Dubai Property Market: The cost of a price drop

Dubai property marketImage Credit: Supplied

Experts agree that Dubai’s residential property market has stopped surfing its peak, and that prices and rents will soften this year while the office market will gain some momentum.

“We really reached the peak, which is good as Dubai was becoming too expensive to live in,” says Craig Plumb, Head of Research at JLL Middle East and North Africa (Mena). He says talk of a residential price bubble deflating has been going on since average sales prices increased by 56 per cent over two years to last June.

“Average residential transaction prices will decline this year, not dramatically but by 5-10 per cent,” he says. “Obviously some properties and locations could go down less or more than that.”

In Abu Dhabi, Plumb forecasts more stable prices and growing rents. “It has seen a 25 per cent increase over two years,” he explains.

Ajay Rajendran, Vice-Chairman of property developer Sobha, believes all seasoned developers are happy with the trend in Dubai, which he describes as a new, more sensible normal.

“There is no question the market is much slower than it was a year back,” says Rajendran. “We would [have gotten] into serious trouble if the steep upward trend kept building, the asset bubble would continue indefinitely. You may feel happy about strong sales in the short term but it would bite you in the back at some point in time.

“What’s interesting is that prices are going horizontally but the transactions are not falling to the same extent. I would be worried if there were no transactions, which isn’t the case.”

In its Top Trends for UAE 2015, JLL states prices and rents could remain flat or fall by up to 10 per cent. According to the real estate company, residential rents will be tick-tocking into the “rents falling” quadrant by the fourth quarter of this year, after a period of growth over several quarters.

Knight Frank’s Dubai Real Estate 2015 Outlook sings a similar tune, predicting prime residential prices to soften by 5-10 per cent and rents to decline by up to 5 per cent this year.

“These are based on transaction prices and rents achieved and they cover the sales of both off-plan and completed property,” explains Victoria Garrett, Associate Partner — UAE Residential at Knight Frank. In contrast, Plumb believes off-plan prices could stay the same, while asking prices of completed properties are likely to experience a steeper decline. “Sellers are already reducing their asking prices,” he says. “Expectations are that during negotiations you could bring them down by up to 20 per cent on secondary sales at the moment.”

Ryan Mahoney, CEO of Better Homes Real Estate, concurs that the room for negotiation has widened, but not quite to the same extent. “I agree there is definitely downward pressure and more negotiating room for most transactions. However, 20 per cent is far too much. I feel it’s more like 10 per cent.” In the rental market, he says landlords are not budging, as there is still strong demand for most rental property.

Developers are unlikely to reduce off-plan prices, but could offer better terms such as extended payment plans and other goodies, says Plumb. “For example, someone was offering a two-year term rental guarantee of 8 per cent or so. I presume the way it would work is that if you rent it out and don’t get an 8 per cent return, the developer would have to top that up for the client.”

Although developers are doing their best to encourage buyers, Thomas Bunker, Manager of Off-Plan Sales at Better Homes, believes they cannot be too aggressive in pricing their projects very low because of what they have to pay to acquire land.

“Consequently we are seeing better payment plans and an attempt to entice buyers with frills,” says Bunker. “In the end, however, someone has to pay for these frills, so often the cost is simply added to the product price.

“An improved payment plan could be a better way to go as this doesn’t cost the buyer more money, while the developer doesn’t have to pay for the extra frills. But the developer does have to shoulder a larger cost burden during the development of the project.”

Talal Al Gaddah, CEO of MAG Property Development, does not see a need to reduce prices, which can be kept at a reasonable level in line with slightly rising construction and land costs. “It all depends on the payment terms,” he says, adding he’s not concerned about a supply glut, as many developers will delay handovers.

Plumb says, “The upcoming supply is significant but not excessive and can easily be absorbed by the market. We expect to see extended timelines and phasing will come into play, so many won’t even hit the market this year, but rolled over into future years.”

JLL counts 25,000 units— about 7 per cent of current stock — coming online this year. Knight Frank predicts similar figures, with new residential supply in the mainstream segment expected to equal about 5.5 per cent of existing stock, with about 2 per cent in the prime segment.

Alan Robertson, CEO of JLL Mena, reckons a positive GDP growth forecast at around 4.8 per cent bodes well for the real estate market, while lower oil prices could affect investor sentiment but won’t amount to anything more concrete. He does expect Russian and European currency devaluations to have an effect. Bunker agrees, as he says there is already a significant drop in demand from Russians in the property market.

“We hope the oil situation will stabilise over the next four to six months,” says Bunker. “[However] European interest has softened a little largely because of growing fears that it is entering a recessionary period. For currency issues in Russia, India, Iran and even the EU, it could take more time as the reasons for their decline are more complex.”

Although Bunker has observed reduced buying appetite from Indians and Iranians, Garrett doesn’t expect the main buyers of UAE real estate — Emiratis, Indians, British and Pakistanis — to change. “This is due to the number of British expats living and working in Dubai and the emirate’s close proximity to India and Pakistan,” says Garrett. “You also see Saudis and Iranians investing in both completed and off-plan property.

“We are starting to hear more about Chinese investors setting up businesses, buying commercial space and looking to buy residences as well as investments, having not been on the radar previously.”

Meanwhile, Middle Eastern investors escaping unrest in other parts of the region are looking to the UAE as a safe haven, while future reconstruction efforts in Syria and Iraq would only benefit Dubai as a business gateway, says Robertson.

“I know of 25 rich families alone that had come from Syria buying villas and opening businesses, aiding the economy,” he says. “There are thousands of them already here — a solid market in Dubai to look at. You should be targeting long-term residents, not those with a short-term view.”

Source: Nicole Walter, Special to Property Weekly


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