Pick the price points wisely

A report by Cluttons described the current market as “arguably the most challenging” since 2008-09. The UAE Property Report 2016 attributes the slowdown in growth to global economic headwinds such as the Chinese economic slowdown, low oil prices and the associated economic challenges faced by Opec states, ongoing sovereign debt issues in the EU and the global fallout as a result of Britain’s decision to leave the EU.

In an interview with PW, Cluttons’ Faisal Durrani, Head of Research, and Richard Paul, Director of Residential Evaluations — Dubai, speak of an end-user driven market for properties that are priced  right and underline the need for a federal policy on affordable housing.

What factors will define Dubai’s residential property market in 2016-2017?

Richard Paul: I think you need to focus on the last 12 months. Dubai is hugely sentiment driven. Poor sentiment started initially with [low] oil prices and the knock-on effect touched on the finance sector as well. Anecdotal accounts from the finance sector  tell us that some of the lending teams are getting smaller as well. Sentiment has not been great. We have not had much to talk about positive news in the emirates. That may change in September-October with new infrastructure projects being announced.

Then there is the opening of the amusement park IMG Worlds of Adventure and the Opera House is opening too. Around Cityscape Global, these give buyers and investors more confidence. People will take advantage of the prices and get involved in a market that hopefully is at the lowest end of the trough. As the sentiment improves, with the stabilisation of market values by some time mid next year, there may be an increase in prices. We have reached the bottom in certain areas.

It’s all relative; Dubai is doing alright. International City will maintain a certain level of demand. It has with- stood a general softening of the market. Our advice to developers is to pick the price points wisely and make sure the offering is what the market wants. Demand is not super high, but it’s reasonable.

Faisal Durrani: The economy is not heavily reliant on oil and gas, but because Dubai acts as a centre for export and finance business services, the slowdown in regional services is filtering into Dubai.

Values have reached their bottom internationally — there is no market immune to it. Dubai is not alone in seeing a reduction in international investment. The state of global economy is fragile.

In some locations, such as Downtown Dubai and International City, values have not moved. Going forward, in places like Downtown and International City, more projects will be launched and absorbed rapidly.

What is your take on prices, both for those that buy to live in luxury and affordable segments and for investors?

FD: At the end of last year we had forecast a 5-7 per cent drop. We are halfway there. We stand by our original prediction. We expect a 5 per cent decline in capital values for apartments and 7
per cent for villas.

RP: We have seen that it’s very rare that you have an entire market and different sectors all reacting at the same time. Some are lot slower to respond. For instance, in the Palm Jumeirah we have seen a drop of 8.8 per cent. Ultimately that’s probably because the demand may have softened but there is a reluctance
[from sellers] to come down from those levels. You see a sudden drop purely because of the reaction time of the sellers.

End-user buyers are going to be here for five years and more. They can withstand a 5 per cent or 10 per cent fluctuation. As and when we are bottoming out, you then may start seeing more investors.

It’s mostly end-user driven, currently. In Downtown you get about 5-6 per cent returns. You are going to end up with profit eventually. Still, it’s not for people looking for margins, but a home
that suits them.

The real fundamentals of buying property are becoming prevalent not just in terms of value but also demand. Those projects are being absorbed.

What is your take on rentals?

RP: Yields on certain markets are quite high. The choice has improved. Landlords want to retain tenants and renegotiate not only rent but also maintenance contracts, etc. Supply numbers are coming on so there should be a continuation of softening of rentals. There is a rental calculator implemented that keeps things reasonably steady. If you work out the cost of moving and time that it takes to do that as a family, a 10 per cent drop is not worth moving. When units become vacant is when you get lower rates.

FD: The tenants are in the driving seat at the moment. Overall rents are down but just over 7 per cent. There is a slowdown in the pace of job creation at senior levels, which is weakening demand in the top end of the property sector. This is true of sectors such as oil and gas and banking. On the other hand, hospitality, leisure and tourism sectors are key forces of tenant demand. Going forward, the projects linked to the World Expo 2020 and others will drive demand in lower to mid-range rental property. Demand is quite weak for luxury rental.

We’ve not changed our forecast. We’re expecting rents to be down 10 per cent for both apartments and villas.

Is the buyer profile changing? There are reports of a resurgence of Russian interest along with Egyptians.

FD: The buyer profile remains unchanged—Emiratis and GCC buyers followed by international buyers from India, Britain and Pakistan. The number of transactions that have taken place are down 30 per cent over the first half of last year.

In our recent private capital survey, Dubai topped the list for places where Middle East and North Africa investors are looking to invest. People invest in property because of capital values and rental returns. We were not surprised that Abu Dhabi and Sharjah were number two and three in the region. The UAE is the safe haven.

RP: There are actual transactions that are happening and there is chatter in the market about who is looking. Cityscape will be a good gauge. It will be interesting to see how the buyer profile may vary over the next six months. We have just come through the summer, which is not a very active time.

How is the regulatory environment shaping up and what would you recommend, particularly with regards to affordability?

RP: Some softening if due to the mortgage regulation or rental cap, that brings the market to the level which we did not see in 2013. The Central Bank has a mechanism to stimulate the market. It can lower the loan-to-value levels to stimulate some growth. It has to be done sensibly. Maybe next year is not the time for it.

FD: One of the areas that need to be looked at is affordability. At the moment no one understands the definition in relation to people’s income, demographic background and location. There are different models in use around the world. We need to try and find what works best for the UAE as a whole. I would like to see that being done at the federal level — a definition and perhaps a minimum quota requirement for every development.

Source: Shalini Seth, Special to PW


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