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There is a tendency to associate the rise in real estate values with bubble, while the moderation in prices with the property endgame. But is that always the case? Not necessarily. Residential sales in Dubai did record across-the-board declines last year, with villa sales prices down year-on-year by 11% and apartments by 8%, as per estimates by real estate consultancy Asteco. In case of Northern Emirates also, with the exception of Fujairah and Ajman, rental rates declined marginally last year, with Sharjah and Ras Al Khaimah recording 2% falls each. Abu Dhabi however saw a slow but overall positive market performance in 2015, as apartment rental rates increased, on average, by 5%, with prime projects achieving up to 10% growth, and 3-4% growth for apartment sales prices.
Wealth Monitor asked market experts if 2016 is time to buy or sell. The experts debate on the current state and the outlook of the UAE property market and try to get insights into the factors behind why property prices in many areas in Dubai are in downward spiral and the moderation is faster than the rents? Are off-plan sales are making a comeback again in Dubai? What are the risks involved from an investor’s perspective? Are they seeing investor demand for luxury property in Dubai waning and that of mid-level affordable accommodation on the rise? What’s the best option from the point of view of a customer: buy or rent property in Dubai? How real estate brokers are combatting falling sales and the downturn in the Dubai property market?
And here’s what they had to say….
David Dudley, International Director and Head of Abu Dhabi Office at JLL MENA
It’s A Correction Not A Major Crash
The current slowdown in the UAE real estate market should be seen as a minor correction as opposed to a major crash. While the impact of reduced oil prices on the economy will lead to a short-term slowdown in demand, this is occurring at a time of minimal supply completions leading to relatively stable market conditions. The market experienced a major upswing from 2013 to 2014, led by the residential sales market, with prime residential prices growing at 25% per annum. This pace of growth was unsustainable. The current phase is a slowdown and a relatively minor correction, rather than a major crash – with reduced supply coming through at a time of weak demand, allowing underlying dynamics to catch up with the pace of value growth.
While liquidity has tightened, funding is still available for project finance and corporate level lending – it is just more selective. The good news is that demand growth continues from projects that started when oil prices were strong. Developments such as the airport expansion or the growth of Etihad Airline have an economic multiplier effect, ensuring continued GDP growth, albeit at a reduced pace.
Abu Dhabi Property Law To Bring Opportunities
The new laws place greater responsibility and regulation on developers, which will inevitably suppress supply growth. This will help reduce the risk of over-supply in the current period of weaker demand; however the key will be to allow sufficient supply to come through to maintain a healthy balance between supply and demand to keep rents and prices at a competitive level. The good news is that demand growth continues from major capital projects that started when oil revenues were strong. Projects such as the airport expansion, the growth of Etihad Airline and other major tourism attractions, including The Louvre Abu Dhabi have an economic multiplier effect, ensuring continued GDP growth.
Matthew Green, Head of Research & Consultancy, CBRE, UAE
Market’s Become Flexible
The slowdown in activity within the residential sales environment has certainly encouraged more flexibility in the market, although this has broadly come from developers through waiving of registration fees and offering of more flexible payment plans to investors.
A Long Term Investment
As with any market, there are potential risks when purchasing a home in Dubai, particularly when utilising bank finance in a country where visas are linked to your employment. Given the uncertain economic environment in the region at this time, security of employment has been identified as a key concern, specifically for expatriates working in the oil and gas sector and in some parts of the public sector. However, whether it is in Dubai or any other international market, real estate should always be viewed as a long term investment, and should be considered within your means.
Demand For Off-Plan Slows
As was the case during 2006-2008, there was significant interest in off-plan sales during the last boom cycle from 2013-2014, particularly for units from high profile developers such as Emaar, DPG, Deyaar and Damac. However, since the second half of 2014, demand has slowed considerably as investor sentiment has turned negative amidst the onset of global economic challenges and concerns over local market dynamics. Oversupply and the slowdown in a number of key source markets, including some of the BRIC economies, were important factors in this shift. Whilst supply fears have yet to be realised amidst the slowing pace of many construction projects, Dubai has become a more expensive investment destination for some international investors due to the unrelenting strength of the US dollar, resulting in weaker inward investment volumes over the last 2 years. However, history has shown that Dubai has a cyclical and often speculative real estate market, attracting significant capital from international investors over the years, buoyed by its safe haven status within the region. As a result, we would expect to see off-plan properties find favour once again as the Emirate starts to recover.
Haider Tuaima, Head of Research, ValuStrat
Property Prices Begin Stabilizing
Property prices in Dubai were indeed in a downward spiral, but only for a limited period, between July 2014 and July 2015, after which, prices generally began to stabilize. According to our proprietary ValuStrat Price Index (VPI), June 2014 saw an index peak of 112.9 points as compared to the starting 100 point index for January 2014, by July 2015, the index dropped to 98.4 points, bottoming out at 97.9 points in January 2016, it then saw a slight uptick to 98.0 points during the following month. Therefore there was no effective overall change in values across the 26 neighborhoods we measure during the second half of last year, with a minute indication of recovery in some districts during the first quarter of 2016. As far as Dubai’s asking rents are concerned, they continue to soften.
Generally speaking, there’s continued demand for the full spectrum of properties on offer, however, we do see more focus on properties priced less than AED 1 million as almost half (46%-49%) of the residential transactions in the last 14 months were in this bracket, while on the other side of the spectrum, properties priced more than AED 10 million represented 1.47% of all residential transactions during Q1 2016, which is double the 0.72% recorded the quarter prior to it.
Speculators Out Of Picture
With speculators mostly out of the picture, off plan investors as well as future end-users have become more cautious with their decision making as purchasing off plan can involve a number of risks or drawbacks, especially in the case of buying something that is not yet tangible and cannot be seen. Firstly, if the property market experiences a decline during the construction phase, the return on investment may not be as good as initially hoped for. Or in extreme cases, a project can be delayed due to the developer being short of funds, the market position, or other reasons which all translate to a loss of money and time for the investor – Many such cases exist from past crisis with buyers paying significant sums in deposit payments on projects that become delayed and stalled.
Ranju Kapoor, General Manager, Hamptons International
Developers In Wait-And-Watch Mode
The rental market in Dubai has overall reflected a marginal softening in rates. There has been growth in rentals of new offerings and declines in projects with inventory overhang. New units are entering the market, however several freehold developers are carefully managing their pipeline with projections for delivery in 2017-18, and adopting a wait-and-watch attitude for this year. With less new supply entering, the rental market trends are dictated by demand from end-users who seek specific conveniences including connectivity, ease of access to lifestyle and leisure attractions, and a preference to be part of established communities.
More Demand For End-Use Homes
Over the past year, the rental markets in Dubai have held steady in most established communities including Downtown Dubai, The Greens and Dubai Marina, principally, for this reason. Today, there is increasing demand for end-use homes, as people seek to shift from a rental model to an owned-home lifestyle. Across the market, we see a shift in sentiment, with more customers asking, ‘when should we buy?’ as against ‘when should we sell?’ Several affordable communities have been launched to meet the appetite for value housing but these are yet to be handed over.
Dubai’s Rental Market Attractive
This year will offer interesting insights on how the rental market of Dubai will respond to the shifts in the neighbouring emirates. Sharper drops might have a fall-out as small families may seek to shift their location of residence. But the traffic woes, charges by way of road toll and the time lost in commuting, which in turn impacts the quality of life, will be deciding factors. For now, though, Dubai’s rental market continues to be attractive in terms of yield. This is based on firm fundamentals, and that is the mark of a mature property market.
Real estate market, like any other asset class, tends to move in a cycle. However, unlike many other assets, real estate markets are little more predictable as the recovery of real estate follows the macro-economic recovery. The outlook for the UAE housing market therefore appears increasingly tied to the overall recovery in the economy, especially the crude oil prices. The UAE, and especially Dubai and Abu Dhabi, has been an investment destination for buyers from around the world for many years, a trend which is expected to continue. The elephant in the room, as experts would have us believe, is the attractive yields offered by Dubai property sector that continues to outpace many developed markets around the world, both on the sales and leasing side.