Exploring the other end of Dubai realty

Exploring the other end of Dubai realtyCatherine Clarke - Director of Residential Valuations at Colliers International, Middle East

Recent legislation, namely higher loan to-value requirements on mortgages and higher Land Department transfer fees, has dampened a market that was threatening to overheat. At the same time, currency fluctuations have had an impact on investor sentiment and appetite for second homes in the emirate. This has resulted in a softening in residential prices in Dubai, with Colliers International's latest Dubai House Price Index (HPI), compiled using actual mortgage transaction data from a consortium of financial institutions, recording a quarterly decline of 9 per cent and yearly decline of 10 per cent in the second quarter of this year.

So what does this mean for the Dubai property market? Does it still offer good returns and what opportunities exist for canny investors and developers?

Firstly we need to remember that real estate is not a short term investment, it is an asset that appreciates over a three-year cycle. Yes, we have seen a decline in H1 2015, however, if you look at property prices in Dubai over a three or four-year cycle — bearing in mind over 2012 to 2013 it registered a growth of 50 per cent — it still offers a good return on investment.

Rather than solely looking at the figures, we also need to look at the state of the market on the whole. The Dubai property market is settling, and increasingly following global trends. The reduction in the number of transactions reflects the nature of the transactions in the market, the majority of which are for completed properties, purchased by investors and increasingly endusers. This is a positive sign for the market as it indicates that the lessons learnt by the crisis has created a more cautious investment environment, while supportable demographics, demand and a strong GDP, have replaced speculative optimism.

Affordability gap

While historically the Dubai market has been perceived as being at risk of boom and bust, as it matures and becomes less speculative the real challenge is to ensure that the market supports the growth of the city with the right product mix.

Our research into the affordability gap, which looks at the lack of housing affordable to the majority of residents (not to be confused with low-income housing) indicates that 50 per cent of Dubai's households earn between Dh9,000 and Dh15,000 per month. Following internationally accepted standards of what a household can afford to spend every month on accommodation, this limits rental or mortgage repayments for these individuals toDh32,500–Dh54,000 per annum. A further 35 per cent of households have an affordability level of Dh54,000 to Dh90,000 per annum which equates to Dh15,000 to Dh25,000 per month. This leaves a remaining 15 per cent that can afford above Dh90,000 per annum, Dh25,000 and above per month.

Taking into account the above, the only areas where rents are in the range from Dh 32,500 and Dh54,000 are International City, Discovery Gardens, Al Quasis, Deira, Al Nahda, Remraam, Sports City, Queue Point, Jumeirah Village Circle and Arjan. It should be noted that properties within this rental range are generally studios and one bed rooms. Rental demand within these locations remains high and with about 25,000 additional properties being required to fulfill the requirements of this price bracket we anticipate that this will remain until this housing gap is fully addressed by the both developers and government authorities.

Another critical factor that our research highlights is the need to review the current mortgage cap that took effect at the end of last year. Under the current regulations, transfer fees have doubled for all property sales and expatriates buying a property for under Dh5 million must now produce a minimum deposit of 25 per cent. This means that, even if a family or young couple could afford the monthly repayments, they would very likely struggle to raise the deposit. If the loan to value ratio was reviewed for properties under 1 million, then we would see a number of young professionals and families in a position where they could afford to buy a home that is good for both their family and their lifestyle.

High returns

Dubai is not alone when it comes to the issue of developing affordable housing. There are net gains to be made by developing affordable communities as part of creating a layered economy, with each income bracket contributing towards the overall development of the economy and its real estate market. When developed effectively, affordable housing can provide high returns for investors — significant rental increases were witnessed in more affordable locations in Dubai, and community facilities, such as healthcare and leisure services, can increase the developer's overall returns on a midmarket housing project.

Over this period purchasers began to reassess their property choices and the first class of property to suffer were the properties with a transaction price over Dh5,000,000. This property segment was hit hardest mainly due to the increase in the deposit required by lenders for properties as implemented by the Central Bank mortgage cap (35 per cent as opposed to previous market norms of 25 per cent). This combined with the increase in transfer fees from the Land Department (from 2 to 4 per cent) had a negative impact on this segment of the residential property market.

Lower end of the market

This led to a move by investors to consider off plan properties, favouring those that target the lower end of the market and that they consider will have an easy introduction to the rental market upon completion. A developer that has adopted its development model to suit this approach to investment has been Nshama, with their Town square Development in Dubai Land. It has just launched its second phase, Zahra Apartments; and the asking prices are listed as starting at Dh503,988 for a one bedroom apartment, Dh703,988 for a two bedroom apartment and Dh999,988 for a three bedroom apartment.

Investors who are more risk adverse have concentrated on the completed properties where immediate rental incomes can be derived. These investors are looking at long term gains and have specific criteria for yields from 7 to 8.5 per cent in mind. In addition, they are interested in well maintained properties in locations with reputable property management teams. Targeted areas are where properties generally transact in the lower end of the market, under Dh1,000,000.

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Source: Catherine Clarke, Special to Property WeeklyPW

The writer is Director of Residential Valuations at Colliers International, Middle East. She has been practicing in the UAE for ten years and is also responsible for the implementation and development of the Colliers International House Price Index


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