Cityscape Dubai event an acid test for off-plan sales
Posted on 06 October 2008 with no comments from readers
The world’s biggest business-to-business property show, Cityscape Dubai 2008 opens today and all eyes will be on off-plan sales to determine whether the summer slowdown is over, or if the global financial crisis will take its toll on the Dubai real estate sector.
Only a year ago the mood in the Dubai real estate sector was almost universally bullish. Off-plan sales at Cityscape Dubai 2007 beat all records, and Cityscape Abu Dhabi 2008 earlier this year also had buyers queuing at the stands. This will be a hard act to follow this week.
The mounting global financial crisis, which has spilled over into UAE stock markets is almost certainly going to make would-be buyers of off-plan property more cautious. Foreign buyers who have been among the most exuberant at recent Cityscape events must surely be chastened by the near meltdown of the global financial system over the past few weeks.
Moreover, the days of easy credit that allowed foreigners to raise money at home for investment in Dubai have gone. People are also far less sure about their employment and income prospects as the world enters a recession. Buying secondary homes is a luxury that can be postponed.
The Real Estate Regulatory Authority CEO Marwan Bin Galita has put a brave face on the outlook, forecasting not falling prices in Dubai but a reduction in the profit rate that investors will make on their off-plan purchases.
Price support
It is perfectly possible that high rates of economic growth in Dubai will continue to support rising house prices. And certainly if global inflation rates pick up over the next couple of years nominal prices look well defended.
Indeed, supply and demand conditions in the completed property market are very tight and prices have been, and continue to increase at amazing rates in the most popular districts of the city. Nowhere else in the world are house prices rising as fast as Dubai, except in Abu Dhabi and Doha; of course in most parts of the world house prices are falling.
But for investors to feel confident about buying off-plan they probably need the prospect of a high return on their investment to take the risk. For if you can only see a small capital gain over a three year period then you might as well keep your cash in the bank and buy a completed property in three years’ time instead.
The recent series of scandals and investigations in Dubai must also have taken their toll on buyer confidence. But this should be balanced against the excellent work the RERA has done in introducing comprehensive regulation into off-plan sales.
Regulatory progress
All off-plan sales now have to be registered with the Land Department before they are legal, and all payments go into trust accounts that can only be accessed for the project concerned. Developers can also not just decide to hand payments back if a project is cancelled or vary the size of units sold without compensation.
Where Cityscape Dubai 2008 will see the best off-plan sales will surely be in those districts of the city where people most want to live: by the Jumeirah Beach, or on The Palm, or in the villa districts of the Emirates Living. It will be the more marginal areas that will be ignored by off-plan buyers unless prices are discounted.
What does this likely slowdown in off-plan sales at Cityscape mean for the future of the Dubai freehold property market, now in its sixth year of existence?
Skeptical voices have been predicting the collapse of the Dubai real estate boom since it started in 2002, and have been consistently proved wrong. People who sold their villas in Dubai this spring have missed a huge gain in prices since then.
Prices still rising
With Dubai in an investment-led economic boom and completed homes in short supply relative to the inflow of expatriates then completed unit prices are not in any imminent danger of a correction. It remains a sellers market for homes and landlords. House prices and rents are still going up.
Where a consolidation and possible correction seems to be coming is in the off-plan market. In the context of Dubai – with its very small completed freehold property market – this could mean that the market for completed property is almost entirely unaffected.
The RERA is strongly placed to undertake a rationalization of development projects in Dubai and to protect the interests of buyers as far as contract obligations permit, as well as the developers both government and privately owned.
This would seem to be the way forward for the off-plan property sector, especially as developers are finding project loans more costly and difficult to obtain due to the global financial crisis. But a great many projects will still go ahead and buyers eventually obtain their properties.
You could perhaps characterize this as a slowdown or consolidation phase of the Dubai real estate boom. But there simply are not enough completed units to meet demand right now so a real crash or major correction is out of the question. Prices will head higher if at a slower pace, meaning that profits on off-plan deals will be lower as Marwan Bin Galita predicts.
