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Dubai: Real estate prices in the UAE are showing signs of stabilisation after strong growth in the past two years, particularly in Dubai, according to global credit rating agency Standard & Poor’s.
The rating agency believes a big drop in prices is unlikely in the short term, and that’s good news for the country’s banks, which have large loan exposures to the real estate sector.
“The residential sector real estate prices are near the 2008 peak with fewer empty units in the market. With strong economic growth and population growth supporting the sector, the recovery looks healthy,” said Tommy Trask, Director of Corporate Ratings at Standard & Poor’s.
The future direction of prices hinges on the level and pace of new supply coming to the market, which is significant in Dubai and less so in Abu Dhabi.
“Excluding unforeseen shocks, Standard & Poor’s Ratings Services believes a big drop in prices is unlikely in the short term, and that’s good news for the country’s banks, which have large loan exposures to the real estate sector,” said Standard & Poor’s credit analyst Mohammad Damak.
The real estate sector is basking in good economic growth in the UAE, which is likely to remain healthy. S&P has forecast GDP growth of 3.8 per cent in 2014 and 2015. The country is also stable, compared to instability in some countries in the wider Middle East region. That and low interest rates are attracting strong external demand for Dubai real estate from regional and international investors. Looking ahead, Dubai has won host rights for the World Exposition in 2020, which is likely to boost the Emirate’s investment in infrastructure, construction, job creation, and ultimately demand for real estate.
Real estate transaction volumes increased by about 50 per cent over the past year in Dubai. Land sales reached Dh120 billion in 2013 — excluding remortgages and donations — compared with Dh49.5 billion in 2010, according to Dubai’s Real Estate Regulatory Agency. However, sales volume is still below its Dh88.4 billion peak of 2008. S&P has used land sales as a proxy for total demand. Total for land and housing real estate transactions in 2013 reached Dh236 billion compared with Dh154 billion in 2012. This demand was almost evenly split between local (Dh122 billion) and external demand (Dh114 billion).
S&P analysts view that a significant presence of foreigner investors as potentially negative for the market’s overall stability. “During the last real estate cycle, we understand that a significant portion of foreign investors exited the market entirely, accentuating the nosedive in prices. Generally speaking, nationals arguably have a greater long-term incentive to hold their investments, while foreigners might have a greater incentive to sell and leave the country,” said Trask.