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Residential sales prices have been gradually dropping in the past three quarters, albeit rather slowly, and this trend is expected to continue throughout the year. This might not come as good news to short-term investors, but experts say a price correction was long overdue and the current trend is a sign of a maturing market.
“We are expecting average prices to fall further during the rest of the year,” says Craig Plumb, Head of Research at JLL Middle East and North Africa (Mena). “The decline of 2 per cent in the first quarter is very much in line with our full-year forecast of up to 10 percent. This reflects a period of relative stability rather than rapid decline and is certainly a welcome trend as the market was previously showing signs of overheating.”
According to JLL’s Dubai Real Estate Market Overview — Q1 2015 report, released last month, residential sales prices saw a marginal decline across both apartments and villas, although rents remained relatively flat. Although the price correction is marginal, it is seen as a positive trend for the market that witnessed extreme overheating during 2012 and 2013 — the period when average residential sales prices increased by 60 per cent. This unsustainable pricing growth had sent ripples across the industry amid fear of another bubble formation.
With prices now gradually coming down, industry observers say those fears could be put to rest.
“Average prices had increased by almost 60 per cent in the two years to July, raising fears of another bubble developing,” says Plumb. “The more recent stabilisation shows that this bubble has been averted without a sharp price correction.”
He says there is a general recognition that prices will remain flat or decline over the rest of the year and that there are limited opportunities for capital appreciation in the short term. “Those investors seeking short-term returns will therefore look elsewhere than the Dubai residential sector.”
However, for middle-income end users, this could be a good time to buy property because prices are softening. This segment of buyers hasn’t received much attention from developers in the past, but trends have started to change in the past few years. Some developers are coming up with more affordable projects such as Nshama’s Town Square near the Arabian Ranches. The government is also taking initiatives and proposing mandatory affordable housing quotas.
“Dubai’s real estate market is clearly witnessing a cooling period, which is making properties more affordable and allowing end users to enter the market,” says Robin Teh, UAE Country Manager, Chesterton Mena. “We expect correction to continue for the rest of the year as more supply enters the market. This will lead to higher end-user participation in the market.”
The mortgage caps, coupled with increased transfer cost and declining oil prices, have had an effect on dwindling sales numbers. However, Gregory Lewis, Head of Dubai Prime Residential Sales at Knight Frank, notes an increase in inquiries, which, he believes, is due to the decline in prices. “Investors and end users alike are testing the market to see what can be bought. As prices drop, this also opens the market to new buyers who once could not afford to buy, but can now.”
Lewis says this shows a maturing side to the Dubai real estate market, which should give comfort to longterm investors and end users.
The softening of the market is welcome from a buyer’s point of view, but it is also important to raise awareness about its impact among sellers, says Mario Volpi, Managing Director of Ocean View Real Estate.
“They need to understand that there are periods of change and that property prices do need to come down and not just go up. If the sellers react quickly to this point, we may even have a busy summer ahead of us as there are many potential buyers waiting to join the property market.”
Drop across sectors
The fall in prices has been relatively uniform across all sectors, with no significant variation between villas and apartments or luxury and mid-market sectors. Villa prices were more or less in line with 2008 prices during the first quarter, and apartment prices were about 9 per cent higher. “It is likely that apartment prices will continue to decline during the first half and possibly stabilise around previous peak levels,” says Robin Williamson, Managing Director and Real Estate Industry Leader at Deloitte Middle East.
During the first quarter, some of the most affordable areas were International City, Discovery Gardens and Dubai Sports City, with average prices below Dh1,000 per square foot. “Last year, some 70 per cent of residential sales transactions were below Dh2 million and we predict that these more affordable areas will continue to experience strong demand for the remainder of the year, with an increasing proportion coming from end users with the desire to own a home,” he says.
Data from the Dubai Land Department also reveals that transaction volume came down substantially to 4,200 in the first quarter from 8,900 during the same period last year — a decline of about 53 per cent.
“We consider the variance in transaction levels to be partly related to sales price trends, whereby investors may have exercised a greater level of caution as prices reached a new peak in the second half of last year, as well as a decline in demand from key source markets and a number of projects, which commenced handover in the first quarter this year,” adds Williamson.
Volpi says transactional activity continues to slide and this is evident in the reluctance of some sellers to reduce the prices of their properties. “As prices remain stubbornly higher than buyers are prepared to pay, the time frame of a property remaining available on the market gets longer,” he says. “This quarter has shown lower transactional numbers compared to the same period last year.”
The rental market was more or less flat during the first quarter, with annual rental growth at just 3 per cent. However, observers anticipate rents in the prime segment to fall by up to 5 per cent this year.
“Rental prices have remained flat compared to the same quarter last year, but the sentiment is that rents are due to fall this year, albeit slowly, as more inventory will become available,” says Volpi, adding that popular areas will continue to hold on to their prices due to the demand for rental stock in these locations.
However, Mat Green, Head of Research and Consultancy — UAE at CBRE Middle East, says that while rents have softened slightly, the rental sector overall will outperform the sales market, reversing some of the gains achieved last year when there was a clear disconnect as yields compressed. “Despite the forecast delivery of about 25,000 new residential units this year, the leasing market still has relatively strong fundamentals amid projected economic growth of around 4.5 per cent,” says Green, adding that the sustained level of growth in the economy is expected to prop up rental demand. “While we expect negative growth to emerge during the second quarter, declines are forecast to be quite marginal.”
According to Deloitte, Residential rents across Dubai in the first quarter were broadly maintained at the highest level since the government’s rent price index was introduced in 2009.
Analysis of key sub markets shows that rents in Business Bay and Discovery Garden are still below the 2009 index base, having taken longer to recover since the market crash. “This is most likely a result of significant new supply in Business Bay and the secondary location of Discovery Gardens,” says Williamson. “Conversely, prime villas on the Palm Jumeirah recorded the strongest growth in the first quarter of ten index points, as a result of limited supply.”
A huge number of residential units are also expected to be delivered to the market this year. It is one of the factors that will keep both sales and rental prices in check. As of the first quarter, about 1,000 new properties have been delivered as many projects got delayed during construction.
Although the projection is that close to 22,000 new units will be added this year, many projects could continue to face delays. “We would not expect all of these projects to be delivered as many will continue to experience construction delays,” says Plumb. “The general slowdown in transactions will also encourage developers to hold off on projects.”
Compared with the supply planned for the next three years, Volpi says large developers with a good land bank would likely consider the market condition before launching new projects.
Source: S.A. Kader, Special to Property Weekly