Liquidity crunch bites deep into Dubai realty prospects

Dubai realtyImage Credit: Supplied

Dubai: A lack of liquidity for investors will be the biggest threat Dubai’s realty will have to confront this year even as property values drop further. Unless a new dynamic comes into play, a recovery could be delayed further into 2017, according to an update from Phidar Advisory, the consultancy.

And as liquidity ‘tightens, there is even less capital available for investment in completed units, which are often preferred during a down cycle and/or risk-averse climate,’ according to the report, the first of multiple market updates due for release in the coming days.

When there is less money to spread around, that will tell on property values as well. ‘This compresses prices for complete and off-plan properties,’ the report adds. ‘Even if construction delays reduce the completed supply available to end-users, this supply still impacts investment demand.’

For developers planning the timing of their launches this year, these are details they will need to go over carefully. A couple of key launches, essentially the addition of new phases at existing developments, are likely this month itself, according to some developer sources. But these are principally in the high-end space.

But can the market keep absorbing new off-plan supply at a time when it is still in the throes of a downturn now into the 18th month? Off-plan sales, ‘especially in Dubai’s volatile market with short cycles, will absorb liquidity long after the boom is over,’ Phidar reports. ‘For example, although the market has been in decline, projects launched in 2013-14 continue to absorb market liquidity.’

Master-developers with deep pockets can get away with taking the longer term view. But it will not be the same for mid-tier developers, with few exceptions, who will need a faster sales cycle to recover their investments. Property values dropped an average of 12.7 per cent last year.

This is where a Catch-22 situation kicks in — even if there are investors keen on picking up ready mid-market properties, many may not have the funds on call to buy. Taking out mortgages to finance the transaction, especially for first-time buyers, will then depend much on the banks. Which begs the question will local banks come to the rescue with the needed liquidity?

Then there are the problems brought on by events in the wider economy. According to Jesse Downs, Managing Director at Phidar, “Global economic dynamics are tightening liquidity, increasing capital costs, and slowing growth in the region. These trends could continue for two years. Improving transparency can help bring down market risk, which is critical in the current environment.”

According to its estimates, 14,000 plus homes were completed in Dubai’s masterplanned communities this year, for an estimated 18,600 new units across the entire city. These broadly tally with what other consultancies project as actual supply compared with estimates of 20,000 units at the start of 2015. But some reports suggest actual deliveries could have been below 10,000 units last year.

According to the Phidar report, ‘The five-year supply pipeline grows at 3.6 per cent compound annual growth rate (CAGR) whereas the demand grows at a robust 6.5 per cent CAGR, largely due to jobs created by the development and running of the Expo 2020 project, which should start to ramp up in 2018. However, when announced and launched projects are included the five-year supply CAGR jumps to 5.7-7 per cent.’

Source: Manoj Nair, Associate Editor, gulfnews.comGN


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