Five reasons why Dubai’s property market will not see 2009-type crash – S&P

Dubai’s residential property market will see a double-digit correction in prices this year following three years of sharp appreciation, a new report by S&P has found.

The report estimates a “moderate” 10 to 20 per cent drop in prices for a number of reasons including additional supply and lesser demand in the market, volatility in the UAE’s equity markets and lower oil prices.

The impact is already being felt – REIDIN’s residential property price indices for Dubai show negative growth of between 4-5 per cent from January to April 2015.

Average prices are also down roughly 2 per cent for apartments and 1 per cent for villas in Q1 compared Q4 2014, according to property consultants.

However, S&P asserted that the correction would not be as steep as the one experienced by Dubai’s real estate market in 2009.

“We believe real estate companies in the UAE are better armed to deal with the current slowdown and should be able to absorb it with limited ratings impact,” said Standard & Poor’s credit analyst Franck Delage.

Dubai’s property market saw prices fall by up to 60 per cent following the financial crisis in 2008, goaded by increased speculation – especially in off-plan sales. Several projects were cancelled or put on hold, investors lost millions and some developers shut shop.

The market recovered by 2012 but again began seeing a sharp growth in prices, attracting concern from experts such as the IMF, who warned that unless prices stabilised, there was the possibility of another bubble.

By late last year, the impact of new government regulations and increasing supply helped cool the market with most experts predicting further price correction this year.

“Property development is a volatile and cyclical business by nature, especially in Dubai’s market where most buyers are investors. Our current ratings already incorporate this inherent volatility and potential softening in our base case,” S&P said.

“Still, we have run alternative scenarios, where market conditions would deteriorate further than we currently anticipate, with average selling prices dropping 30 per cent, and interest rates doubling. Even under these harsh conditions, the ratings impact on GCC issuers would likely remain limited over the next 12-24 months as the current backlog and presales support cash flow,” the report added.

S&P also offered five main reasons why Dubai is better prepared this time and the market will remain on its feet.

1. The UAE economy has become more diversified

Dubai’s economy, especially, is more diversified and less reliant on oil. Non-oil companies are contributing to a large share of GDP and employment, and their expansion may partly offset weaker demand from oil-related companies. Furthermore, non-national investors dominate real estate investment in the UAE, and in many cases, their spending power is unaffected by the decline in oil prices. Indian and Pakistani investors, for instance, accounted for more than 18 per cent of investment transactions in the UAE in the first quarter of 2015.

2. Demographics are supportive

Population growth in the UAE is a fundamentally supportive factor for real estate prices and rents in the next five years or so. We assume 5-6 per cent population growth for Dubai and 7-8 per cent for Abu Dhabi for the next two years in our base case. For instance, planners expect Dubai’s population to reach about three million by the time it hosts the World Expo in 2020.

3. Tourism will remain an important source of market growth

Strong growth in tourism, especially to Dubai, should be supported by large infrastructure projects over the next decade. The emirate saw 57 per cent growth in tourism to 13.2m international visitors in 2014 from 8.4m visitors in 2010. Dubai Airport is also now officially the world’s busiest in terms of international passenger traffic.

And just for Expo 2020, the Dubai government plans $6bn-$8bn of investments. Tourism growth should continue benefitting some real estate segments like hospitality and retail (Majid Al Futtaim, Emaar Hospitality, Emaar Malls Group). Although we anticipate reduced shopping spending from Russian tourists, we believe spenders from Asia (especially growing numbers of Chinese visitors), elsewhere in the UAE and neighbouring countries like Saudi Arabia should help stabilise retail performance.

4. The sector has learned from the past

The local regulator has established protective measures since the last crisis. We believe the risk of default has fallen considerably due to the implementation of a loan-to-value cap on mortgages (between 60 per cent and 75 per cent) and developers’ mandatory usage of escrow accounts, which can be released only when construction is completed.

We believe that presale mechanisms, which our rated developers use in particular, will help improve the predictability of revenue and cash collection. The UAE’s new credit bureau that monitors personal debts will also help banks and financial institutions to assess mortgage lending risk more accurately.

5. Positive geopolitical developments could benefit the UAE

Stabilisation of the political situation between Russia and Ukraine, a rebound of the Russian ruble against other currencies, and the possibility that the US will gradually lift sanctions on Iran are all alternative scenarios that could also support the real estate market in the region.