Dubai realty's transition from euphoria to caution

Dubai realty's transition from euphoria to cautionImage Credit: Supplied

When it comes to Dubai's property market, euphoria may not necessarily be a good thing. In contrast, a sentiment that veers towards caution may just be ideal. Over the last 12 months, investor and developer sentiment about Dubai's property market has swung from extreme exuberance to one displaying a more measured outlook. But built into that shift in perception lies the longer term viability of the realty market.

Because all through the first quarter — when the bullishness in pricing and transactional activity was at its peak following the Expo 2020 win announcement — there was no indication that the party was going to last. It was as if all of a sudden the market and its players had decided it was time to unlearn all the lessons that the downturn of 2009-11 had so painfully made clear to them. Sellers were changing their asking prices almost by the day, and even then found they had more than one buyer willing to cough up the markup.

But the binge buying and selling had to end, and the best part was that it did quickly enough. By mid-March itself, there was a quite noticeable drop in number of transactions, and do too did the demands from those selling units. In one go, it seemed as if all the buoyancy had been sucked out from the system. There was a little bit of help from the hike in transfer fee charges (from 2 per cent to 4 per cent) brought in during Q4-2013, as well as the tougher mortgage lending norms established by the Central Bank. All of that was, for all intents and purposes, for the greater good as there was no way it could have gone on longer without upsetting the carefully recalibrated dynamic of the market.

Nicholas Maclean, Managing Director of CBRE Middle East, rates it as a ''market self-correction as it did not involve too overt a government intervention, which is what investors, particularly overseas buyers, want to see. The way that residential market has behaved in the last two quarters — when it was mostly stable or even a slight fall — represents stability.''

That was enough to give developers the space to stick to their plans in terms of timing their launches and creating new capacity that buyers actually want. ''I have always maintained Dubai's property market has not even scratched the surface when it comes to realising its long-term potential,'' said Hussain Sajwani, Chairman of Damac Group. ''Whether a market goes up or down, a developer will have to react quickly to market changes. Damac will be hands-on in continuing to look for opportunities.''

Sajwani does walk the talk on fast-tracking action. In August, Damac confirmed the purchase of 55 million square feet in Dubailand and immediately announced the second of its 'Akoya' branded projects on the spot.

Through the second-half of the year, developers have maintained a steady pace on off-plan launches, which have seen them increasingly focus on locations that are yet to fully show up on the investor radar. Maritime City has just seen its first formal launch of a residential project, and there have been new ones at Golf City and Studio City.

''Newer locations further out from the city means that a developer can come up with projects that target a mid-income buyer,'' said Rizwan Sajan, Chairman of Danube Group, which has just launched a Dh300 million project at Studio City. ''Doing so at some of the more mature residential locations in Dubai is no longer possible... the land value itself would push end-user pricing beyond the affordable point. To be truly accessible to a budget buyer with an income of Dh20,000 or so, the pricing has to be somewhere between Dh700-Dh1,000 a square foot and the units must have smaller floor plates.

''More than anything else, developers with off-plan projects have to focus on the payment side of things — banks are currently unwilling to have a sizeable mortgage exposure on off-plan. In such a situation, it's for individual developers to get creative with payment schemes.'' (Under Central Bank guidelines, an off-plan should not have more than 50 per cent lending on off-plan sales.)

Has the mortgage situation improved? For sure, disbursals are building up as a percentage of banks' retail lending portfolio. With property values stabilising, both borrowers and lenders have a better understanding of what their loan sizes should be. (Nothing was more galling than for a prospective buyer chancing upon a property selling at a particular value to go through the rigorous and time-consuming mortgage processing needs and then find the prices had shot up in between.)

In 2015, banks could open up the taps further and that could help widen the end-user base. Only if that were to happen would the market's dependence on cash buyers lessen.

But the biggest game changer would be when the expected 20,000 plus residential units do get completed in the next 12 months and get absorbed into the city's living space. Only then would the rental side of the market see some equilibrium take effect, and possibly help with a further cooling off of leases.

From the year gone by, Dubai's property market has learnt to live well with caution. It has to remain that way for quite a while yet.

Read more: Dubai realty market cool-off forces investor rethink

Source: Manoj Nair, Associate Editor,


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