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It is no surprise that given Dubai's relatively recent history with a catastrophic property boom-and-bust cycle, the ten quarters of growth in the real estate sector - which has seen sales prices surge 37 per cent since 2012 - increasingly had some weary of a coming crash.
Those fears were heightened in the third quarter of this year, when property consultancy CBRE reported a 1 per cent reduction in residential rents and a marginal drop in transactions, suggesting to more bearish analysts that a hard road could lie ahead for Dubai.
Others urged perspective. The third quarter included the month of Ramadan, always a slow one in the emirate and in the region at large. But more importantly, the Dubai that experienced an economic boom in the past two years and that has seen its equity market surge more than 130 per cent alongside a property price hike is a very different animal from what it was five years ago.
The surge in prices over the past couple of years - the past quarter's miniscule drop in rents and transactions notwithstanding - has had many analysts worried about how far the real estate sector would go. But Garbis Iradian, Deputy Director of the Institute of International Finance, does not feel the emirate is under threat going forward.
''The recent surge in real estate and equity prices has raised concerns over the potential for another speculative bubble, but there are major differences between the current and the previous booms,'' says Iradian.
He points out that while property prices are up, the average residential property price per square foot remains well below its peak in September 2008, just weeks before the bottom fell out of the Dubai market in a financial crisis whose repercussions are still being felt today. They also remain far lower than other major cities.
The safe haven status of Dubai for Arab investors looking to move their money from Syria, Iraq and Libya, which has fuelled the last ten months of growth, and the awarding of the rights to host the World Expo 2020, along with the millions of dollars in construction contracts that are set to follow and visitor numbers expected to boost an already buoyant tourism sector are some of the other factors.
''The surge in housing prices is benefitting from strong demand from local and foreign investors attracted by the UAE's stability and safe haven status in the region,'' says Iradian. ''Unlike the previous boom years, a significant portion of investors, particularly from Russia, India, Iran and troubled Arab countries, are paying in cash.''
Also, Dubai is better regulated than it was in 2008, with much of the reform initiated by the government. Wary of situations during the previous boom, when state-owned developers had eye-watering levels of debt, the emirate has imposed restrictions on both government-owned entities and the banks that lend to them. These include a requirement that banks cannot lend more than 25 per cent of their equity.
Then there is the fact that credit growth, a key feature of asset bubbles, is modest despite last year's accelerated growth. It stood at just over 7 per cent last year, far lower than the 18 per cent seen between 1996 and 2012. Cash has taken over from lending. Equally, the vast amount of property under construction, say analysts, means a slight correction is to be expected, as was seen in the third quarter. Recent data by consultancy JLL suggested that 39,000 new housing units will come online over the next two years, an increase of 9 per cent over the existing stock of 365,000 units.
As more and more property gets built, the market will remain well supplied, says John Stevens, Managing Director of Asteco, which recently conducted a study of the expected build in the emirate over the next two years. Asteco's projection is a little under JLL's, but still demonstrates significant growth.
''Around 30,000 homes will come online within the next two years,'' says Stevens. ''An internally commissioned Asteco research shows that this is the number of units needed to match supply with demand, which equates to 24,000 apartments and anywhere between 6,000 and 9,000 villas.
''These units are forecast to be ready for rental at the end of 2016, and while this may feel like an interminable wait for many frustrated tenants, it will also provide much-needed stock in the run-up to Expo 2020.''
Sceptics also suggest that a problem could arise after the Expo, when the tens of thousands of units currently under construction are built. They argue that this raises the prospect of a repeat of the post crash scenario, when many developments were left empty. But Stevens does not agree.
''The spectre of rampant vacancy levels due to a surfeit of oversupply post-Expo is nothing more than an urban myth,'' he says. '''Even during the global financial crisis, Asteco didn't register a crash in vacancy levels for residential accommodation, just a dramatic decline in rental rates.
''There were no empty buildings in our portfolio of around 12,500 units and 370 buildings, and we maintained our vacancy levels throughout this challenging period.''
The increase in rents seen over the past two years has been a major gripe for Dubai residents, which has resulted in a rush to what property companies call secondary and tertiary locations - those on the outskirts of Dubai that were not popular in the past.
International City, which four years ago was one of the cheapest locations in Dubai, saw its highest year-on-year annual growth in the second quarter of 2012, up 66 per cent. A two-bedroom apartment here now leases at some Dh70,000 per year.
At the same time, the traditionally less popular areas of Dubai are still seeing rents rising fast. In Jumeirah Lake Towers (JLT), the average rent for a two-bedroom flat now stands at Dh150,000, up from Dh85,000 over the same period last year, according to Asteco figures. In Discovery Gardens, rents for a two-bedroom flat rose from Dh75,000 last year to around Dh95,000.
Even in Deira, traditionally a cheaper area to rent property, a two-bedroom flat can cost on average Dh110,000 per year. At the other end of the spectrum, Dubai Marina and Downtown Dubai saw the biggest increases, with year-on-year growth of 62 per cent and 52 per cent respectively. In Dubai Marina, the average annual rent of a two-bedroom apartment now costs Dh200,000, up from Dh112,500 a year ago.
The new supply, will ease the rampant rental inflation of recent years, but will still make for a competitive environment, says Stevens.
''Our data also shows that the stabilisation of both rental rates and sales prices is ongoing, but this doesn't mean that prospective tenants will be able to bag a bargain in their preferred location or building,'' he says. ''Rent increases will continue for very specific developments and specific products in line with demand and are contingent on the type of ownership structure.
''The Dubai International Financial Centre area will always incur a greater cost due to limited supply. The same for the Palm Jumeirah. But if you are after a three- or four bedroom villa, then in the next two years we will see a lot more choices coming online.''
The Dubai Government has taken steps to stop the property market from overheating by doubling transfer fees and raising requirements for mortgages. Mat Green, Head of Research and Consultancy - UAE at CBRE Middle East, believes this is a positive step.
Iradian, meanwhile, cites the capping of mortgages for nationals and expatriates and a ban by Emaar on real estate agents selling off-plan property before completion as strong efforts to prevent property speculation.
''The new rules are expected to dampen speculation in property and the UAE authorities seem to be keen to prevent another bust in property prices,'' says Iradian. ''Investors are more cautious, policy making has improved, Central Bank regulations are tighter and, according to JLL, property development is changing with larger projects being phased in according to demand, and reduced reliance on pre-sales.''
That said, analysts say that if Dubai is to see a stable and successful real estate industry leading up to and hopefully after the Expo, the government will need to keep its eye on the regulatory landscape.
''There is still strong evidence of volatility and speculation in the residential segment. This is a factor that could yet pose future challenges for the market if further regulatory measures are not implemented to help better control boom-and-bust cycles,'' says Green.
Iradian agrees. The government and the UAE Central Bank may have done a good job so far in taming the unregulated beast that was the Dubai property market, but they will need to continue to watch that it stays in line going forward.
''The authorities will need to be careful to ensure that policies on a variety of fronts are aimed at containing macroeconomic and financial risks from the housing and equity markets,'' he says.
''The modest credit growth is welcome, but the Central Bank should continue to assess evolving risks and be ready, as needed, to tighten the recent measures if current price trends continue.''
Find out how tight broker regulations will do good in Dubai
Source: Orlando Crowcroft, Special to Property Weekly