REAL ESTATE BUSINESS in the UAE: Meraas Holdings Case Report
Brief Concerning the Firm
Meraas Holdings Profile
Meraas Holdings is among the leading property companies in the United Arab Emirates. Located in the capital, Dubai, the business was founded in 2007 as a means of enhancing the potential and prestige of the town of Dubai (Meraas 2019). Because of this, the business has partnered with other leading global stakeholders in the true estate field to transform Dubai in to the modern city that it’s today. That is notwithstanding the truth that Meeras entered a business that had giant incumbents like Emaar who had already established themselves in the sector with the intention to be number 1 in the field.
Services and products
Meraas deals in property development, sales, and marketing. The true estate products include residential houses, offices, hotels, and restaurants. Recently, however, the business has diversified its operations into other sectors such as for example healthcare, destinations, hospitality, ventures, leisure, and dining (Meraas 2019). These sectors complement the company’s ventures in the true estate industry.
Challenges that Face the true Estate Industry in the UAE
Like any field, the true estate sector isn’t free of challenges which make it susceptible to economic hick-ups both within the spot and on the global stage. The five major challenges the sector faces include changes in oil prices, fluctuations in forex rates, forces of demand and offer, mortgage rates, and rent revenues (Gulf 2019). These factors tend poised to negatively affect the gains that accrue from the sector.
Particularly, experts project that the upsurge in mortgage and US interest levels will probably make leading property stock markets such as for example Emaar Properties and Meraas Holdings to record negative results before end of the year (Gulf 2019). The possible consequence of the downward trends in rent revenues may be the closure of properties by property developers. This outcome would destabilize the true estate industry in the United Arab Emirates adversely.
Brief concerning the Industry
Indeed, it really is correct to infer that the true estate sector in the UAE is booming. Lots of people are migrating to the cities browsing for greener pastures and better standards of living. Consequently, the demand for property infrastructure is increasing. Accordingly, more developers are venturing in to the sector to tap onto the vast market. Therefore, you can find thousands of property companies which are registered in the united kingdom (Gulf 2019). However, the is dominated by nine major companies, the majority of which were established in the last three decades and so are in both major cities – Dubai and Abu Dhabi.
Moreover, since these businesses have a large share of the true estate market, the federal government has shares within their ownership, hence, regulates their operations in the sector. This is simply not to say that the actions of another companies aren’t regulated. All property transactions are controlled by the Ministry of Lands and the true Estate Regulatory Agency (RERA). The very best players in the field include Emaar Properties, Nakheel, Meraas, Damac PROPERTY, Dubai Properties, and Deyaar Properties situated in Dubai. Additionally, Mubadala Investment Company, Al Dar Properties, and Tourism Development and Investment Company are located in Abu Dhabi.
Regulations 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 for example Meraas Holdings have already been compelled to diversify into other sectors which are more profitable but closely linked to the true estate sector (Zhuge et al. 2016). The implication here’s that other small companies will probably establish themselves in the market and expand their market share. This move could threaten the profitability of the nine main firms mentioned previously. Moreover, the truth that these major players are located in the cities, highlights a chance for other companies to build up in the sub-urban parts of UAE.
As highlighted earlier, the true estate industry is lucrative in your community as it is in virtually any other modern country today. Area of the reason for that is that there surely is a ready market for the merchandise developed and sold in the sector. Essentially, you can find four main products which are associated with the real estate business in Dubai. The foremost product includes residential houses and apartments (Wealth Monitor 2019). That is expected due to the large population of individuals searching for life in the cities, with many of them searching for residential property to either rent or buy. While analyzing the elasticity of demand for residential products, it is very important also think about the price changes which have occurred in the sector.
Elasticity of demand and offer are measurements which are used to look for the percentage change in quantity demanded and supplied in accordance with the percentage change in prices. Among the major applications of elasticity of demand and offer in the true estate industry would be to determine the output levels. The residential segment, that is arguably the biggest, can indeed be utilized to investigate the profitability of the industry over confirmed period. In the UAE, it really is worth noting that market analysis and calculations usually do not include labor camps and Emirati housing projects which are undertaken by the federal government.
Offices form the next largest market for the true estate industry. The demand for offices is high because you can find a large number of organizations in the UAE looking for commercial space to use their businesses. Most offices in the UAE can be found in major cities like Dubai and Abu Dhabi because most multinational companies have their regional branches situated in these cities aswell. The offices are rented or sold by the true estate developers. Meraas Holdings’ property is principally located in Dubai (Wealth Monitor 2019). The revenues they obtain from these properties is frequently useful for expansion and diversification of services and products.
Additionally it is important to remember that the true estate industry in UAE provides retail spaces for business. These mainly include big malls that exist for rentals. For instance, the Dubai Mall may be the second largest retail store on the planet. The mall originated and is partly managed by Emaar Properties, the best property agency in the UAE (Wealth Monitor 2019).
The last group of products provided by the UAE’s real estate business are hotels. They are closely from the tourism industry in the united kingdom. The overflow of tourists from around the globe has made the hotel sector worth venturing into due to its high returns. In 2017 alone, reports indicate that 15.8 million people visited Dubai. These visitors would require various kinds hotels in which to stay throughout their travels. Indeed, since Dubai continues to be on the verge of growth, a whole lot is still expected concerning the development of the hotel and property industries (Wealth Monitor 2019). Investors have, however, been warned that climate change and global warming will probably affect the tourism industry. This might create a lower demand for hotel facilities.
Individuals are arguably the most crucial stakeholders in virtually any industry because they’re the users of the produced goods and giving services. Therefore, before venturing into any business or investment, it is very important not only consider option of the market, but additionally to measure the ability of the consumers to get the products being produced or services on offer. It is because demand involves both will and the capability to buy.
In the true estate industry in UAE, you can confidently conclude that there surely is a easily available market that may fulfill all of the tenets of demand (Wealth Monitor 2019). In the United Arab Emirates, the true estate customer segment is split into either Emiratis or Expatriates. Also, the clients can purchase or rent property either as groups or individuals. Additionally, the merchandise consumed range between offices to retail shops and houses or apartments.
THE Cost Structure
Fixed and Variable Costs
A company’s cost structure is essential in determining the profitability of the business enterprise. For a venture to qualify as a small business, the costs incurred should be significantly less than the revenues obtained. In a nutshell, there should be a profit (Wealth Monitor 2019). Therefore, no business entity would survive if it creates losses for an extended period. It’s the profit obtained by Meraas, for instance, that enables the business to diversify into other sectors of the economy.
Financial analysis can be an essential tool for determining the viability of a small business in the long-term since it distinguishes fixed costs from variable costs and compares them with the full total revenue obtained from the business enterprise. Fixed costs are thought as the costs that must definitely be incurred by a business that are not linked to the final output. Therefore that these costs should be incurred if the company makes profit or not, and whether it operates or not (Wealth Monitor 2019).
Types of such costs include property tax, electricity, and office rent. Considering electricity being 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 based 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.
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 numerous 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.
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 meant to enlighten Meraas holdings on the very best practices in the market and highlight the areas that require improvement.
Secondly, the tourism industry is expanding daily. UAE is poised to double the amount of tourists coming into the united states by 2020 (Investopedia 2019). The entertainment industry can be likely to increase at exactly the same rate, meaning that there’s a chance for Meraas to get more fortunes from the.
Lastly, the training system in Australia is growing to be among the company’s potential customers due to the expansion projects which are ongoing. All around the UAE, new schools and colleges are increasingly being built, and the old ones are increasingly being renovated. Therefore, Meraas is likely to take a invest the industry and offer the required products (Investopedia 2019). However, given the large numbers of firms in the market bidding for similar tenders, Meraas is likely to show aggression towards this end.
Threats in this context will be the factors that are more likely to hinder Meraas from attaining its goals. Generally, threats are external factors that impact both productivity and profitability. A few of the threats include rising inflation, the legislation to improve rent rates by 5%, introduction of VAT in 2018, and reduced government shelling out for sector (Wealth Monitor 2019). Each one of these factors will probably affect Meraas’ operations if proper measures aren’t set up.
Investors don’t simply enter a business blindly. There are various factors that must definitely be considered before making a decision to venture into a business such as property. For instance, the investor should learn the needs of the prospective market segment and weigh in on the chance of meeting the requirements (Wealth Monitor 2019). Most of all, the attractiveness of the where the company lies should be checked.
For example, just how many people are entering the yearly? Porter was the initial economist to investigate the problem of industry attractiveness. He inferred that any industry will be suffering from Porter’s 5 forces: rivalry, threats of substitutes, buyer power, supplier power, and barriers to entry (Carbaugh 2016). However, this paper talks about other factors which are more likely to determine the attractiveness of the true estate industry, especially in the United Arab Emirates: price competition, threats of new entry, and industry performance predicated on cost and demand.
In economics, price competition is really a term that’s used to make reference to the pricing of similar commodities within an industry. The normal practice is that a lot of companies use pricing as a competitive advantage to expand their market share (Carbaugh 2016). However, it is a strategy which could backfire if the business is compelled to lessen its prices to an extent of earning losses. The implication here’s an investor must investigate the amount of price competition in the market because it will be unviable to venture in to the industry and produce goods and/or services at prices greater than the present selling price.
Meraas Holdings found itself in that situation. However, the benefit of the true estate industry is that a lot of customers aren’t only worried about the pricing of property but additionally the designs (Wealth Monitor 2019). How an apartment was created and the place where it is located may be the most significant factors to be looked at by a portion of customers. That is perhaps what made Meraas establish its property portfolio in Dubai.
Threats of New Entry
New entrants in to the industry can destabilize the marketplace and displace the incumbents should they have the bigger ability. Therefore, the barriers to entry into a business such as for example stringent government policies and the expense of the entrance are a number of the factors that determine the competitiveness of a business. In the true estate sector, the threats of new entrants are relatively high due to the low priced of entrance (Wealth Monitor 2019).
However, the threat isn’t so high for established companies like Meraas and Emaar because of their financial might, having experienced the sector for greater than a decade. Since regulations in UAE aren’t very restrictive, new companies are venturing in to the industry each year. The major repercussion of the higher rate of new entrants is that the costs of property products will probably go down because of the upsurge in supply. Ultimately, the demand for cheaper products will probably increase, thus delving a blow to giant incumbents in the market.
Industry Performance Predicated on Cost and Demand
The performance of any industry is influenced by the partnership between cost and demand. In the true estate sector, developers weigh between your cost of production and the available market for the merchandise. For Meraas, the price of production in the town of Dubai is normally high. However, given the increasing demand because of its high-end products in the administrative centre, the price of production will not affect its performance in the market (Wealth Monitor 2019). It is important for the business is that it’s availing quality products to the marketplace and creating a good benefit from that.
Macroeconomic Factors and Government Policies
The true estate industry in the UAE can be impacted by macroeconomics. They are factors that govern national and regional economics such as for example inflation, unemployment rate, and gross domestic product.
Inflation is an extremely big concern for some countries on the planet since it affects the nation’s overall economic performance. It really is characterized by a rise in prices of goods and services and decrease in the worthiness of the currency. Statistical data designed for inflation rates in the United Arab Emirates indicates that the rate of inflation was the best in 2015 at 4.07%. In 2018, the inflation rate dropped to 3.2%.
Experts attribute this reduction in the increasing fuel costs and stabilization of the UAE currency contrary to the US dollar. Not surprisingly, the inflation rate is likely to increase to 3.5 by 2020 because of the introduction of Value Added Tax (VAT) earlier this past year (Wealth Monitor 2019). The major blow of inflation on the true estate industry may be the high cost of production due to the increase in the price of construction materials.
For the true estate industry, High unemployment rate means inability to get the products availed in to the market. In the United Arab Emirates, the degrees of unemployment are relatively low in comparison to other countries in your community. Through the great recession that almost brought the global economy on its knees, the unemployment rate in UAE shot to an archive most of 4.6% (Wealth Monitor 2019). The figure dropped to 3.71% in 2018 and is likely to drop even further following the 2020 expo.
Gross Domestic Product (GDP)
Gross Domestic Product may be the parameter that is utilized 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 on the planet 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.
From the above discussions it can be concluded that the real estate industry in
the United Arab Emirates does relatively successfully. Meraas Holding, situated in Dubai, has seen tremendous growth since its inception in 2007. Because of favorable business environment and government policies, the business has were able to diversify into other sectors such as for example hotel, hospitality, and health. The analysis has revealed that the fluctuation in oil prices, introduction of VAT, and strengthening of the united states dollar are a number of the challenges facing the true estate industry in UAE.
The findings of the report also reveal that the true estate industry in the UAE has 9 major players including Meraas. However, you can find thousands of others seeking to penetrate the. The benefit of Meraas along with other established firms is they have a financial advantage on the new entrants, making them like a good market share in the united kingdom, and particularly in Dubai. The primary products availed to the marketplace include houses, apartments, offices, and retail spaces such as for example malls (mostly for renting).
The buyer purchasing decisions in the UAE’s market is mainly driven by pricing and located area of the property. Whereas some individuals search for the least expensive properties, others search for locations that suit their interests. For instance, tenants of retail shops often target places with high populations and busy economy. Therefore that any business that seeks to venture in to the industry must undertake market segmentation to see the precise needs of the prospective market.
Finally, it could be concluded that the true estate industry in the United Arab Emirates is of interest to investors, both foreign and domestic. That is due to the fact of favorable price competition that will not guarantee any firm competitive advantage using price reductions. The barriers to entry in to the industry may also be minimal due to the small starting capital that’s needed. Given that the marketplace has already been flooded with a large number of firms each attempting to gain foot in to the market, the primary challenge for new entrance is always to match the stiff competition from giant incumbents such as for example Meraas and Emaar.
Limitation of the Economic Research
Despite the fact that the scope of the analysis was exhaustively covered, there are many challenges that surfaced along the way, and which hindered the precision of the study. To begin with, there’s hardly any to no information freely available online for the Meraas financial record. The company’s website will not provide its annual financial reports as will be expected for an organization of its caliber. Perhaps, it is a business technique to conceal valuable information from its major competitors.
Secondly, the analysis found it difficult to investigate the competitiveness of the in Dubai since there is no database providing the precise amount of developers and their respective market shares. Again, this made the study vague and much more general. In the years ahead, the Land Department of the united states will be able to update such necessary information and make it open to economists for analysis.
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