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A Perfect Lull

September 2016

Wealth Monitor zooms closer into the Dubai property market to find whether it will continue to deliver the value proposition flawlessly despite short-term hiccups. By Sunil Kumar Singh

Talk of Dubai, or for that matter, any property market slowdown usually conjures up all sorts of negative things. The question now in everybody’s mind is where is Dubai’s property market heading? At first instance it may appear like a downright slowdown. Look closer and it seems there are a number of undercurrents, so intertwined that it allows no generalizations. There’s a mixed bag of market trends, so to say. Take a look at the average residential rental and sales rates that have softened in some areas in Dubai and Abu Dhabi, but they’re not monolithic as the trends vary by location. A report by CBRE substantiates it when it says residential rentals and sale prices continue to fall, although there is clear fragmentation in the market.

Figures released by the Dubai Land Department (DLD) depict healthy activity currently underway in Dubai property market. Investment in Dubai’s real estate sector in the first half of the year crossed AED 57 billion, and there was encouraging news coming out of Sharjah’s realty market as well – the city pulling in investment worth AED 12.1 billion in the first six months of the year. The real estate market in Abu Dhabi, as always, continued to lure investors with high rental returns on investment and a great promise of capital value appreciation. As per findings by Bayut, in July 2016, Dubai’s real estate market remained strong with rental yields going as high as 6.5% in select apartment categories. Average yield across all bed categories was recorded at 5.6%.

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Take for instance Emaar. Reflecting the positivity in the market, Emaar’s property business recorded positive growth during half-year (Jan to June) 2016, with revenue of AED 4.341 billion (US$ 1.182 billion), which is 20% higher than the property business revenue during H1 2015 at AED 3.620 billion (US$ 986 million).

“Emaar has recorded strong and positive growth in property sales this year, despite the challenges globally. As a bellwether company, this reflects the positive growth environment of Dubai’s property sector, led by the emirate’s strong fundamentals – and energised by the growth of its core economic sectors including retail, hospitality, trade, aviation and logistics,” Ahmad Al Matrooshi, Managing Director of Emaar Properties, told this publication.

Nevertheless, while Dubai’s economy has continued to outperform its neighbors buoyed by its diversified economic base, the devaluation of major currencies against the US dollar, spurred by global economic uncertainty, has impacted investor sentiment in the Emirate’s real estate market. While Dubai’s residential sales and rental see downward pressure, mid-market segment remains resilient. This despite the fact that the Emirate’s residential prices fell for the sixth consecutive quarter during Q2 2016, with average sales rates falling by -2% quarter-on-quarter, resulting in a 12% decline year-on-year, as higher-end and luxury residences witnessed the most significant drops during this time, says CBRE, adding, ‘prices within the mid-market segment have proven to be far more resilient to this downward rate trend, reflecting the current demand for affordable accommodation in freehold communities.’

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Brexit Impact
Apart from decline in oil prices and global events, the strengthening US dollar is another factor impacting investor sentiment in the Emirate’s real estate market. A poll by Dubai-based real estate portal – propertyfinder.ae – of several of the emirate’s top real estate agencies, has indicated that the anticipated ‘Brexit effect’ has reached the local market. According to an early gathering of feedback from propertyfinder.ae’s closest partners, there are already two distinct short term effects being felt in Dubai. On the one hand, a small but noticeable number of UK owners with property for sale in the emirate have reduced their asking prices – taking advantage of the weak pound against the dollar/dirham. On the other hand, a number of UK investors that had expressed interest in buying here are now apparently holding back.

Dubai has long been popular among British property buyers with UK citizens emerging as the second largest investors in the emirate’s real estate last year. According to the Dubai Land Department (DLD) they invested a whopping £1.9 billion in 2015.

Brokers Feel The Heat
The softening of rental and sales is starting to hurt property brokers. The level of sales in the Dubai market has fallen by around 30% compared to 2015 and so there are definitely fewer transactions around for real estate brokers. Over the first 6 months of 2015 there was a total of 10,600 sales recorded with the Dubai Land Department, this had fallen to around 6,300 over the same period this year. This is aggravating the situation where there were already too many brokers operating in the Dubai market.

“While some brokerage firms have closed altogether, others have simply reduced their headcount or placed more agents on a ‘commission only’ salary structure – which minimises the cost of the reduced level of activity on their business model,” Craig Plumb, head of research MENA, JLL. The other trend worth commenting on, he adds, is the shift in activity away from the sales market to the leasing market – and many agents have probably focussed their attentions on this sector of the market in recent months. There remains strong demand for rental units in Dubai and the volume of activity in this sector is likely to remain far higher than that in the sales market.

“We would not expect to see many more closures as the market now appears close to its cyclical trough and we would expect the volume of sales in Dubai to increase again during 2017,” he adds.

Agrees John Stevens, Managing Director, Asteco, “With single buyers/occupiers expected to enter the market as sentiment improves we could see an increase in transaction levels. Prices are very close to bottoming out, therefore we could see new buyers entering the market.”

Where To From Here
Dubai Real Estate has always been a hot market for investors from all over the world due to strong capital appreciation and higher rental yield. When transactional activity is compared with real estate prices for the last 5 years, a research by Cityscape Global and Reidin has observed that there is a strong relation between residential transaction volumes and real estate prices with the lag of 6 months. Based on the comparison of residential transaction volumes and price trends, the level of residential transactional activity leveled off at the end of 2015.

There has been a consistent increase in the level of transactions throughout 2016; except in July, as it is beginning of summer season coupled with month of Ramadan, when generally transaction activity slows down due to working hours. In the meantime, Dubai’s residential market price index has remained flat. The historic correlation between the transaction activity and prices index suggests that a new real estate cycle may start within the third quarter of 2016 leading to an increase in property prices. This combined with Dubai’s economic growth rate, more balanced supply and less dependence on oil suggests that there is likely to be a positive correction upwards; leading to great rental yield and capital value appreciation for investors who act now (See chart).

Property market in other Emirates are also faring well in yield terms. In Abu Dhabi, for instance, following six months of a relatively flat performance in H1 2016, investors are still being rewarded with an average 5% gross yield across the city, topping out at 8.8% in some areas, according to Chestertons MENA.

Asteco’s Stevens expects to see further marginal declines in values over the next six months as the market looks likely to bottom out by year end with, at most, a 5% decline. This could be offset by potential increased transaction volume as lower prices unlock demand and stimulate renewed interest from single-unit buyers for soon-to-be-completed buildings.

Basel Al Kasem, CEO and founder, Al Basel Group, Dubai, believes that it’s a good time for investors now to invest because although the prices have gone down in some areas, yet the rental return or yield still remains high. For instance, he says, if a buyer had bought an apartment valued at AED 1 million a few years back renting at AED 80,000 a year, he is getting almost 8% return on his property. If the price of the same apartment were to fall to 800,000 now, and rent at 80,000 a year, this means the same property is yielding 10% return.

In sum, the verdict is out and the emerging perception is that the nascent confidence in Dubai and the wider UAE property market is slowly and surely tiptoeing back in the market, if not roaring back. Many market experts reckon the Dubai property market is close to bottoming out, if there’re no major external shocks. Sunny Tyagi, Client Manager, SPF Realty, sums it up, “With the property prices coming to a more realistic level and the affordable housing projects are becoming attractive to the end-users, thereby increasing the possibility of a large scale migration to home ownership, from rental homes, which will continue helping the recovery of Dubai and the UAE property market in general.”

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