Price correction perks

PW examines the reasons behind the recent adjustment in Dubai real estate values and its impact on the marketImage Credit: Supplied

Dubai’s property prices began to weaken slightly from the third quarter of last year after soaring rapidly in 2013. According to Knight Frank’s Dubai Real Estate Market Overview—2014 Key Events and 2015 Outlook, residential price growth entered negative territory in both the prime and mainstream segments in the third quarter, with the former seeing a 0.2 per cent fall and the latter a 5.2 per cent drop.

Moreover, the price indices experienced their second consecutive quarterly decline in the final three months of last year.

Experts view the recent price correction as a normal phase of a property market cycle. It is a sign of a maturing market since the prices slipped moderately and did not have a dramatic fall similar to the crash in 2008-09 when prices were slashed by nearly 60 per cent. “The noteworthy thing about this price correction is that it has come before the market could overheat with speculation,” says Ashirwad Somani, Chairman of Candour Properties. “Hence, it is a moderate correction and not a sharp one; in other words it has marked a reduction in the volatility of the Dubai market. This is definitely a sign of a maturing market that is not vulnerable to severe price drops.”

Going through the cycle

Sunil Saraf, Managing Director of Tanjay Real Estate, explains that a property market moves in cycles  from revival to growth, peak and correction. The current Dubai property cycle, he says, began in 2009 when the market started to revive after the crash and prices were at their lowest.

“By 2010-11 the market became attractive for buyers,” says Saraf. “With two to three years of continuous increase in buying activity, the prices rose substantially, bringing the market to its peak at the end of 2013 and early last year. By the end of the third quarter last year, the market began a moderate correction in prices that still continues in this quarter.”

 The gradual slip in prices in the past two quarters is good, as it prevents the market from overheating, which keeps buyers away. Saraf cites a location where properties were being sold for Dh700 per square foot in 2009. Prices increased to about Dh1,400-Dh1,600 by early last year, which was a 100-120 per cent rise in values in four to five years. “This is a massive growth rate that is unhealthy for the market,” says Saraf.

“Now let’s assume this pattern continued for another three to four years. The value of the same property could rise up to about Dh2,100 per square foot. An enormous increase such as this makes the property market fragile, where developers will float several new projects and buyers purchase  property for speculation rather than consumption.”

Furthermore, in these circumstances end users or middle-class buyers would stop buying as property becomes unaffordable, leading to a decline in demand and eventually a sharp price crash as witnessed in the 2003-08 cycle, says Saraf.

In the current tightly regulated market, Saraf says property prices have reduced slowly based on the demand-and-supply mechanism, which is healthy for the sustainable growth of the sector. “The market is now at the correction phase of a second cycle, which is good as it creates visibility and better understanding than in the previous years,” says Saraf. “In 2008, there was no benchmark for people to refer to and take better calls based on the market’s historical behaviour.

“However, now people understand the cycle, which makes buyers believe in this property market more strongly than they did in the pre-crash days.”

Dubai’s property sector is still young and learning from its mistakes. Regulatory measures have been instrumental in bringing more stability to the market in recent months. Lewis Harrison, Client Manager at real estate broker Exclusive Links, says, “Appropriate measures have been implemented  to strengthen the market, such as transfer rates being doubled, mortgage rates being capped, the Real Estate Regulatory Agency tightening its rules for the growing number of real estate brokerages, and a more regulated approach to the buying and selling of property.

“This is giving a more typical cycle to the property market and applying the brakes to radical growth in property prices.”

Additional factors

However, other factors have also influenced the recent correction, says Harrison. One of the major reasons is an abundance of off-plan properties in the market, leading to oversupply. “In such a market, motivated sellers have no option but to lower their prices to remain competitive, making it a lot more price-oriented in the resale market,” he says.

“The other essential factor is Dubai’s status as a global business hub. Hence, international factors are also going to affect the property market that could, in turn, lower property prices, such as the current dip in oil prices and other political influences around the Middle East and globally.”

Good time for end users

Experts say the gradual price correction creates opportunities for end users to enter the market. Chris Whitehead, Managing Director of ERE Homes, says, “With the recent price drops and strong rental income, the correction has made investing desirable again.

“As prices drop, the yields increase. Combined with ongoing infrastructure improvements and heavy investment being injected into tourism, Dubai has matured and is proving to be an excellent long-term investment strategy,” he adds.

His advice to residents looking to stay more than five years in Dubai is to “look at investing”.

“With low financing rates and currently high rents, long-term buying gives them lower monthly outgoings  and a real asset return at the end of their term.”

Somani adds that investors can now enjoy better prices, good payment plans and easy terms, which they can use to their advantage to achieve healthy returns.

“Opportunities are abundant in this market, but they will not last forever as assets change hands. Hence this consolidation period could end anytime soon, after which the prices would start moving upwards.”

Moreover, he believes the first quarter will set the tone for the rest of the year. “I see the market becoming stable and consolidating at these levels this year,” says Somani. “However, there will be very interesting new launches this year and some of them would be worth considering, since long-term payment plans will be on offer.

“Also, opportunity traders with deep pockets will enjoy this year since there will be offers as well as exits throughout.

“Moreover, people who have invested should stay invested since there will be a very positive wave expected beyond this year in Dubai’s real estate sector, after this consolidation phase is over,” he adds.

Source: Hina Navin, Special to PW


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