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In restaurants, coffee shops, offices and homes across Dubai there is often just one topic of conversation: what is going to happen to the emirate’s property market in the coming 12 months? Widely acknowledged as a barometer of the wider health of the UAE economy, the real estate market has become subdued in some areas, but reasonably managing to hold its own. That is despite a broader commercial environment that is being impacted by low oil prices and global economic uncertainty.
But here in Dubai, we are finding that there is a mix of internal and external factors that have helped to make the real estate market more resilient to global pressures over a period of time. The property market has recorded healthy gains until 2013-14 since when prices plunged in 2008 and investors fled the market. Both rental yields and property prices have seen a robust recovery allied to a surge in the development of a wide variety of new projects. As a result, investors
once again started to become more confident and optimistic about the potential returns, albeit while exercising far more caution.
A more cautious approach has also seen investors closely watching every kind of fluctuation in the industry that would enable them to assess the implications of wider economic conditions on the local market.
For example, these would include some of the economic pressures that have been faced by Russia and now the slowdown in China allied to the continuing regional and global impact of oil prices.
Not the same market
We believe, however, that the emirate’s housing market today is far from what it was in 2008. To begin with, the macroeconomic slowdown this time has been triggered by vastly different events compared with 2008, when a number of inherent issues with global financial systems were largely responsible for the real estate slump.
Today, there are several internal factors, including government-introduced regulatory changes, a broader investor profile and the increased maturity of the market that are having an influence on the behaviour of rents and sale prices that are helping shore up the industry.
A closely watched real estate index, shows that the overall drop in real estate prices this time around has been far less dramatic compared with 2008. Project completions are also expected to pick up this year after being more subdued last year.
Given that the pressures of global events are at the forefront of investors’ minds, we have identified five key factors that we believe are likely to impact Dubai’s property market this year.
1. Liquidity is increasingly important as markets tighten. The impact of continuing international economic uncertainty, coupled with geopolitical turmoil and weak oil prices, is set to continue to impact world markets and make liquidity challenging.
2. Oil prices unlikely to recover in the short term. Dubai’s highly diversified economy has been largely shielded from the impact of weak oil prices, but some buyers could still have trouble investing in the local residential market. Prices are not expected to recover in the short term, and as Iranian oil flows into the market, this may add further pressure.
3. Flight to quality and rise of the end buyer. A drop in demand, along with oversupply, has opened up commercial and residential property in better locations, allowing buyers and renters to move to more luxurious or desirable areas at lower costs. Government controls, including increasing property transfer fees to 4 per cent from 2 per cent, has reduced speculation and increased end-user buyers with longer-term investment goals, leading to more stability in the market
compared with 2008.
4. Affordable housing, a future focus. There is a drive towards affordable housing, with increasing amounts of housing coming onto the market at prices that compete with the rental market, but also — and probably more importantly — appeal to a much wider demographic. While overall home prices as well as the number of transactions in Dubai dipped last year, more affordable housing areas have incurred lower declines and, in some cases, even maintained value — or rental yield.
5. Short-term softening until the market returns to growth in the run-up to the World Expo 2020. We expect that infrastructure works directly related to the Expo are set to kick in from next year and that will trigger both job creation and a spike in demand in the residential construction sector.
Wait and watch
Overall, we are going to see a wait-and-watch approach, unless there is a significant recovery in the global economic picture. While some projects are being delayed or scaled back to adjust to slowing demand, rental yields have not fallen as much as property prices.
Meanwhile, in the absence of a large number of new developments, there was a focus on restarting old projects and delivering existing schemes at last year’s Cityscape Global in Dubai. Initiatives such as the Dubai South development, expected to include a rent-to-buy scheme, and developers’ focus on providing affordable housing developments should provide a push in the right direction.
Source: Property Weekly