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With most market researches hinting at a drop in prices of properties in Dubai, is it the right time to invest? Or, should one tread cautiously? Is it the right time to sell, or should you ask your tenant for a rent hike?
According to the latest property market update prepared by Core Savills based on the first six months of the year, property prices will witness a decline. It will stabilise in early to mid-2016 as the activities around Expo 2020 gains momentum. David Godchaux, CEO of Core Savills, tries to decode the current market trends to predict the future.
The property market peaked in October 2014 with prices higher than the levels achieved during the boom phase of 2008. However, since then, apartment prices have come down by a compounded average of 1.2 per cent per month. Sale prices of villas, which also peaked, witnessed a fall by around 0.7 per cent per month. These headline figures should provide a note of caution to investors, but the decline should not come as a surprise. House prices typically move in cyclical fashion, dependent on many macro-economic issues such as wage growth, job figures and GDP. Whilst many investors enter the Dubai market looking for a short-term, high-yield property, many more rely on rental income as part of their investment strategy. With high rental inflation in recent years, rental returns are likely to have levelled out for existing owners. For owners who are entering the market now, rental yields are expected to increase.
Wage growth could lead to a recovery in prices, but there are a number of regional and global economic trends that are very likely to prevent this. External factors such as the lifting of Iranian sanctions, stability in Egypt, Chinese crackdown on capital outflows, Russian sanctions, instability in Yemen, the falling Russian ruble and euro, and the appreciating dollar are influencing Dubai’s residential market.
The decline in apartment prices is steeper than that of villas because majority of the new residential stock entering the market consists of apartments.
We anticipate that the market will continue its downward trend with further price and rent softening ahead, before stabilising in early to mid-2016.
Exiting the market now may be a wise decision for those who have invested between 2009 and 2014 and who are looking for short-term capital gains. However, the market will once again hit a growth trajectory in late 2016 or early 2017 as Dubai gears up for the Expo. Buyers looking to enter the market now should wait for deals priced lower than last year’s. They should earn reasonably higher rental yields with no substantial short-term capital gains.
Variations in areas
Emirates Hills villas command the highest prices averaging Dh3,200 per square foot, closely followed by villas on the Palm Jumeirah which command sales prices of Dh2,600 per square foot.
Sales prices of apartments closer to the city’s financial centre also attract premium rates. Apartments in DIFC hover around Dh2,000 per square foot; those in Downtown Dubai at Dh2,500 per square foot. These two districts benefit from tight supply and demand. They are also surrounded by world-class dining, leisure and retail destinations. However, we expect to see a correction in these areas along with the rest of the market.
The market today has more end-users and long-term investors rather than flippers and speculators who existed before. Developers are restricting reselling before handover and Land Department transaction fees have increased.
Sales prices and rents are determined based on the merits of the property rather than on the selling strategies of particular developers. Location, quality, amenities, facilities, accessibility and availability of public transport are some of the determining values.
Loan-to-value ratios are much lower now compared to before. Also, banksare maintaining a more cautious approach when lending. Furthermore, interest rates have come down substantially.
Overall, the Dubai market is now more mature with a strong GDP and population growth.
A number of regulations have been introduced over the last few years which have made Dubai more investor-friendly. New regulations related to strata and escrow laws, the issue of refunds to investors, transfer or cancellation of stalled projects, guaranteeing of projects, regulation of real estate agents and others have been introduced. A number of new projects are being launched after some progress has been made on construction. This trend is helping boost investor confidence as in the past off-plan projects were sold based on brochures only.
Source: S. Dhar, Special to Freehold