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Two major factors that characterized the UAE's real estate market in 2014 were a large number of new project announcements and wider variety of funding models. The mega projects that were announced include Mall of the World and Dubai Parks and Resorts, apart from a host of residential projects—already under construction — by Emaar in Dubai Hills Estate, Downtown Dubai and Dubailand. Dubai Properties and Damac also added properties to their portfolios.
''These will have to compete for buyer attention, considering the number of previous generation projects that have been relaunched,'' says Craig Plumb, Head of Research, Middle East and North Africa at JLL. ''These include Dubai Lagoons (now Dubai Creek Harbour) and Dubai Canal.''
But while many of the new projects are as ambitious as those launched previously, the industry has learnt a number of important lessons, such as the need to obtain secure funding or reducing reliance on off-plan or land sales, says Plumb.
''Developers have become less reliant on presales. While there continues to be a steady stream of off-plan launches, most of these have been relatively moderate in scale and restricted to a small number of toptier developers. Moreover, although some local banks remain cautious, given their legacy of overexposure to the real estate sector, the financial position of most developers has improved as they have managed to reduce their debt exposure in 2014.''
Plumb adds that developers have recognised the need to phase projects over time in line with consumer demands. For example, the first three towers of its Dubai Creek Residences has been launched by Emaar at Dubai Creek Harbour. But it could take nearly 30 years to complete the development.
Matthew Green, Head of Research at CBRE Middle East, believes that Dubai's population forecast of 3.4 million people by 2020 is definitely possible. While the emirate has more than 447,000 units, CBRE calculated that future supply, estimated at 65,000 units (2015-17), would still be dominated by apartments at 79 per cent with the rest taken up by villas and town houses.
''You can see from the number of projects being launched that there is a real push from developers to get back into the off-plan market,'' says Green.
''Interestingly, we're seeing that villas are becoming a larger component of the overall supply, more than we've seen over the past decade, when the average was 90 per cent apartments and 10 per cent villas. We see this as a potential area for deflation of rents, although it will remain quite sector- and location-specific.''
Green also points out that most of the new supply is either moving towards Jebel Ali and Dubai World Central, or closer to Meydan and Mohammad Bin Rashid City.
''Dubailand is going to be a big component of the overall [picture]. However, in areas that we view as core locations especially for expats — such as Downtown Dubai, Dubai Marina and The Palm Jumeirah — there is still a reasonable supply coming through,'' he says.
While no major new laws and regulations were issued this year, the effects of those issued in 2013 were deeply felt. The International Monetary Fund had cautioned that the Dubai property market was in danger of overheating between the summer of 2013 and May 2014. The Dubai Land Department set out to curb speculation by raising the property transfer fee from 2 per cent to 4 per cent in October 2013, while the UAE Central Bank introduced strict lending rules.
The emirate's residential sector saw a dramatic increase in prices — up by an average of nearly 60 per cent over the two years to June 2014 — but has since witnessed some cooling, says Plumb. ''This is a reflection of regulatory changes designed to reduce price pressures and seller expectations.''
Green terms the year as a game of two halves, with the first half experiencing strong growth in residential sales and leasing, and the second half providing stability across the market. ''It has been an interesting time because we're not used to stability in this market, but volatility,'' he says.
Faisal Durrani, International Research and Business Development Manager at Cluttons, believes it was the introduction of the federal mortgage cap and increase in registration fees that helped to transform Dubai's residential market and put it on the path to sustainable growth so it attracts the international investment community.
John Stevens, Managing Director at Asteco, agrees that, in principle, both measures have had an impact, as they made it more expensive for prospective buyers to get on to the Dubai property ladder. However, natural market forces were also at play.
''For the first time since 2012, we have seen both residential rental rates and sale prices decline as a result of a natural adjustment to ongoing new supply,'' he says.
Green concurs that registration fees and mortgage regulations have had an impact together, and that on their own they wouldn't have caused prices to drop.
''Yields have been decimated due to decreased price growth in 2014. This doesn't meant that everyone here is a buy-to-let investor, but purely on that basis Dubai is no longer as attractive as it was before [for investing]. If rents dropped further it's only going to reinforce this trend,'' he adds.
Ahmet Kayhan, Co-Founder and CEO of Reidin.com, a real estate information company, says the year would be remembered for how strongly the Dubai residential market bounced back to peak price levels.
''The new peak is being corrected by the market with a flattening residential sales price line as well as increasing rent levels. This delivers a healthy rental yield market due to missing supply, but it's hard to sustain in the long run considering that affordability levels are dropping rapidly for the medium and low-income families,'' he says.
According to Asteco's third-quarter 2014 market report, it was the third quarter in a row when apartment and villa rental rates dropped by 2 per cent and 3 per cent respectively against second-quarter figures, with sales also showing a decline at 1 per cent and 4 per cent respectively. However year on-year growth remained positive with a 31 per cent and 17 per cent increase in sales prices for apartments and villas.
A similar year-on-year growth picture was revealed by CBRE, which states that apartments registered a 20 per cent increase and villas, 11 per cent. However, according to Reidin, transactions were down in numbers and value by 23 per cent and 17 per cent respectively (January-November).
On the rental side, apartment as well as villa rents went up by 7 per cent on an average this year, compared to 30 per cent and 17 per cent respectively in 2013. Due to an increase in supply, the highest growth occurred in Downtown Dubai, International City and Discovery Gardens. And these figures signal affordability. Green says, ''The market has become increasingly fragmented in terms of decline or growth of sales and rental prices on an area, project or building basis, and is likely to remain that way.
''It depends on how much property owners are willing to sell or let for, but we won't see the volatility or high price spikes and drops we've seen in the past.''
He reckons that areas such as Dubailand will be more affordable, but this isn't an indicator of low quality—it is rather a result of people wanting to spend less on a distant location.
In terms of who is buying what, regional turmoil has been affecting Dubai positively with cash flowing in from the affected countries. ''A lot of money coming into the region is because cash is being moved out of high risk countries to a nation perceived as comparatively stable,'' says Green. ''Money is always going to come into this market for the sole purpose of buying property here. They are not going to look to make capital gains or rental yield, but at some point sell.
''The profile of the majority of investors hasn't changed much over the past five years, comprising mainly of UAE nationals, Indians, Pakistanis and people from the UK.''
Meanwhile, Durrani reckons that 2014 would be remembered as the year that brought much more stability to Dubai and Abu Dhabi property markets. ''Although we are witnessing stabilisation, the market is still maintaining a positive growth trajectory, but at a much more sustainable level,'' he says.
''However, in Dubai, capital values are expected to record marginal declines for a few more quarters.''
Villas will meet the demands of those looking for a home instead of an investment. Green says, ''Investors usually buy villas to live in, as rental yields are terrible compared to apartments.''
The oil factor
What happens with the oil prices remains to be seen, but the real estate sector in Dubai is unlikely to suffer either way, says Green.
''From a real estate point of view, a potential negative effect could be the oil and gas sector slowing down the [rate of] new offices opening here. But Dubai is not an oil economy, so if global economic growth is spurred by reduced cost of oil, transport, etc. it could have a positive impact.''
Nicholas Maclean, Managing Director at CBRE Middle East, believes it is the international property market that has more to fear, should sovereign wealth funds here decide to curb real estate investments abroad and keep the money at home.
''Sovereigns of the region are an important source of new cash for international markets. If that is withdrawn, it will have much more of an impact,'' he says.
Source: Nicole Walter, Special to Property Weekly