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Most mature real estate markets follow a cycle, the performance of which is measured by peaks and troughs. These have durations from four to 12 years, with an average of eight years although some authorities refer to the 18-year period. A property cycle is a logical sequence of recurrent events reflected in factors such as fluctuating prices, vacancies, rentals and demand. Business and economic cycles last more than a decade and they influence property cycles in different sectors.
Given that the Dubai property market is young, with the first freehold transaction recorded in 2004, and mortgage transactions not coming to fruition until 2006, it has not had the opportunity to develop a property cycle similar to those in more mature markets. Instead, it is influenced by both internal and external factors, which, in addition to demand and supply, are key drivers of price fluctuations. We have outlined some of the key factors shaping the residential sales market in Dubai over the last year:
Increased rental rates
In the second half of 2013 and the first quarter of last year, the escalating rental costs in prime locations led many tenants to relocate to more cost-effective locations such as Jumeirah Village, Dubai Sports City, Remraam and Discovery Gardens. As tenants’ demand increases so has the attraction to investors with the overall impact being a consecutive increase in rents and sale prices.
Dubai Motor City, particularly, saw increased activity. In the second and third quarter of last year sale prices and rental costs again showed growth but at a declining rate. Downtown Dubai and Palm Jumeirah apartments registered a decrease in sale prices and rental costs. However, Jumeirah Lakes Towers stabilised, registering no change in the third quarter of last year.
In the last quarter of 2013 a new mortgage cap rule was confirmed by the UAE government, taking effect in December. The new rule included a mortgage limit with a loan-to-value ratio of 75 per cent and 80 per cent for expatriates and UAE nationals respectively for property below Dh5 million. Loans for property valued more than this were limited to 65 per cent of the value for expatriates and up to 70 per cent for nationals. In the third quarter of last year, prior to the new law taking effect, the expectation of the new mortgage cap put pressure on the market, with investors accelerating their acquisitions in an attempt to take advantage of the mortgage finance available at that time (85 per cent, for both expatriates and UAE nationals). This increase in demand by investors caused a significant increase in values and also an opportunistic increase in asking prices beyond the market values.
In the fourth quarter of 2013 the unsustainable increase in asking prices together with raised transfer fees, might have discouraged buyers causing a drop in demand, decreasing the total volume of transactions by 41 per cent (from 866 to 507). In the first and second quarter of last year, purchase and asking prices continued to increase, however, the volume of properties actually transacted fell again below the totals of the fourth quarter of 2013. It appeared that the government measures to stabilise the property market were starting to have an impact. This was further illustrated in the stabilisation of the villa index in the second and third quarter of last year.
Increase in transfer fees
The Dubai Land Department (DLD) doubled the transfer fees for all property sales, except the first direct sale from the developer to buyer, which remained at the previous rate. Transaction costs now consist of the transfer fee to the DLD (4 per cent), commission to the agent (2 per cent), noobjection certificate fee to the developer (Dh1,500) and loan application fee to the bank (between Dh2,000 and Dh15,000). The increase in the transfer fees appears to be designed to temper the rise in prices and when taken in combination with the mortgage cap rules, it seems to have had the desired effect.
The capital gains tax on overseas investments implemented by the Indian government is one of the factors that might have affected Dubai’s residential real estate market. Historical evidence indicates that Indians have the highest proportion of investments in Dubai’s residential property market. According to the DLD, in 2013 Indian nationals conducted around 8,000 transactions worth about Dh18 billion. However, in the first half of last year Indians conducted 4,400 transactions worth about Dh10.5 billion. Now, as per the India Tax Law, Indian nationals have to pay overseas capital tax on gains from the transfer of a property as well as on capital appreciation and net income from the rent. While no clear evidence exists of a link between the change in tax regime and acquisitions by Indian nationals, the firsthalf numbers so far indicate a parity.
In addition to the above, Russian nationals have had currency issues that might have affected their consideration of Dubai’s real estate market for investment purposes. At the end of the second quarter of last year, the rouble-dirham exchange rate was close to 0.107, later in the third quarter the rate was at 0.093, a drop of 13 per cent.
For Russian investors the price of an apartment in Dubai in the third quarter of last year increased by 13 per cent over a period of just three months. This has had an impact on the tourism market and there has been a flight of money from Russia to overseas markets as the rouble continues to weaken against the dollar.
The effects of the overseas capital gains tax and the fluctuation of the rouble are as yet inconclusive. Further data is required before any substantive analysis can be produced. This year, we anticipate the market will continue to be influenced by the above factors. Our research indicates that it could also be impacted further by the fluctuating oil price and new regulations, such as the confirmed increase in transfer fees from 2 per cent to 4 per cent for off-plan property. This year we also see new supply coming online in prime residential areas, which will have an impact on capital values and rentals.
Source: Catherine Clarke, Special to PW
Catherine Clarke is Director of Residential Valuations at Colliers International. She has been practising in the UAE for nine years.