How timing matters in real estate

How timing matters in real estateImage Credit: Supplied

Lower property prices, high rents and resident-friendly amenities are making the property market more attractive to end users. Investors, meanwhile, tend to wait until the market bottoms out before making a move. Analysts point out though the question property buyers should ask is not whether prices have hit rock-bottom, but whether rentals have remained resilient.

Price drops indeed acquire a different meaning for homebuyers and investors when taken in the context of rentals. For investors, it is a delicate balance between the sale and rental values to maintain healthy yields. It is more straightforward for homebuyers as lower property prices, combined with high rents, make it a simple decision for tenants to buy rather than rent, provided that they can afford the mortgage.

''It is important to compare prices not only in nominal value, being the price per square foot, but also the in ROI terms,'' says David Godchaux, CEO, Core-Savills UAE. ''Yield levels in Dubai are still very high in comparison to other global cities, which means prices are lower in relative value. The quality of life, level of development, infrastructure, health care and strategic location also compare very favourably with many other markets. On the prime market, construction quality also generally compares in similar terms to other prime properties across the world.

''There is a unique selling point and the advantage here is a combination of these factors such as high yield levels and a market that is getting deeper and showing healthy signs of maturing with less marked real estate cycles in the future,'' he says.

Rentals more resilient

Dubai's rental market has been more resilient than the sales market, with less severe declines in rates, according to real estate consultancy Cluttons. ''[Last year] rents across Dubai's freehold residential areas declined by an average of 1.3 per cent,'' according to a Cluttons report. ''Q1 2016 registered a further 2.7 per cent drop in rents, which has dragged the annualized rate of change down to -3.5 per cent.''

While villa rentals remain relatively stable, slipping by 1.8 per cent in the first quarter and by 2.8 per cent compared with the same period last year, apartment rentals have registered a fall of 4.1 per cent during the first quarter and 4.7 per cent compared with last year.

Faisal Durrani, Head of Research at Cluttons, says: ''It is our expectation that rents will decline in general by a further 3-5 per cent this year on average, with the top-end of the property spectrum seeing more significant corrections of 5-7 per cent.''

However, sale prices have dropped at a faster rate. Standard & Poor's Ratings Services states in a report, ''Planned supply of new residential units remains high in 2016 [26,000 units according to Reidin], which is roughly the same as what was announced at the beginning of last year [25,000 units]. However, only a moderate consideration should be given to planned supply since much of the price correction will depend on how many units are actually delivered. Demand, on the other hand, will probably remain subdued given that investors are plagued by macroeconomic pressures.''

Standard & Poor's expects the price to not exceed 10 per cent in light of the Dubai government's willingness to sustain public spending despite lower revenues and still positive, albeit slowing, demographic growth.

Godchaux says that while cash buyers will seize the best deals, the divergent trajectories of rents and sales values make the emirate an attractive destination for investors. ''I believe this is generally a good time for all types of investors to search for opportunities in light of the strong yield compression that has happened since the last financial crisis in most mature economies around the world,'' he says.

Research indicates that prices are yet to bottom out, but may do so this year. Cluttons' outlook for Spring 2016 indicates that as the local economy continues to adjust to softening global conditions, overall residential values and rents in Dubai are set for a further decline this year.

The real estate consultancy's Dubai Spring 2016 Residential Property Market Outlook shows that after falling by an average of 3.1 per cent last year, residential values fell by an additional 2.2 per cent during the first quarter of 2016.

Standard & Poor's report states that real estate prices in the UAE are likely to continue declining this year. The agency, however, pointed to ''housing affordability improving from the current price environment''.

Not quite affordable

All things considered, analysts stop short of pinpointing when exactly prices will bottom out. ''It is difficult to predict when the market will be bottoming out,'' says Godchaux. ''But we are witnessing a growing pool of investors, who are looking at the right time to re-enter the market and are ready to transact if the right property for them is priced right. I think there is still potential for further slight price softening as Ramadan and summer are coming, and anticipation of [further decline] at the end of summer.''

The market, however, is more favourable to some than others. ''The high-level yields are going to favour those who are able to shift from rental to ownership or are pure investors, and penalize people in the lower income brackets, who cannot afford to put a down payment or do not qualify for a mortgage,'' says Godchaux.

The loan-to-value ratio can also be a deterrent for those looking to own their first home. ''The current new supply is catering largely to the middle-income segment and affordable living is yet out of reach for the lower-income members of society, thus pushing occupiers to rent instead of transitioning to ownership,'' says Godchaux.

The market may be more attractive but not quite enough, according to transaction data. Apartment sales values declined by a marginal 0.8 per cent on average over the last two years, which, Durrani says, reflects greater resilience in this segment. ''That said, there has been a reduction in the number of transactions registered during the first quarter, suggesting there may be a lag before apartment values start to slip,'' says Durrani. ''Reidin data shows that apartment transactions fell from 2,787 in the fourth quarter last year to 2,349 in the first quarter. With that in mind, we are expecting to see apartment values decline by 3-4 per cent this year as transactional activity slows further.''

The market is already responding to the changing buyer demographic as reflected in the price stabilization of more affordable homes. According to Cluttons, apartment values demonstrated greater resilience during the first quarter, with marginal declines across the board. ''Aside from mid-range apartments at Business Bay, which registered a 12.8 per cent decline in average prices to Dh1,068 per square foot, several submarkets saw values stagnate in the 12 months to the end of the first quarter, including more affordable locations such as International City, Jumeirah Lakes Towers, Discovery Gardens and the International Media Production Free Zone.''

The report points to the fact that the resilience of values in such locations demonstrates the emphasis buyers place on areas they perceive to offer best value for money, with homes priced between Dh650–Dh750 per square foot and Dh1,300–Dh1,400 per square foot being most in demand. This has in turn helped sustain values at these levels in some of the core locations in the city.

''For investors, we still believe that the high-end and upper mid-market segments offer the best long-term total returns in Dubai, and that entering the market now is a good idea in this segment,'' says Godchaux.

''We have seen interesting deals in the Marina, Downtown Dubai and upcoming developments in Jumeirah, such as City Walk, the area's first freehold development, or Dubai International Financial Centre [DIFC] that attracted a lot of interest from investors.''

Here's a guiding hand in the financing market

Source: Shalini Seth, Special to Property WeeklyPW


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