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As Dubai's real estate sector coasts along the bottom curve of its cycle, the exact timing of the end of the downturn has been dominating real estate conversations in the past year. The consensus among real estate experts, however, is that a new growth cycle will start next year. ''Dubai is standing right before another growth story,'' says Ahmet Kayhan, the CEO of Reidin. ''A new positive cycle will start somewhere in 2017, will go up to the World Expo 2020 and around that a gradual correction will occur. We always have that three- to four-year cycle and a correction.''
The market turnaround will be dependent on Dubai's continued investments in infrastructure development and expanding population, which Reidin currently estimates to be around 1.8 million-1.9 million. However, fluctuations in Dubai's rental yields could also signal a change in direction in the property market.
Dubai boasts one of the best rental yields in the world. This means rents are expensive for tenants, says Kayhan, but it also means that buying is a more attractive proposition.
''The cost of your mortgage is 4.55 per cent maximum, but you can get 8-9 per cent [return by] leasing out a unit, so it pays your mortgage and you get extra money with a currency pegged to the US dollar , and it's asset backed,'' says Kayhan.
Many off-plan projects could even achieve yields of up to 12-13 per cent. ''That's highly profitable,'' Kayhan says, ''but greedy. Historically it is very hard to maintain rents at these high yield levels. It is no longer sustainable for the market to carry those yields.''
Kayhan believes the current situation, where prices are low and yields are high, is expected to make a turnabout next year when prices would go higher and yields start to drop. ''As the yield goes up people start buying,'' says Kayhan. ''Transaction volumes over the last couple of months before summer were up. After Cityscape yields will go up further and then go down.''
Sean McCauley, Director of Agency at Asteco, sees a similar trend as he predicts marginal declines in value over the coming months. ''This could see a possible increase in transaction volume as low prices unlock demand with an increase in single unit buyers, especially for nearly completed or finished properties,'' he says.
According to a report by Cluttons, residential capital value growth rates in Dubai started to recover from the 2008-09 market downturn at the end of 2011, peaked in 2013 and started declining again at end of 2014.
''Prices are very close to bottoming out so there will be opportunities for buyers to secure good deals for both completed and off-plan products for the remainder of this year and into next year,'' says McCauley.
The supply factor
JLL estimates around 23,000 units to be delivered in the second half of the year, with 27,000 units delivered next year, while Knight Frank says around 30,000 units will start construction in the second half this year and in the following year. Kayhan, however, says that many could be delayed as developers release their projects in phases.
The estimated deliveries could differ with actual deliveries by up to 50 per cent, according to Kayhan, noting that the market won't be swamped with new launches in the near term.
''Very few deliver on time,'' he says. ''The average delay is three to six months. There will be a couple of new launches, but not huge because of the level of finance available, and you have to take into account [factors such as oil prices], basically the macroeconomy.''
According to the Dubai Land Department, Arabs continue to hold the biggest chunk of real estate investments in the emirate, followed by investors from India, the UK and Pakistan. Iran, Canada and China come next, trailed by France, the US, Russia, Afghanistan and other nationalities.
Kayhan says it is important to look closely at the economies of these source markets to predict their future property investment activities. ''The Gulf is still suffering a little from lower oil prices, but if you look at Russians, this market was dead over the last 18 months,'' he says. ''And they're not coming back in a big way for the next two to three years. Indians are out because of taxation [and other] issues in their home country.''
While the Chinese have buying power, Kayhan believes they usually look for buy-to-lease options and don't live in the emirate like the Russians. Kayhan says Dubai's key markets in the near term would be the Middle East, particularly GCC investors, as well as Iran.
''Iran is very important for Dubai as it hasn't opened up yet, but it will within two years or so,'' he says.
What buyers want
Damac Properties, which specialises in upscale developments, says around 60-70 per cent of its buyers are non-residents looking for a second or holiday home, property for their children or an investment asset. Making mortgages more accessible to both residents and non residents could further drive both domestic and foreign investment activity, says Ziad El Chaar, Managing Director of Damac. Complicated documentary process is putting off buyers, he says.
''Buyers give up half way,'' he says. ''However, close to 5,000 mortgages were recorded on ready projects but mainly offered to residents buying their principal home here, which is encouraging. We're always pleading with banks to make mortgages more accessible. They shouldn't be scared of loss of value; property is stable and a bank's property valuations are very close to real value.
''If they lend 40-60 per cent [of the property value] over 15 years, they can always foreclose [the property when the buyer is delinquent], so where's the risk?''
According to Reidin, Dubai Marina had the highest transaction value, including mortgage purchases, with the Palm Jumeirah second. They are followed by Business Bay, Jumeirah Lakes Towers (JLT) and the villa communities The Springs, Meadows and Arabian Ranches. ''Sales and mortgages have to follow each other, but on smaller units they are often not required,'' says Kayhan. ''Dubai Marina has one of the largest number of units and its freehold, so every year around 10 per cent [of properties] change hands. The area will always be in the top 10.''
However, there are fewer mortgages taken out on cheaper units, which also trade in higher numbers. International City leads in number of transactions, followed by Dubai Marina, JLT, Business Bay, Jumeirah Village Circle (JVC) and Dubai Sports City. ''International City, trades so much because of the high yields of up to 11 per cent, as the units are smaller,'' says Kayhan.
Ozan Demir, Data and Research Manager—UAE at Reidin, says apartments will dominate the market in the next two years, ahead of villas and town houses.
''Around 95 per cent of the units launched during the first half of the year were apartments, with Dubailand, Dubai Silicon Oasis and JVC the major communities where we expect [most of the] apartment supply, while the Al Qudra Road area is reserved mainly for villas and town houses,'' says Demir.
Premium locations such as Downtown Dubai and the Palm Jumeirah will continue to be favoured, according to Dana Salbak, Associate Partner and Head of Research at Knight Frank. ''They provide luxury and in the case of Downtown it's accessible and central,'' says Salbak.
However, Dubai has been undergoing a natural geographical expansion away from Shaikh Zayed Road towards Abu Dhabi due to the government's commitment to develop Dubai South, where Al Maktoum International Airport and the World Expo site are located, according to Salbak.
She adds that Mohammad Bin Rashid City, Meydan in particular, and Dubailand have a lot to offer in terms of real estate development. ''Also, the new developments along the Dubai Canal are ones to look out for, particularly the Creekside developments by Emaar. This tells us investors are still high on luxury,'' she says.
''While apartments continue to be favoured, town houses are now gaining favour as practical alternatives to big villas,'' says Salbak.
McCauley echoes the same sentiment. ''Smaller units will be preferred over larger properties, with studio and one-bedroom apartments and smaller one- to three-bedroom town houses and villas expected to have stable transaction levels from a sales perspective, while they will also remain strong in the leasing market,'' says McCauley.
Get a glimpse on the lure of Ras Al Khaimah
Source: Nicole Walter, Special to Property Weekly