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Regulatory developments, macroeconomic uncertainty and a good supply pipeline have transformed the UAE real estate market into a buyer's market, analysts say. Market sentiment is reflected in the fact that more people want to sell rather than buy. While the number of agreed sales has remained the same, property consultant Cavendish Maxwell's Residential Market Survey Q3 2015 results show that buyer enquiries continued to decrease, while seller instructions increased.
''As the Dubai market continues to go through a correction phase, overall market prices have continued to see a nominal decline by 2 per cent throughout the third quarter,'' the Cavendish report states. ''Approximately 6,000 residential units have been introduced into the market in the third quarter in areas such as Dubai Sports City, Dubailand, International City, Jumeirah Golf Estates and Jumeirah Village Circle.''
There are numerous factors at work here. Commenting on its Q3 Dubai Real Estate Market Overview report, Craig Plumb, Head of Research at JLL Middle East and North Africa (Mena), says, ''The downward trend in residential performance continued in the third quarter with sale prices falling further and rents registering marginal declines. While the general Reidin sales index dropped 10 per cent year on-year in August, the rental index points to a 1 per cent decline in rental values.
''This comes as tighter government regulations, higher inflation levels and a stronger [US] dollar have made property expensive for both local and overseas investors, resulting in a decline in the volume of transactions and a drop in prices to more sustainable levels.''
Apartment and villa sales and rentals have continued to perform differently, depending on location and the choices available to buyers.
Adam Wisher, Head of Development Advisory and Real Estate Research at Cavendish Maxwell, says, ''Over the last quarter apartment sales have seen a nominal 2 per cent decline across the board in most locations.''
However, Cavendish Maxwell also notes that some secondary areas have registered a double-digit decline in sales values in certain locations, whereas prime areas have held out a little more. Prices continued to drop at the same rate as the second quarter in Dubai Marina, the Greens and Views, Jumeirah Beach Residence and International City, while prices in Dubai Sports City and Dubai Motor City declined at a more accelerated rate throughout the quarter.
Secondary locations such as International City, Motor City and Discovery Gardens have seen prices decline the most at 10 per cent, 10 per cent and 9 per cent respectively over 12 months.
In the more central and established areas, prices have dropped between 4 per cent and 5 per cent during the same period.
The trend has been reported by other property consultancies as well. The latest Dubai market report by real estate advisor CBRE says that average rentals within the residential segment in Dubai remained stable during the third quarter (based on figures until August 30), although the market is highly fragmented with some affordable locations achieving growth, while other areas experiencing more pronounced drops. CBRE reports a further compression within the sales segment, with sales rates declining around 2 per cent compared with the second quarter and around 6 per cent year-on-year.
Mat Green, Head of Research and Consultancy — UAE at CBRE Middle East, says, ''While global economics have reduced investor sentiment and partially impacted Dubai's residential sales, the slowdown is largely attributed to a price correction resulting from market stabilisation.''
Cavendish Maxwell puts the average villa prices decline at a rate of 2 per cent in the third quarter, consistent with the decline in the previous quarter. The decline in villa prices slowed in the third quarter in communities such as Jumeirah Golf Estates, the Meadows, Springs and Lakes. Price declines accelerated significantly in Jumeirah Islands, Victory Heights, Arabian Ranches and Al Furjan during the third quarter in comparison to the second quarter.
Jumeirah Golf Estates villa prices dropped by 1 per cent in the third quarter, a notable improvement from a 3 per cent drop in the previous quarter. Prices at the Meadows and Springs declined at a slower rate than in the second quarter.
Compared to the previous year, the decline is more pronounced. The villa market prices have dropped by about 4.4 per cent throughout the first three quarters and 9 per cent over a 12-month period, with further supply of these units being launched and completed during the period.
Rentals continue to lag in terms of catching the downturn from sales. ''Apartment rents have remained stable in the third quarter, while villa rents decreased in most of the major villa communities,'' according to the Cavendish Maxwell report.
The exceptions to the rental stability are Business Bay, where rents dropped by about 2 per cent, and Dubai Sports City, where rents came down by 3 per cent in the third quarter.
The numbers speak for themselves with 6-7 per cent yields not being uncommon in prime areas. ''Prime locations still demand premium rents with a one-bed apartment in Downtown Burj Khalifa ranging from Dh110,000 to Dh125,000 per annum,'' according to the Cavendish Maxwell report. ''Similarly a one-bedder in the Views or Greens ranges from Dh95,000 to Dh110,000.''
Villa rentals are continuing to see a decline in most major villa communities, despite the locations showing strong rental activity throughout this year.
''Rents have declined on average by one per cent in the Meadows, Springs and Lakes. In locations such as Victory Heights and Jumeirah Park, rents have dropped by up to three per cent in Q3 2015 from the previous quarter,'' says the Cavendish Maxwell report.
While Abu Dhabi follows the developments in Dubai, albeit at a slower pace, it also behaves differently due to its buyer demographic. Comparing the two markets, the Cavendish Maxwell report says, ''Abu Dhabi is traditionally less driven by investors and more by the decisions of end users, which leads to a market less responsive to speculative trends and more controlled.''
The emirate has seen a relatively stable quarter in terms of price movements, recording an overall market decline of 1 per cent in both apartment and villa prices. Rents continued to remain stable across both markets.
David Dudley, International Director and Head of Abu Dhabi Office at JLL Mena, says: ''The general trend for the third quarter and the first three quarters of 2015 has been stability, with value performance of most sectors remaining flat, and a slight increase in hospitality performance. Following a two-year bull run where residential price growth at 25 per cent per annum outstripped GDP growth of 3-5 per cent per year, a period of stabilization is not a bad thing – allowing market dynamics to catch up with sentiment.''
What the fourth quarter holds
A steady supply of end user friendly buildings, attractive payment plans, low interest rates, regulatory improvements and lower sales prices are making the UAE's real estate market attractive to buyers. However, investors might have to wait for the market to bottom out before making a decision to buy.
The introduction of the Dubai International Financial Centre (DIFC) Wills and Probate Registry are among new regulations that are boosting confidence in the real estate market. Combined with the mortgage cap, stronger regulations on brokers and rental caps, along with more consumer-friendly banking rules, the forces now at play are likely to impact the market positively in the long term.
With the steady supply of new units, the UAE is increasingly becoming a buyers' market, as around 6,000 residential units were delivered in the first three quarter alone, according to a report by property consultant Cavendish Maxwell.
Brokers who participated in a Cavendish Maxwell survey on Dubai's residential property market seemed positive that prices would go up. Forty per cent of the agents surveyed say prices would remain the same in apartments, whereas 32 per cent predict stability in villa prices. Thirty-six per cent of those surveyed say villa prices would decrease by up to 5 per cent, 28 per cent say prices would fall more than 5 per cent. Sixty-four per cent say apartment rentals would not change, whereas 44 per cent believe villa rentals would also remain the same.
Cavendish Maxwell's report says that additional supply entering the market could place further pressure on prices until next year — a factor that developers are seeking to control via staggered delivery of projects.
Adam Wisher, Head of Development Advisory and Real Estate Research at Cavendish Maxwell, says, ''There were about 18,000 units scheduled for delivery this year, of those only 6,000 units have entered the market as we have seen many completion dates delayed to 2016 or 2017. Developers will closely monitor the absorption rates and sale price movement in the market, to make strategic decisions on the delivery.''
Analysts are expecting prices continued slow decline over the next year. ''Prices are expected to continue softening over the remainder of the year and into next year, before the emirate witnesses another growth cycle in the years leading up to the World Expo 2020,'' says Craig Plumb, Head of Research at JLL Middle East and North Africa.
However, a further slowdown might be balanced out by increased interest rates. Jean-Luc Desbois, Managing Director of mortgage consultants Home Matters, says, ''In terest rates are at an all-time low. They're on a downward curve. However, under pressure from the US rate increase, we have already started seeing that change. Three-month Emirates Inter Bank Offered Rate [EIBOR] bottomed out at 0.67 and now is circa 0.83, a 19 per cent rise. We will see slight interest rate increase by the end of the year, [but] I don't see them going too high over the 18-24 months.''
Analysts view the slowdown as a result of efforts to introduce stability in the market and reduce both volatility and speculation. Desbois says the government intervened by rising transaction fees from 2 per cent to 4 per cent, and by limiting the finance available to consumers.
''A mortgage cap was introduced and the loan-to-value [LTV] ratio came down,'' he says. ''In the first quarter last year, the mortgage market peaked and from thereon we saw a gradual decline in transaction numbers. Most developments in the country have come off by 20-25 per cent since the second quarter last year.''
The outlook is also affected by the overall confidence in the UAE economy. Wisher says, ''Factors such as the estimated population and job growth leading to 2020, with the UAE's initiatives to encourage investment, should help support the absorption of upcoming supply.''
Impact of regulation
One of the most welcome developments for those with a long-term view of immovable assets in the UAE has been the announcement of the DIFC Wills and Probate Registry. Jerry Parks, Partner at law firm Taylor Wessing Middle East, says, ''It's for non-Muslims with assets in Dubai and provides a degree of certainty on how the assets will devolve on death. This has been a grey area for a long time, which has led to much confusion. People have been motivated to establish complicated offshore corporate structures to deal with it.''
Parks says the registry allows property owners to sign and register a will. Upon death the DIFC courts will issue a probate, which Dubai and DIFC courts will enforce. ''That should give people greater confidence to invest,'' says Parks.
However, regulatory changes can also impact sales directly. Zarah Evans, Managing Partner of Exclusive Links Real Estate Brokers, says, ''We are continuing to see regulations rolled out by the Real Estate Regulatory Agency that have some impact [by] restricting the market.''
Advocating a longer term regulative rather than restrictive view, she says, ''For instance, anyone who is directly or indirectly related to real estate brokerage can no longer act with a power of attorney for the buyer or the seller. There are a lot of professional real estate companies in the marketplace and they're here for the long term. Things have to be moderated and regulated rather than blocked out completely.''
Making a case for an industry-friendly regulatory environment, Evans says, ''Dubai encourages more investment; we're asking overseas investor to come, get to a queue and find out that the stock is sold out. Experiences like that do have a negative impact. They could relax that [and] allow us to act on behalf of investors with some regulations in place. That would encourage a lot more investors.''
Parks says attracting institutional investors remains a key challenge. ''The wider issue that concerns me is the lack of institutional investors in Dubai,'' he says. ''In sophisticated markets you have institutional investors. Institutional investors are wary of investing in Dubai for a number of reasons. One is the application of the rent caps to commercial leases, which makes it difficult for institutional landlords to forecast rental income accurately.
''The other is the predominance of short-term leases here, as opposed to the 25-, 50- and 99-year leases that are common in other commercial real estate markets. There is room for improvement.''
Nonetheless, the overall sentiment is still positive. ''The long-term view is positive. There is better regulation from all points of view. No longer can banks change the rules. That's a massive step towards consumer confidence.''
Get a glimpse on Burj2020: Bigger, better
Source: Shalini Seth, Special to Property Weekly