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Aside from listing the merits of a property, another key feature of a property valuation, especially if it is conducted for loan security, is a commentary on the condition of the market. This requires specialist knowledge, which is why valuations can only be carried out by trained surveyors.
If the valuer thinks the market is overheated, it should be stated in the report. In recent times, many valuers have reported that the rate of growth in residential property prices, which has reached about 30 per cent per year in some parts of the UAE, can't go on much longer.
These growth rates are ''unsustainable in the long term'', says Simon Brand, Head of Valuation Advisory -Middle East and North Africa at JLL.
However, most valuers don't think the UAE is on track for another property crash, at least not as bad as in 2008 when prices in some locations fell by half. One factor that is different this time is that the government has taken action to control rising property prices, imposing transaction fees to prevent property from being sold quickly and putting limits on mortgages.
Brand believes these measures, alongside tighter restrictions by developers themselves, are behind a recent slowing in residential sales - the number of villas sold in May fell by half compared to May last year.
However, there are limits to how much government intervention can influence the UAE market. Data from the Dubai Land Department suggests that up to 70 per cent of transactions in the past 12 months were cash purchases.
If only a minority of buyers in the UAE require a mortgage, restricting access to financing can only have a limited effect on price escalation. Meanwhile, those same restrictions make it harder for mortgage property buyers, which could suppress demand.
''My concern is that the Dubai residential market is rapidly becoming unaffordable for owner-occupiers and with continued supply, the risk of a price correction remains high,'' Says Brand.
Rental rates also affect property prices and they are providing worrying signs of a market in distress. The UAE Central Bank, in a financial stability report published earlier this year, took the uncharacteristic step of warning that rental yields have fallen below historical averages. It stated this is often a hallmark of an overheating housing market.
Brand agrees: ''Residential yields are very dose to levels where, even factoring in capital appreciation, they make little sense on a pure real estate investment basis.''
Why have sales prices accelerated so far ahead of rents? One reason could be the mechanisms put in place by the government to protect tenants, such as the rent index in Dubai. Another could be the rising supply of residential property. With new residential projects being developed, housing supply may be on track to exceed demand.
However, it is hard to make accurate predictions about the UAE property market because there is not enough public information accessible to valuers - certainly less than in more established markets such as London and New York.
James Lewis, Partner at Knight Frank, says because a lot of cash buyers ''don't need to let out the space, the pool of leasable stock is probably less than we'd expect''. This means the UAE rental market is not as efficient as in more established markets, which can lead to inefficiencies in terms of pricing and difficulties in forecasting.
Another reason for caution is the general shortage of independent data. While Dubai authorities offer a property database, supplied by Reidin, a real estate information company focused on emerging markets, Lewis says, ''There's a bit of a lag, perhaps longer than we'd like.''
He adds there isn't an independent database to check against Reidin's data. ''We're beholden to that one party. We might like to see some competing measure.''
The lack of comprehensive data limits what valuers can say with confidence in their reports. Yes, the trends indicate that prices are rising at an unsustainable rate and rental yields are f3lling, but whether there will be a correction and when, it is hard to say.
Prognosis is still good
However, the valuers consulted for this article say despite the worrying signs, there are still reasons to be optimistic about the UAE housing market. The buzz around the World Expo 2020 in Dubai will continue to drive infrastructure spending and tourism. There is also a sustained influx of investment from foreigners who see the UAE property market as a safe haven fm their wealth.
There is also encouraging data from the Central Bank that the financial sector is less exposed to the property market than in 2008, a factor that ought to soften the impact of a correction in prices.
Click on Real Estate News to get the latest real estate and property news from Dubai, the UAE and the Middle East
Source: Mark Gordon, Special to Property Weekly