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Dubai is in for the long haul. The global city has learnt to weather fluctuations and has positioned itself as a strong economy that will become the hub of a ultitrillion-dollar Islamic economy and finance over the next five years. Cosmopolitan and bold in its dynamic diversification, with the private sector playing a leading role and policymakers displaying an unmatched far-sightedness, the emirate’s significance as a business and leisure capital has grown, with its property sector serving as a strong magnet for investors.
From the start of the year, however, optimism has tempered slightly as real estate has come under downward pressure, evoking despondency in some and indifference in others. However, this calls for a reassessment of the sector, a need to take the long view, and debate whether it is prudent to give up on the bullish
Market cooling, not cold
Analysts have said that Dubai’s property sector will continue to see a softening in prices over the second half of the year and into 2016. This trend does not merit shortsighted panic or knee-jerk reaction, but instead needs objective analysis.
The residential market in Dubai faces downward pressure as rents and sales prices registered quarter-on-quarter declines vis-à-vis Q2 2014 and annual declines. In July, official figures showed house price inflation in Dubai falling below 7 per cent per year for the first time since last October.
The numbers did dampen the spirits of investors taking the wait-and-watch approach. It is true that as the market recovered last year, a wide gap appeared between asking prices and affordability. Dubai’s property dip intensified due to a stronger US dollar, eurozone issues and the International Monetary Fund’s (IMF) tepid outlook for the global economy.
A reduction in government spending is expected, following the decline in oil prices, which perhaps slowed the pace of growth. Ultimately, a combination of these factors began to hurt market sentiment.
A close analysis of the latest figures indicates that the picture need not be one of gloom. Although there has been a decline in aggregate volume and number of deals, overall transaction volume in H1 2015 was Dh129 billion, which was higher than the volume for H1 2014 at Dh113 billion (this includes land transactions too).
The slowdown in Dubai real estate is part of a worldwide pattern of softening prices, barring some countries. Cooling measures in key Asian centres continue to weigh on prices and transactional activity, not only in Hong Kong and Singapore, but also Beijing and Shanghai. Cities such as Jakarta, Miami and London have outperformed the sector, while New York and Los Angeles have had a weaker recovery.
Secondly, several cooling measures introduced by the UAE authorities in the real estate sector have, to an extent, contributed to the slowdown. The Dubai government doubled its transaction tax on the purchase of properties and introduced limits on the size of financing homebuyers can take out.
Fortunately, none of these factors are debilitating and it is likely that the Dubai property market will bounce back and head northwards. The city is likely to retain its sheen and continue to attract international investors.
Estate with a difference
Dubai’s rising status as one of the most important global business and tourism hubs ensures that the size of the property market will remain substantial with possibility of steady growth. The emirate has attracted foreign investors due to myriad of factors — political stability, superior infrastructure, taxfree environment, high rental yields, freehold property status and the World Expo 2020. It now has a more diversified and less oil-dependent economy and is expected to grow by over 4.6 per cent over the next five years, according to IMF estimates.
Also, Dubai has been able to generate trust in its real estate due to the sustained efforts by the government and local authorities to discipline the industry. Prices today are independently reasonable and lessons learnt from the past have forced the authorities to structure regulation that ensures a robust environment for investors.
One of the most attractive characteristics of Dubai property investment is the prospect of high rental yields, considered among the best in the world. Gross yields range from 6-7 per cent, and climbing. Apartments in Dubai can expect to achieve rental yields of up to 7 per cent, although they generally hover around the 6 per cent mark. This is a huge increase on other global locations, and London in particular, where property owners are lucky to achieve 3.2 per cent. Rentals in Dubai have held on, making the returns highly attractive.
The UAE has chosen to focus on affordable housing with Dubai planning to introduce mandatory affordable housing quotas for all new residential developments. Developers are also launching projects affordable for the middle-income group.
Local consultancies say the time is right for renters in the emirate to become homeowners as equated monthly instalments (EMIs) fall below their monthly rental outgo. However, it is now mandatory for a purchaser to put 25 per cent as down payment for completed properties.
Banks are more sensitive to customer requirements and under UAE Central Bank regulations, the fees and charges are reasonable and uniform. A wide range of safe financing is available for those seeking affordable housing, including expats. Apart from the down payment, an average homeowner would need to pay an EMI of around Dh5,000, which is quite reasonable.
Although options for foreigners are limited, banks are keen to cater to this segment, offering non-resident finance to foreign investors with high amounts and tenors of up to 20-25 years.
Source: Pawan Dhawan, Special to PW
Pawan Dhawan is Head of Home Finance at Noor Bank.