Dubai’s Property Sector Plots Conservative Growth

After a lull of more than two years, 2013 saw Dubai’s residential property prices rebound strongly with prices in some areas even back to pre-crisis levels. Sales prices soared as high as 30 per cent in 2013, fuelled by optimistic sentiment surrounding Dubai’s World Expo 2020 win.

According to property consultant Knight Frank, prime property prices in Dubai rose faster than any other place in the world during the first half of 2013, up 14.7 per cent, and growing five per cent between April and June alone.

Fearful of the market overheating, authorities introduced a number of regulations including a hike in property transfer fees, and mortgage caps to control the unbridled growth, eventually leading the market to stablise.

As the effect of regulatory measures kicked in, the rate of growth among real estate prices in the emirate slowed down in the first quarter, a trend that continued well into the first half of this year.

In a report, property consultant CBRE said that sales prices grew just five per cent in the second quarter from the first but prices were up 31 per cent year-on- year during the first half of the year.

In line with the slowdown in the sales market, the value of real estate transactions in the emirate fell 14.7 per cent to Dhs52 billion during the second quarter of this year from Dhs61 billion in the first quarter, data from Dubai Land Department (DLD) showed. The emirate recorded total transactions worth Dhs113 billion in the first half of this year.

“The initial frenzy leading up to Dubai’s successful World Expo bid and the strong domestic demand for residential property helped to lift average values by 51 per cent,” says Faisal Durrani, international research and business development manager, Cluttons.

“Post the announcement, as anticipated, the property market has seen a return to moderate pace of growth so far during 2014.”

Government regulations such as the doubling of the property registration fees and the ban on off plan re-sales by some developers have positively impacted the market behaviour, he adds.

“We have recorded a gradual slowing in the pace of price growth, which we view as an anticipated normalisation of the residential market.”

However, Durrani also highlights that the most effective measure in helping reign in price growth was the implementation of the federal mortgage cap.

“The increased size of deposits as been restricted to the lower end of the property spectrum.”

“We are already seeing the first signs of this emerge with data from REIDIN [a real estate information provider] showing a nine per cent fall in the number of deals registered during the first quarter, when compared to the same period last year. The magnitude of the decline is more pronounced for villa transactions, which are down 46 per cent on Q1 2013.”

STronger ThiS Time?

Anticipation of Dubai’s Expo 2020 win fuelled the emirate’s property market in 2013, resurrecting fears of a bubble and a subsequent crash akin to that of 2009.

Earlier this year, the UAE Central Bank issued a warning saying that low residential yields in Dubai and Abu Dhabi indicated that the market might be over heating. Experts say that such fears area result of the federal mortgage caps means that the range of property options available to mortgaged buyers has unfounded due to timely government intervention, strengthening the market.

“Overall market fundamentals are arguably stronger now than during 2008, with solid occupier demand, a smaller development pipeline, tighter regulations and a healthier global economy,” says Nick Maclean, managing director, CBRE Middle East.

“Dubai’s economy also appears to be more robust, with core sectors such as retail, trade, tourism and industry and manufacturing performing well.”

Moreover, Dubai is also attracting mature investors this time around, instead of the fly-by dealers of the past lured by rapid acceleration in values, and regulation failing to keep pace, Durrani notes.

“We have a market that has matured significantly and so has the buyer base, with genuine domestic demand now central to the performance of the residential market,” he asserts.

Despite the market’s maturity, however, analysts suggest additional regulation is needed to ensure its longevity.

“I presume authorities will begin to look deeper into the issue surrounding the resale of property going forward as this is an area that remains a threat to the stability of the market, despite developers beginning to self-regulate themselves by imposing restrictions on the resale of off plan properties,” says Durrani.

“The government has made tremendous efforts to curb the flow of property flipping that was in many ways responsible for fuelling the 2007 to 2008 boom. Some basic rules governing the duration for which an investment must be held would also be a good starting point.”

WhaT nexT?

Analysts say that Dubai’s property prices are expected to continue their growth in the second half of the year, albeit at a slower pace.

“We expect the Dubai market to continue its road to recovery, with growth projected across all real estate sectors during 2014,” says Mclean.

“The pattern of this growth is becoming more inclusive, although individual sub-markets, quality and ownership structures can still have a major influence on performance.”

However, the CBRE managing director expects growth levels to be lower than 2013, due to measures taken by the government to curb speculative activity and affordability becoming a more influential factor driving property transactions.

Durrani also believes growth will level off as the year progresses, with little or no increase over the next six months.

“However, we must remember that residential values have already risen by 3.1 per cent in Q1, which still leaves them 44.8 per cent ahead of the same time last year,” he adds.

A key factor for the slowdown in price growth could be due to new supply coming into the market this year. According to a CBRE report, almost 17,000 new units could be completed with the majority of them delivered in secondary locations like Dubailand, Jumeirah Village Circle and Dubai Silicon Oasis.

“The residential development pipeline is still increasing, with a rising number of new projects being launched month by month,” the consultancy cautioned.

“Whilst this pipeline is still far smaller than witnessed during the last cycle, it is nonetheless growing quickly and is certainly something to monitor carefully, with a danger that further down the line supply could again start to exceed demand fundamentals.”

But even the additional supply might not dampen sales growth for this year, according to Maclean, with improving market conditions potentially translating into escalating sales growth in the coming quarters amid rising rentals and stronger investor demand.

“Unlike the previous property boom, sales activities are now more driven by the end-user markets with their interest only apparent for completed or close to complete units,” he says.