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When it comes to reading the market, analysts bring varied perspectives to the table. But most agree that despite the softening of prices and decline in growth, the overall picture is optimistic.
Some key trends that have emerged include buyers in the prime segment looking for long-term capital growth and willing to pay a premium for the right property. Also, despite the downward trend, experts say the market is not distressed, with most vendors holding on to assets.
While low oil prices are problematic, the World Expo 2020 will likely keep any trouble on a macro level at bay. This, coupled with the diversity of Dubai’s economy, should support growth.
Maria Morris, Associate Partner — Project Marketing, Knight Frank Middle East
Trend: In the first half of this year, we witnessed further maturation of the residential market with buyers in the prime segment looking for quality stock and long-term capital growth rather than opportunistic, short-term purchases.
Market: The weakness of the euro and Russian rouble, coupled with lower oil prices, has dented confidence and applied downward pressure on transaction levels and prices. This has led to speculation that prices could fall further over the second half, leading some buyers to adopt a wait-and-watch attitude.
However, in the prime segment, while prices have fallen to mid-2013 levels, the cumulative decline seen over the past year is smaller compared to the mainstream market. This, in turn, has meant that interest in prime stock hasn’t ebbed in the same way.
The market correction following the cooling measures introduced at the end of 2013 is good news for the Dubai residential sector. We are finding our buyers far more discerning with their search requirements. They are looking for well-designed products with superior specifications that align with their portfolio of global properties in London, New York and Hong Kong.
Outlook: We anticipate this trend will continue in 2016 and have already seen that buyers in the prime segment will actually pay a premium for the right property, with their focus shifting to long-term capital appreciation and lifestyle living as end users. The buyer demographic in the first half of 2015 was still weighted towards Emiratis and GCC nationals, Brits, Indians and Russians. But as Western sanctions on Iran are lifted over the next few years, we suspect there will be a spillover of capital into the UAE, with Dubai likely to benefit especially.
Moreover, with tourism numbers rising from Africa and the Far East in 2014-15, we anticipate there will be further residential property interest from these markets next year.
Safina Ahmad, Head of Residential Agency, CBRE
Trend: The residential sector is witnessing a period of deflation. New property launches are no longer attracting the same fervour as in the past, while properties are tending to sit on the market for longer as investors practice more caution and patience in decision-making.
According to an analysis of Dubai Land Department (DLD) data, transaction volumes have dropped by around 14 per cent, while there has been a 15 per cent decline in the total value of these transactions during the second quarter as compared to the same period last year. Despite the sustained declines recorded during the
first half of 2015, sales prices on average still remain only around 1 per cent lower than the same period last year. As has been the trend, Downtown Dubai, Dubai Marina, Emirates Living and the Palm Jumeirah continue to generate most transactions.
Market: Until recently developers were taking design capabilities and facilities management in-house, a move which has perhaps detached their teams from the market, essentially deskilling their workforce. This has culminated in a cookie-cutter approach to some developments with the same value proposition across multiple locations. However, this has started to change and we are witnessing a shift as more savvy developers are looking to external consultants to help them shape products that cater to the requirements of each sub-market.
Outlook: The residential market is likely to witness a further decline over the next 12 months. Beyond that, we expect to see a more permanent shift in buyer behavior and expectations.
To purchasers, our advice is to be realistic. Although there has been a downward trend in terms of volume and value, this is not a distressed market.
Buyers should be speaking to brokers who have the most objective understanding of the market before formulating their offers. An informed offer supported with evidence is more likely to be accepted. There could be discounts of 10 per cent from listing prices available and, coupled with currency plays, it’s a great time to buy.
Faisal Durrani, International Research and Business Development Manager, Cluttons
Trend: The villa market continues to be dragged down, which has, in large parts, been a direct result of the introduction of the federal mortgage caps. The upfront equity requirements to purchase a villa has risen sharply, which has suppressed demand. At the same time, villa supply levels have risen sharply and of the 20,000 units we expect to see delivered before the end of 2017, almost 70 per cent will be villas, suggesting a sudden turnaround in this segment of the market is unlikely.
Still, strong population growth and job creation levels should help to offset the rate of decline. Villa values are down 5 per cent on average so far this year.
Market: There are a number of complex drivers at work in the market at the moment. On a macro level, the collapse in oil prices threatens to undermine planned government spending, but with Expo 2020 on the short-term horizon, infrastructure commitments are unlikely to be altered tremendously. Furthermore, the diversity of Dubai’s economy should support growth.
We have already seen a number of lead indicators ranging from LinkedIn to Moody’s that point to strong jobs growth, which supports our forecast of a rise in the number of residents in Dubai by 400,000, taking the population to around 2.8 million by 2020. This will go a long way in absorbing the planned future residential supply.
Outlook: The other thread in the oil tale is Iran. There is no doubt that a fickle commodity market such as energy will see further downward movement once Iran is given permission to resume oil exports. This poses obvious challenges to OPEC member states’ fiscal budgets.
However, the silver lining is likely to be the boost to the UAE economy.
The Iranian government has estimated that $100 billion-$200 billion is needed in infrastructure investments following almost a decade of crippling sanctions. It is our view that much of these funds will be channelled
through the UAE, and Dubai in particular, which will improve liquidity for the UAE’s banks. In turn, international and domestic occupiers are expected to make a return to Dubai, hubbing Iranian operations out of the emirate.
This has obvious ramifications for the office market, with take-up levels likely to rise along with job creation levels and, therefore, household numbers and residential demand.
The influence the lifting of sanctions can have could be momentous for the UAE, but it is likely to happen in slow motion, with the effect being gradual rather than astronomical. Still, it does make for an exciting medium-term outlook for the UAE’s real estate markets.
Alan Robertson, CEO, JLL Middle East and North Africa
Trend: The major trend over the first half of the year has been the decline in sales activity. DLD data reveals there were around 7,400 transactions of units and buildings in the Dubai market over the first half of 2015 compared with 14,100 over the same period last year. The total value of these sales has also declined significantly — from Dh22.8 billion in H1 2014 to Dh15 billion in 2015. While the trend has been towards much less activity, actual price levels have stood up quite well. Despite the market witnessing a 50 per cent fall in sales activity, prices only declined by around 7.5 per cent in the first half of the year, and this shows the market is far more stable and mature than in 2008-09.
Market: There are three main factors driving the trend towards less residential sales activity: macroeconomic conditions, tighter market regulations and market sentiment. Key among macroeconomic factors has been the rising value of the US dollar over the past year. With 80 per cent of residential transactions in Dubai involving foreign buyers, this has reduced the attraction of the market for investors from non-dollar denominated economies.
The introduction of regulations designed to slow down market activity has also had an impact. Regulations to reduce the maximum loan-to-value ratio of mortgages and increase transaction fees (from 2 per cent to 4 per cent) have contributed to lesser transactions.
As result of all of this, many investors see little or no prospect for short-term capital growth and have therefore delayed or postponed their investments.
Outlook: With a healthy level of new supply entering the market over the next 12 months, prices are not expected to recover until the level of sales activity increases again. Additionally, with speculators likely to remain on the fringes, this is a good time for those who are renting and want to buy.
Source: Sanaya Pavri, Special to Property Weekly