No reason to panic about Dubai real estate

Posted on 10 November 2008 with no comments from readers

For all the gloomy talk about a property correction in Dubai, the local real estate market has withstood the global financial crisis far better than its more mature rivals, once upheld as a far more solid proposition. According to Dubai based consultants Asteco, villa prices were up by an average of 24 per cent in the past three months and apartments by 20 per cent. That just has to be the hottest markets in the world.

Asteco has one of the most extensive property transaction databases and its quarterly survey is widely respected, so this is not a question of an optimistic broker dreaming up some figures. Rental increases are slowing down, however. Villa rentals were up by 11 per cent in the past three months and apartments by four per cent.

Of course, October was a particularly quiet month for Dubai estate agents. Clients were glued to their monitor screens watching stocks plunge. This is hardly the moment to go looking for a property. But people were still buying. The Dubai Land Department continued to report a healthy flow of business and hence the price hikes for villas and apartments.

Mortgages halve, no collapse

There have also been concerns raised about the rising cost of mortgages and higher loan-to-value ratios. But the first point to note is that the majority of transactions in Dubai do not involve mortgages, and secondly that mortgages are still flowing. Mortgage transactions were down by a half in October, say insiders, but this is a cup half-full and not down 80-90 per cent as in the UK, for example.

It seems the continued population migration into Dubai is keeping the local property market alive in difficult circumstances, combined with a healthy desire by many new residents not to have to pay the city’s famously high rents. As the Asteco survey commented: ‘With more and more expatriates making a long-term commitment to stay in Dubai… many expatriates see buying a villa as a sound investment.’

Asteco noted that Downtown Dubai villas gained the most in the three months, and were up a thumping 61 per cent in value. Palm Jumeirah villas were up 42 per cent, Palm Jebel Ali off-plan villas by 39 per cent, The Meadows by 38 per cent, and Emirates Hills by 35 per cent.

The report expects Dubai house prices to level off and ‘not to show any major increase over the next two years’. The argument for buying therefore revolves around avoiding the very high rentals paid in the city and accumulating equity in property. It is an argument any resident paying rent will appreciate immediately.

US post-election rally

Other estate agents believe the market will show more strength this month as the hiatus in stock markets during October will have delayed some purchases by literally frightening people off big financial deals. There is also likely to be something of a relief rally in global capital markets in November with the US presidential election over and a feeling that stock markets might have passed their bottom.

Whether this proves to be more than a short-term relief in the global economic crisis remains to be seen. But it could mark the late start of the traditional autumn seasonal upswing in Dubai property sales, at least for completed homes available for immediate occupation, and that following from quite remarkable price gains over the past three months. That could mean higher prices or a consolidation of the recent price increases and higher sales volumes.

What seems far less likely is an early resumption of the dash for off-plan property that had come to symbolize the Dubai property boom, and latterly transferred to Abu Dhabi. At Cityscape Dubai 2008 held at the start of October the near absence of interest in off-plan developments, particularly in Dubai, caught many developers unaware.

And November opened with news of the repossession of the $3.5 billion Plantation project in Dubailand by the Dubai Islamic Bank, with off-plan buyers asked in a newspaper advertisement to ‘please contact the bank’. This is bound to be a further blow to market confidence in off-plan developments.

Off-plan out, completed property in

Is it now possible that the completed property market could become entirely divorced from off-plan, with the former continuing modest price advances, while the latter undergoes a serious shake out, consolidation and correction. That is what seems to be happening down on the ground in Dubai property today, with the flow of new migrants strengthening the price of property that is completed and available for immediate occupation.

This is worrying for the many off-plan owners of partly completed and un-built property across the emirate, and it is impossible to generalize about the outlook. Well-financed developments with stable developers and good contractors will deliver more or less on time and to specification. There is no cause for a general panic, especially as completed prices seem to be weathering the global financial crisis with distinction.

However, where people have put down a deposit on an off-plan property with the expectation of ‘flipping it’ to a buyer before the next payment became due, there is a problem as there are now no buyers. These individuals will have no alternative but to ask for their deposit back, and currently they will get 70 per cent and that is much better than in countries where a deposit is forfeit.

If developers suffer from a great many off-plan cancellations then they will have to ask for permission from the Real Estate Regulatory Authority to combine schemes until they arrive at an economically viable project. That would doubtless annoy buyers who had chosen specific apartments but RERA rules make it quite clear that specifications have to be followed or appropriate compensation paid.

Investor protection

This is of course only applicable in the worse case scenarios, and it shows the degree of investor protection now on offer in Dubai real estate. For most off-plan projects buyers will find that their apartments are delivered as promised, albeit with delays usually standard these days, and that the demand for payments follows as scheduled, although developers may turn out to be a little more lenient about late payments if the market gets tougher.

Further-out the $4 trillion dollar bank bailouts of October may deliver a bout of inflation for the global economy later next year which will support higher oil prices. Under that scenario Dubai house prices and rents will rise yet again. Villas look winners, particularly completed ones. Off-plan apartments in poor locations look like the losers.
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