shao, C., Gao, J., Dong, C. and Zhang, H. (2016). Agent-based joint model of residential location choice and real estate price for land use and transport model. Computers, Environment and Urban Systems, 57, pp.93-105.

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