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Luxury has long been an integral part of the Dubai story, with the promise of unrivalled living standards one of the key reasons many expatriates are drawn to the emirate. But a new trend in Dubai property market suggests buyers are most active in the middle-range and not in the high-end segment.
A recent report by Knight Frank reveals that while prices of apartments and villas above Dh10 million have increased by some 6 per cent this year, the mid-range sector has seen a massive 24 per cent hike, fuelled by investment from Indian, Pakistani and British expatriates who made up four-fifths of buyers in the third quarter.
New figures from Asteco also confirm the boost in the mid-range market, with interest shifting to peripheral communities such as Jumeirah Village and Dubai Silicon Oasis (DSO), as many buyers remain priced out of popular areas such as Downtown Dubai and Dubai Marina.
In Jumeirah Village and DSO, prices per square foot are currently in the range of Dh850 to Dh1,150 and Dh650 to Dh850 respectively. In comparison, prices range from Dh1,200 to Dh2,400 per square foot in Dubai Marina, while average prices in Downtown Dubai and the Palm Jumeirah are Dh2,800 and Dh3,000 respectively, according to Asteco’s latest third-quarter report.
The mid-range sector has also been boosted by the launch of several new developments, such as the 171-house Dreamz project at Al Furjan.
Victoria Garrett, Head of Residential at Knight Frank, attributes the growing preference for mid-range options partly to the exorbitant prices of luxury property, which have reached unrealistic levels since the announcement of Dubai’s successful bid to host the World Expo 2020.
On the Palm Jumeirah, for example, some residential properties have been marketed recently for more than Dh5,000 per square foot, when the absolute highest recorded in the third quarter was around Dh4,000.
Furthermore, most owners at the top end of the residential property spectrum are Emiratis, who are not compelled to sell unless they can make a substantial profit.
“There has been a lot of unrealistic pricing, especially after the Dubai Expo was announced,” says Garrett. “People thought, ‘great, I can hike my price’, but they don’t need to sell unless they get the price they want.”
John Stevens, Managing Director of Asteco, agrees on the impact of the Expo announcement on Dubai prices across the board.
“Sellers who raised their prices following the Expo announcement and who have been intent on maintaining their position this year, have found that prospective buyers are sitting on the fence for now,” he says.
But it has also been new legislation that has hit Dubai’s top-end market.
In an effort to cool off the property market, which has seen double-digit growth since last year, the government has tightened regulations on mortgage and doubled the transfer fee from 2 per cent to 4 per cent. Buyers also have to pay a 2 per cent agent’s fee and bear the extra cost of getting a mortgage.
New regulations have also increased the deposit when buying property from 15 per cent to 35 per cent for property above Dh5 million and 25 per cent for property under Dh5 million.
As a result, many residents have been priced out of the high-end segment and are being pushed into the mid-range bracket.
“It’s not an issue for cash-rich investors, but new buyers eyeing prime property will need more time to secure a higher down payment, which has a domino effect on transaction processing and volume,” says Stevens.
That said, experts broadly welcome the changes. There has been plenty of speculation that the rapid growth of real estate rates could lead to a repeat of the crash that devastated the property market in 2008—even if Dubai’s fundamentals are now far better than they were in 2007.
“With a number of projects announced and renewed investment activity, Dubai should be cautious of overheating,” says Nick Maclean, Managing Director of CBRE Middle East. “[But] the government’s various regulatory measures will go some way to act as a brake on an overheating property market.”
Garrett agrees, noting that the regulatory measures introduced by the government will allay fears Dubai is getting carried away with a prolonged, heady boom off the back of the Expo success.
“The cooling measures have had a good effect,” says Garrett. “We had 35 per cent growth last year. If we continue to grow at that pace, we would be heading towards a potential crash. It wouldn’t be sustainable.
“Also, the fact they took those steps was a positive message of a maturing and sustainable market. It gives more confidence for foreigners looking to buy.”
Those who see themselves staying in Dubai longer are the ones fuelling the growth of the mid-range property market, particularly in the face of ever-rising rents over the past two years. High rents have also stimulated the buy-to-let sector.
This has led to an increase in schemes that are attractive to expatriates who otherwise would rent, says Maclean. Such schemes include off-plan options, which offer attractive payment plans, low initial deposit and back-end structures. Maclean believes this is allowing more people to enter the market, although there are also concerns.
“The sheer volume of new residential developments is once again becoming a point of concern, although as yet the actual delivery of new supply has not reached a point where demand is being rebalanced,” says Maclean. “Overall market fundamentals are arguably stronger now than in 2008, with solid occupier demand, a smaller development pipeline, tighter regulations and a healthier global economy.
“Dubai’s core sectors such as retail, trade, tourism and industry and manufacturing are performing well.”
Garrett and Maclean are bullish going forward, despite the drop-off in transactions that was seen in the third quarter. They foresee slower growth next year and beyond, but there will be growth nonetheless.
“I think we are still going to see a bit of growth. I don’t think we have hit the top yet,” says Garrett. “I think we are going to see slow growth to the end of this year and next year, or it will stabilise.
“I don’t think we are going to see a drop-off. I think between now and the Expo we will see some sort of correction, but I don’t think it will be a crash like last time.”
Maclean attributes the drop-off in transactions and the slight fall in prices to government measures, which experts generally welcome.
“With market conditions steadily improving, we anticipate residential rental and sales growth to continue throughout the rest of the year,” he says. “Even though the first half of the year has seen strong activity, the results appear to show a slowing of the market compared to last year. This is attributed to a combination of factors, including the measures taken by the government to curb speculative activity and affordability becoming a more influential driver of property movement.”
Meanwhile, many who bought mid-range property on the outskirts during the past boom were left with mortgages that no longer reflect the value of the property after the market crash. As buyers now choose midrange projects in less-central locations, there are concerns they could suffer the same consequences when a major correction hits Dubai property market.
Garrett says this could be an issue once again, but urges those looking at peripheral properties to ensure they are getting a good deal.
“It will probably happen, because if prices drop and you can get something much further in for the same price, then, of course, you are going to take that option,” she says. “I guess it comes down to infrastructure. If you look at these new places being built, it is about how good their communities are, with communal pools, playing areas and facilities to make people want to go there.”
Not everyone is bullish that there will be continued growth as the year comes to a close. Stevens says many buyers in both the top-end and mid-range markets are waiting to see what will happen over the next six months, especially with rents easing in the short term. On the other hand, with dozens of new projects announced this year, there will be more choices for prospective buyers.
“It’s very much a wait-and-see scenario on the part of buyers, and we believe that sales prices could soften further as the year wraps up with more new supply on the way,” he says.
Source: Orlando Crowcrott, Special to Property Weekly