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Residential units in Dubai will offer the most attractive returns in 2008, growing 37 per cent annually, which will be followed by commercial and retail space, according to a new study.

"We do expect continued buoyancy in prices across the board, although on average these will prove more moderate than has been witnessed over the past few years. In short, we conclude residential units will offer the most attractive returns this year, growing by an average annual rate of 37 per cent to Dh2,100 per square foot, followed by commercial and retail space, which will increase at 23 per cent and 13 per cent, respectively to Dh3,800 per square foot and Dh5,800 per square foot," Egypt-based Prime Group said in a report on Dubai property market.

However, the company is "less" bullish on the hospitality segment with average room rates expected to increase 12 per cent to Dh1,060.

Prime Group based prices and rental yields in Dubai's realty market over a period extending from 2008 to 2010 on a model that captures differing levels of shortages and accompanying price elasticity within the various market segments.

According to the report, Dubai's real estate industry dynamics are firmly entrenched in Dubai Strategic Plan 2015, which strives to achieve a medium-long term objective of diversifying the economic base in key growth areas, defined as priority sectors within the associated blue print.

Of particular significance is the focus of the plan on real estate development and the construction sector, as well as travel and tourism, with the former providing necessary infrastructure for growth of all other businesses, and the latter ensuring sustained economic buoyancy through continuous and aggressive expansion in visitors to the emirate.

"Despite finding ourselves in an unarguably less benign global economic environment, we maintain a bullish outlook for the intermediate term extending over the coming two to three years, premising our assertion on robust demographic and economic indicators."

The current boom in the residential real estate sector is fuelled primarily by demand-based drivers including, aggressive population growth, high cost of living adjusted salaries which make housing increasingly affordable and improvements in liberalisation and the regulatory environment, according to the report.

More specifically in terms of demand, the addressable target market for residential demand, identified as one million individuals, belonging to households willing and able to afford independent housing, translated into a cumulative demand for 268,000 residential units in 2007, assuming a household size of four.

Against this demand, the cumulative stock of housing supply, based on residential units housing single families stood at 192,000 residential units in the same year, according to a recent publication by UAE public authorities. As a result, Prime concludes a pent-up demand figure of 75,000 residential units in 2007, representing 39 per cent of the supply of housing in Duabi at the time.

Going forward, demand growth accrues from increases in the target population at an average annual rate of 7.6 per cent.

Hence, incremental yearly demand in 2008 pertains to 24,000 units, rising to 27,000 units by 2010. Cumulative supply, assuming a 40 per cent delay on the year-on-year rollouts for all projects announced to date totals 375,000 units through to 2010, with the incremental annual rollout peaking next year at 67,000 units.

The implications of the aforementioned pattern for demand and supply in the Dubai residential market are that a 39 per cent shortage in supply in 2007 should revert to near balance status by end of 2009. "Our numbers also suggest a 31,000 residential unit surplus in 2010. It is important to note, however, that we believe assumption risks prove weighted towards an extension of the undersupply status post 2010, rather the opposite."

Meanwhile, Dubai's ambitions for developing office space are primarily driven by a multitude of factors, which have been detailed earlier including availability of low-cost non-Dubai national skilled labour, low energy costs and the presence of freehold Business Park space with limited or zero taxes.

In addition to these, the predominant factor, fuelling growth in the coming years will be the success of Dubai International Financial Centre (DIFC)Dubai International Financial Centre (DIFC), which aspires to develop Dubai as the financial centre of the Middle East and North Africa (Mena), and South Asia region, if not for the world.

Accordingly, in addition to factoring in the growing labour force as a key determinant behind requirements for commercial space in the emirate, we have employed comparisons for global financial centres to determine the pent-up demand for the segment in Dubai.

Prime has utilised individual city data from Colliers International to compile information on the 2007 per capita sqm office space for the 10 leading financial centres in the world, splitting them into developed and emerging countries. The developed country centres include London, New York, Paris, Tokyo, Frankfurt and Brussels, which reflect an average 2.9 sqm per capita of commercial space while the emerging countries, represented by Hong Kong, Singapore, Mumbai and Shanghai show a comparable square meters per capita average of 0.5. The report has opted to utilise an average of 1.7 sqm per capita for the two individual markets - developed and emerging - as the benchmark for determining the associated segment's pent up demand.

"With Dubai, in 2007, reflecting commercial space per capita of 1.5 sqm, we conclude a 0.2 sqm per capita shortage, equivalent to 1.5m sqm of actual office space. Going forward, demand growth accrues from increases in the addressable labour force with an incremental yearly demand average pertaining to 164,000 sqm leading to a cumulative demand of five million square metres in 2010, equivalent to 2.0sqm/capita."

Based on projects announced to date, the market expects the addition of a cumulative 3.2 m sqm of office space, to the current stock of 2.4m sqm, over the coming three years.

With little available detail on when associated stock is scheduled to hit the market, the report has assumed the entire rollout to be equally split over 2008, 2009 and 2010. It has also assigned a 40 per cent delay factor, consistent with our assumption for residential units, to arrive at the cumulative supply estimate of 2.8m sqm by 2010, leading to a stock of office space supply of 5.2m sqm.

"We accordingly conclude that the 62 per cent shortage associated with the 1.5m sqm pent-up demand in 2007 will decline dramatically to 15 per cent in 2009, before the market achieves near balance in 2010."

Although the report forecasts "minimal surplus capacity in 2010," it is important to note Dubai is currently suffering from a dearth of office space in the market with the waiting period for the allocation of units to corporations in the DIFC reportedly in excess of two years.

Furthermore, there is also significant lack of Grade A office space in the market, with businesses being increasingly forced to move into temporary accommodations that are not ideally suited to their requirements. The lack of this "appropriate" accommodation, which is difficult to quantify could possibly lead to an extension in the shortage beyond 2009, the report said.