Buying a property in Dubai - The market concerns

Dubai property marketFaisal Durrani

The International Monetary Fund has been warning for some time now of an impending bubble in the city's residential market. However, these concerns have proved overly negative. Conscious of a repeat of the severity of the last downward adjustment, Dubai authorities have moved to implement a series of measures to regulate the pace of growth. which have proved to be effective in curbing the recent strong capital value gains, while fostering long-term  sustainability of the emirate's residential market.

Following an exceptional year, Dubai's residential property market is showing signs of more modest growth in the first part of this year, as regulations begin to take effect. Despite recent fears that the Dubai market is heading for another bubble, we are seeing a return to a more moderate pace of growth, as previously anticipated, with real estate deal volumes declining noticeably, while buyer demand is showing signs of slowing.

Correction period
The Dubai residential market went through a correction in values during the onset of the recession and values declined on average by almost 50 per cent across the city's freehold areas. The correction, although sharp, lasted for three consecutive quarters, after which values began rising once more as bargain hunters returned to the residential market.

But the resumption in global economic growth, coupled with a range of unique drivers, has helped propel house prices on a strong upward trajectory over the past 18 months. In fact, last year saw the strongest annual growth on record, with capital values 51 per cent up on 2012. This extraordinary growth was fuelled by the expected positive impact of the emirate's successful bid to host the World Expo 2020.

In the lead-up to the announcement, the government released a series of statements on the expected economic boost the city would receive should it be granted the rights to host the mega event. The economy is forecast to see some 277,000 new jobs as a direct result of the Expo 2020, along with a $24.4-billion (Dh89.61 billion) economic boost.

Vendors began pricing in a Dubai win last year, which helped drive capital values by a record 23 per cent during the second quarter last year. Following the win, however, the rate of acceleration has slowed significantly. During the first quarter of this year, prices rose by just 3 per cent, leaving values 19 per cent below their peak in the third quarter of 2008 at approximately Dhl,450per square foot on average.

This gradual slow down in price acceleration has supported a normalization of the residential market with the introduction of the Federal Mortgage Cap and the doubling of the property registration fee to 4 per cent, which have been seen as key measures in stabilizing the market. Furthermore, with developers now conscious of the dangers of off-plan sales, some have banned off-plan resale until handover and this has gone some way towards improving the market's behaviour.

Data appears to point to the introduction of the Federal Mortgage Cap in December, which limits loan-to-value (LTV) ratios, as having the most significant impact on the rate of price acceleration.

Transition to ownership
Property options available to mortgage buyers are now likely to be restricted to the lower end of the property spectrum due to an increase in the size of deposits required, and we have already seen this impact the volume of transactions. In particular, many families are remaining in the rental market until they amass the larger deposits now required, extending the transition period from rented property to owner occupation. While there may be some respite in the form of weaker growth this year, we do not anticipate a decline in values.

The reduction in the number of end users in the market also creates an opportunity for institutional investors to swoop on the market while prices stabilize and domestic demand ebbs to an extent.

With institutional activity now returning to Dubai, we expect to see the city's long-term demand base increasing. The Dh6.9-billion investment by Chow Tai Fook Endowment Industry Investment Development for the purchase of serviced apartments, high-end residences and two five-star hotels at the Dubai Pearl scheme is a standout example of this.

Not only are the regulations stabilising capital growth, they may also prove beneficial to the lettings market, as households may have no choice but to rent for longer. The rapid rebound of the economy, as well as increased level of job creation, has led to rents increasing by 16 per cent since around l2 months ago.

Although the supply pipeline is strengthening, it's too early to assess what impact, if any, it will have on the long-term performance of the rental market. Affordability and the ongoing delivery of new schemes will likely dampen the speed at which rents rise in the near term.







Source: Faisal Durani, Special to Property Weekly
The writer is an lntematlonal Research and Business Development Manager at Cluttons

Al Nisr Publishing accepts no liability for the views or opinions expressed in this column, or for the consequences of any actions taken on the basis of the information provided.


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