What's shaping Dubai real estate?

What's shaping Dubai real estate?Image Credit: Supplied

The opening of the Credit Bureau, increase in mortgage transactions and rise in transfer fees are all viewed by analysts as contributing factors to the relative stability of Dubai's real estate market, despite a general downturn in prices in the past several months.

With a rapidly evolving market, stakeholders need to be on board with the programmes initiated by the government moving forward. But how can the market improve further? What should government departments, the financial sector, developers and the industry in general do to make the market stronger and more resilient? We asked experts to share their views.

Law provides market transparency

Over the last 10 years Dubai has taken large steps towards creating a more transparent and mature market, including implementing its own property laws, developing a robust registry, both in respect of completed and off-plan property, and introducing standard contracts for title transfer.

Dubai has been very transparent about its strategic apirations for the future. For example, the 2020 Dubai Urban Master Plan was approved and made public well before Dubai made its bid to host the World Expo 2020.

Centralised real estate database

There is tremendous opportunity for the Dubai Land Department (DLD) to improve its database by becoming a single repository for all approved building permits and completion certificates. The Municipality and master developers currently keep this data. If the process were streamlined, that would greatly improve the transparent flow of information and improve confidence further.

Dubai Municipality is probably the best government department suited to be a one-stop-shop for planning and building permit approvals. However, some master developers still maintain active control in this area. As an example, master developers previously gave consent (for a fee) to residents to construct swimming pools or to modify villas or construct garden structures. Many owners, as well as consultants and contractors, understood this was the only approval required.

However, many have since learnt they may face sanctions for not obtaining additional approvals for the same work from the Dubai Municipality. The lack of a single and exclusive licensing body has created confusion and some owners may claim they were not informed by the master developer or their consultants or contractors that any other approval was required. In other situations, some developers ask for additional fees if the property owner wishes to carry out extensions to the property, despite the fact that the property has already been fully paid for by the owner.

Credit Bureau and strategic government regulations

This year is a great time to invest in Dubai property. Following the global financial crisis the property market came back in 2012 and peaked in the first quarter of 2014 [until] prices fell across the board in 2015. However, the Dubai property market continues to mature and stabilise.

The Credit Bureau, strategically implemented government regulations, including the increased property regation fees, and home finance caps are contributing to a mature and stable market, fewer speculators. On the other hand, respectable rental returns and the promise of capital gain on account of the World Expo 2020 are additional factors that are currently playing a pivotal role in favour of Dubai's property market.

Expand coverage of financing products

Reconsidering the home finance cap will not necessarily help bring quality investments, but it has certainly prevented speculative buying of property. With the World Expo drawing near, financial institutions need to expand into segments such as offplan projects of tier one and tier two developers, commercial property financing and non-resident financing to attract quality investment. The major players that have these offerings need to review their product proposition and tweak their policies to adopt relaxed yet prudent financing practices. These will go a long way in attracting good-quality investors and uplifting the property market.

Government bodies such as the Real Estate Regulatory Agency (Rera) can continue to regulate off-plan projects and other new developments to ensure there is interest from investors and financiers.

Dubai is a cosmopolitan city, but not too expensive

Dubai is a commercial capital for three billion people from the Indian subcontinent, Africa and the Middle East - roughly 40 per cent of the global population. The transformation of the city has been a very important part of the success of the real estate business in Dubai. As the most sustainable real estate city in the Middle East, Dubai is cosmopolitan with beautiful weather five to six months of the year. It delivers high-quality lifestyle and is not as expensive as cities in Europe.

Another important aspect of property investment is the rental returns. According to various reports, the rental returns from apartments in Dubai are on average 8 per cent, depending on the precise location. Adding to the appeal of property investment in Dubai is the fact that the city does not levy any taxes on income generated from rentals. Similarly, it does not levy any capital gain tax on property sales.

Healthy debt-equity ratio

Real estate is a cyclical business. Since the oil price drop, the GCC has been going through slowdown in various sectors, but this would be true regardless of the oil slump. We believe that ups and downs are common in any business, especially real estate. Dubai goes through a four-year cycle: two years positive and two years negative. We should be ending the negative cycle by more or less the end of this year.

Personally, I have learnt a lot leveraging. There was this belief the market that leveraging has to be limited. In the real estate and construction industries, I think it is best to have a debt-equity ratio of about 40:60. In my opinion, a good ratio would really protect your business against the pressures of a negative cycle.

Rental yields, infrastructure, tax

The obvious points in favour are rental yields, superior infrastructure and tax efficiency. My view is that the most prominent factor is the expansionary fiscal policy that Dubai has adopted, despite the reduction in oil prices. It has been the most aggressive in terms of increased fiscal outlay, increasing budgetary spending by 12 per cent in 2016, as opposed to other countries in the region and unlike the last boom-bust cycle when it curtailed spending by 10 per cent in 2009-10.

The second factor is that the supply fears that have plagued the market in terms of launches have not materialised. The supply delivered in the last two years has been consistently below projections by most analysts. This indicates that supply elasticity has increased in this cycle as developers have become more responsive to market conditions.

However, it also implies, perhaps counter-intuitively, that there might well be a shortage, especially as expansionary fiscal policy leads to increased job creation. It has been due to this fiscal stance, as well as reduced supply, that the rents haven't dropped much, despite widespread concerns being expressed about a slowdown and firings.

Relax regulations on capital market funding

The obvious recommendations are permanent residency linked to real estate purchases and increased loan-to-value ratios. To facilitate investment, we need to formalise and make symbiotic the relationship between real estate and capital markets, the way it is in developed markets. One way to do this is by relaxing regulation to encourage small developers and funds to list in the equity markets.

In the US, the Jumpstart Our Business Start-ups (Jobs) Act of 2015 allowed companies to raise up to $20 million (Dh73.45 million) from the capital markets without the need for audited reports. When it was launched, the primary beneficiary had been the real estate sector.

In Dubai, much of the fund-raising activity by private developers has taken place through a network of friends and family. There are more than 400 private developers registered with Rera currently undertaking development projects worth more than $2 billion. The numbers are expected to grow significantly in the years leading up to the World Expo. Regulation would allow for greater protection for the small investor, as a more robust regulatory framework is gradually put into place.

Furthermore, investment managers get access to far greater information than what's currently available.

Find out why you need to pick the price points wisely

Source: Shalini Seth, Special to Property WeeklyPW


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