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Question of the Week
Recent reports have shown the Dubai market cooling somewhat. Why?
A combination of factors have had an effect. The implementation of the 4% transfer fee along with developers’ proactive attempts to limit speculative practices; the implementation of new mortgage laws limiting the availability of credit to prevent individuals “overstretching” their finances, or providing the finance for the practice of flipping; and new laws governing rental price increases have also had an effect, with investors now recalibrating rental returns which are essentially determined by a well-publicized and transparent formula backed by law.
In addition, there are other investment opportunities competing with real estate. For example, the Dubai Stock Market, which had posted gains of 107% in 2013, having grown 61% YTD. Apart from non-property linked stocks performing well, property developers have shown strong growth in valuations. Emaar stocks have more than doubled in value since August last year, providing investors interested in benefitting from Dubai’s property resurgence to directly invest in developers rather than properties.
And developer practices have also come under scrutiny. Regulations and restrictions for off-plan sales regarding minimum capital requirements, the establishment of escrow accounts, 100% land ownership, authorization procedures, regular audits and investor protection legislation have all resulted in a significant decline in speculative development practices.
The IMF recently stated that Dubai requires additional measures to prevent another real estate crisis developing. Do you agree?
No. Additional measures are not required at this stage. The rapid price growth of the past year had already started to slow some time before the IMF statement was made. Various estimates of quarter over quarter price growth for January to March 2014 for apartments range between averages of 2.7% and 3.4%, with price growth in established areas such as Dubai Marina, JBR, The Palm and Downtown slowing to low single-digit growth, while secondary areas such as JLT and properties in Dubailand have also slowed to exhibit growth in the 7% to 9% range.
A similar story exists for villas, with quarter-on-quarter price growth slowing considerably in more established locations such as Arabian Ranches and The Palm, while secondary locations are still enjoying healthy, albeit slowing, growth rates in the 7 to 13% range.
Office space is showing a long awaited rebound, with quarter-on-quarter increases of anywhere between 7% and 15% depending on the location. While this may seem excessive, remember the office segment was decimated by the global financial crisis and languishing with inventory supply at double demand and rock bottom prices for half a decade. So, given what we know about the current trajectory of price growth rates, additional measures to further cool the market may seem a little premature.
Given the recent performance of finished properties, are there any advantages now by buying off-plan?
Purchasing a property off-the-plan can provide you with superior capital gains by the time of completion providing the market will continue to exhibit price increases beyond the completion date for the particular property that you are considering. This, of course, will depend on an estimation of economic growth, population expansion, the number of competing projects in the pipeline and the eventual industry inventory position.
Be smart about the “product” that you buy. Look for certain property types complete with amenities and facilities in locations which you believe will be keenly sought in the future.
Do not assume that all property types in all locations will improve their values homogeneously. No market works this way. Also check the latest Dubai Metro route planning.
I have a 2-bedroom flat at the Queue Point development in Dubailand. Can you advise me on whether I should sell or rent it out?
At the moment, apartments in Queue Point are generally being valued between Dh700 and 750 per sq.ft., a marked improvement from the Dh450 to 500 per sq.ft. being offered during the recession. We expect values to continue to increase over the coming five years at a sustainable 7-10% average. I suggest you retain the apartment for at least the next 5 years as I am confident you will benefit from superior capital growth and enjoy at least a 7-8% net annual rental return in the meantime.
Can we expect an improvement in construction quality in this current era of resurgence, or is it more like before?
During the GFC, many developers realized that properties of poor quality were dealt the harshest of value declines. Having said that, the old caveat of “buyer beware” still applies.
Deal only with a reputable developer. Ask around or seek professional guidance, as those in the industry have a good appreciation of who the reputable developers are, and inspect buildings already completed by the developer.
Ask what proactive measures are taken to ensure the end product has been built to an acceptable standard. Warranties and any quality assurance policies should be discussed in detail and have the Sales and Purchase Agreement reviewed by a professional, to ensure you have legal recourse should any quality issues arise.
Engage a professional to inspect (snag) your property, and report any legitimate issues to the developer for rectification.
Source: Mohanad Alwadiya, Managing Director, Harbor Real Estate, Special to Freehold