Why are Dubai property prices up 15-20%?
There is enormous gloom overhanging global financial markets today and even UAE stock markets have taken a big hit. Why then are house prices in Dubai on a seemingly endless roll? After spending some time going through the five property classified sections of one local paper this week, it is very clear that completed Dubai property is not only scarce but prices have gone up substantially over the summer.
My rough calculation is 15-20 per cent in the past four months, looking at apartments, villas and offices. That comes after Colliers International reported a 78 per cent gain for residential property in the 12 months to the start of summer. Commercial real estate cannot have been far behind.
Reports of the death of the Dubai real estate market in the venerable Financial Times are therefore greatly exaggerated. Not only is it alive but this beast is growing while other markets are in deep trouble. Why is that? Let me offer seven reasons.
First, the market for Dubai completed property is small – with no more than 30-35,000 units completed so far available to foreigners to buy – while the demand from expatriates moving in to Dubai this autumn is enormous.
Some say a demand for 50,000 units is being met by a supply of around 10,000 units this year.
Secondly, Dubai is still largely a cash market. Perhaps 70-80 per cent of sales are for cash, so the global and local liquidity squeeze from the financial crisis has a lesser impact than in mature markets where more than 80 per cent of sales will require mortgages.
Thirdly, investors this autumn have very few alternative asset classes, except cash and precious metals. Even the UAE stock market has tanked this year and investors are always inclined to chase a good yield.
With the continued flood of expatriates into Dubai – perhaps even more so with global markets in crisis – buying property to rent to them looks a good prospect and yields of five to 10 per cent are highly attractive with UAE deposit accounts paying a maximum of 2.5 per cent.
Fourth, the Real Estate Regulatory Authority and Dubai Land Department have been doing some excellent work in sorting out what was previously a chaotic and unregulated market. Indeed even the property title of foreigners was not formally legalised until two years after it had started. Now Rera is reining in off-plan developers with compulsory registration of all projects and sales, and all monies collected from buyers have to go into trust accounts. Developers also have to keep to their agreed delivery timetables and cannot vary the size of units without compensation. It is clever to sort out the off-plan market while the completed market is still so strong. Scandals and problem projects can be absorbed in a strong market, not in a weak one.
Fifth, the UAE Government is clearly not going to allow the Emirates economy to do anything except cool down slightly. Oil revenues and accumulated reserves give the government a strong hand. A cooler economy is also not necessarily a bad thing either for developers.
The price of steel is down 50 per cent on recent highs, for example. Moreover, the UAE Central Bank made Dh50 billion available to local banks last week to ease liquidity problems, and that is $2,700 (Dh9,900) per capita, more per head of population that the controversial US bailout plan, and for an economy that has nothing like the problems of the United States.
The UAE has massive twin budget surpluses, not twin deficits!
Then sixth, given the high yields that local landlords obtain the relative attraction of Dubai real estate as an asset class has grown as returns elsewhere have vanished. Money should therefore flow into the sector until the point at which prices no longer deliver an attractive yield. How much higher do prices have to go to reach this point? Well, it is quite self-evident from the recent rise in prices that they are not at the limit yet, and investors are getting used to lower returns to their investments.
Eventually as the supply of property moves ahead of demand – assuming the global economy enters a recession and even lowers demand in Dubai – then rents will stop rising and the upward pressure on house prices will ease. But there is no sign of this yet. Rents are also increasing strongly this autumn as well as property prices.
And finally, even if off-plan property sales slump at the biggest business-to-business property show in the world next week, Cityscape Dubai 2008, this is not going to affect the position of the completed property market where supply is short, demand is huge and prices still offer attractive rental yields to investors.
It is possible that many of the expected foreign buyers will be absent from Cityscape this year because of the ongoing crisis which has spread from the US to the real estate markets of the United Kingdom, Spain, Italy, Ireland and even most recently Russia and China. But off-plan projects can be cancelled and consolidated if sales are insufficient to make them economically viable. Indeed, in the long run this will reduce future supply and support property prices.
