Looking back to look forward in Dubai real estate

Looking back to look forward in Dubai real estateImage Credit: Supplied

At some point, Dubai's meltdown, with its all harrowing issues, had to give way to a new era of opportunities. By February 2009 property prices had fallen by 25 per cent since peaking in 2008. Real estate prices in Abu Dhabi dropped by 20 per cent since hitting a high the same year. The high end properties were among the worst hit, with The Palm and downtown areas suffering a massive 35 per cent fall.

It is estimated that by February 2009, projects worth $263 billion (Dh965 billion) were cancelled or put on hold in the UAE (source: Zawya). August of the same year saw an influx of distress funds, and buyers wanted to snap up quick deals in the ready property market.

However, off-plan properties were the hardest hit. Big players such as Donald Trump exited the overhyped Trump Tower project despite its announcement and initial sales, pulling down property prices in The Palm Jumeirah. Burj Khalifa suffered from panic selling. Dubai's five-year credit default swaps (CDS) touched 655 in February 2010, signaling a substantial drop in investor confidence (a higher CDS signifies a greater chance of default).

Prices of commercial properties declined gradually as tenants were driving harder bargains and nobody expected a recovery. Conflicts between developers and buyers also began to emerge in a growing number of instances. Speculator sturned-property-developers vanished, leaving investors in the lurch. Lenders became more prudent and raised their rates. Everyone was busy consolidating their positions and asking only one question: When would the market bounce back?

Safe haven

But there was no respite in sight. The market turned for the worse with more and more project cancellations, and banks and financial institutions tried to reduce their real estate exposure with stricter lending parameters. By the end of 2011, Dubai saw property values fall by as much as 65 per cent.

The region was in turmoil too. The Arab Spring began in December 2010 in Tunisia, and spread rapidly across the Middle East and North Africa, creating an atmosphere of fear and uncertainty.

However, the UAE, thanks to its prudent foreign policies, remained calm and gained the reputation of being the safest haven in the Arab world. Its quality of life, infrastructure, and safety and security began to attract the wealthy from the affected countries. More and more people came in and soon, real estate started looking up.

Robust growth

In 2012, Dubai registered robust growth in its realty sector. Well-managed, high quality assets were the first to turn around. While asking rents for prime office space remained flat in the third quarter, and secondary rents faced more downward pressure, around 460,000 sq m of office space were delivered over the first nine months of the year (source: JLL).

By the end of 2012, Dubai's CDS dropped by more than 50 per cent since February 2010. The emirate, which once featured among the top 10 default probabilities, was taken off the list of riskiest sovereigns after the third quarter of 2011 (source: CNBC).

However, about one fourth of Dubai's residential properties were empty, the commercial property market was not faring well — about one-third of office space in the central business district was unoccupied — and vacancy rates were still high in several neighbourhoods.

The total value of properties purchased in the first half of 2012 (Dh12 billion) was 74 per cent less than the Dh46.5 billion of sales in the first half of 2008. Still, the number of property transactions in the emirate jumped by 50 per cent during the same period compared to the first half of 2011, according to data from the Dubai Land Department. Prices of residential properties in prime locations such as Downtown Dubai and Dubai Marina also rose by about 15 per cent.

Real GDP also grew by 4.4 per cent in 2012. Drivers of growth included private consumption and exports on the expenditure side, and crude oil and services on the production side. Excellent infrastructure, ample foreign exchange assets, and continued structural reforms implied no major slowdown in the pace of non-hydrocarbon real GDP growth. Nevertheless, the ratio of real hydrocarbon GDP to total GDP declined from 55 per cent in 1995 to 33 per cent that year.

In 2013, the economy enjoyed robust growth supported by higher oil production and continued recovery in domestic demand. The emirate's safe haven status, strategic location and growing tourism sector continued to attract investors.

Then came the announcement of Dubai hosting World Expo 2020, which provided a major boost to the real estate market. In a bid to prevent the formation of another property bubble, the UAE Central Bank introduced mortgage caps that limited leveraged non-cash exposure. The banks were also asked not to go beyond 25 per cent of their equity or 100 per cent of their capital when lending to government-related entities.

Dubai, now focused on cementing its position as one of the world's top cities, directed its energy towards building a knowledge economy that would attract high quality talent from across the world. The Knight Frank Global Cities Survey 2014 rated Dubai as one of the top ten cities in 2014, based on economic activity, quality of life, knowledge, and influence and political power.

New challenges

But there is still much to be done. Clarifying property ownership rights is an important area that may determine the growth prospects of the segment. A two- or three-year visa for property owners may not be attractive enough for residential property investment. Moreover, a clearer legal framework for freehold properties would further boost the segment.

The happenings in the broader world can equally impact prices. The slowdown in China may affect the regional market, while political developments in the surrounding areas are an important parameter that can determine the fluctuation in UAE property prices to a certain extent. However, a positive development in the deadlock with Iran can make the UAE an attractive destination for businesses to set up bases and provide a fillip to property prices.

The second, third and fourth quarters of this year have shown a healthy slowdown in property prices — even a decline in some cases. As we step into 2015, the best way to view investments in Dubai realty is with cautious optimism.

Find out why Dubai's luxury real estate still makes sense

Source: Sammyo Halder, Special to Property Weekly

The writer is an alumnus of Harvard Business School and senior vice-president of a foreign bank. The opinions expressed are his own and bear no connection to the outlook of his organisation


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