Will Dubai property prices free fall this summer?
Posted on 04 June 2010 with 3 comments from readers
The summer season promises to be a long one this year with Ramadan stretching it out until the end of September. The Dubai Financial Market is back to the lows of March 2009, and the real estate market will probably soon test new lows too.
News that Dubai intends to enforce a generally avoided housing tax equivalent to five per cent of an annual rental index on an estimated 300,000 households from January 1st next year has also left estate agents dumbfounded that any city dealing with a real estate crash could be so stupid.
The oversupply of property in Dubai is already here, while Abu Dhabi continues to be a relatively tight market.
A search of the leading real estate listings’ website PropertyFinder.ae reveals that Dubai has 18,887 properties for sale and 11,366 available for rent.For Abu Dhabi the market supply is much tighter, with 2,099 units for sale and 1,372 looking for tenants.
Going forward market estimates for Dubai are for an additional 20,000 units to be added to this pool in 2010 and 2011. Abu Dhabi is building less real estate but there will be a significant increase in supply in certain categories such a high-end residential apartments.
Palm oversupply
Concentrations of vacant property are already evident in Dubai. Fancy an apartment on the iconic Palm Jumeirah? Well there are 1,394 to choose from, according to PropertyFinder.ae, and 439 with three or more bedrooms.
Or perhaps you want to buy an apartment in the Jumeirah Beach Residence facing the beach in the Dubai Marina district? Take your pick from the 713 properties listed.
It is amazing then that Dubai property asking prices actually seem to have gone up over the past six months, and even selling prices. This appears to have more to do with a global economic rebound, manifested in higher trade and tourism in Dubai, than the supply and demand dynamics of the local real estate sector.
Indeed, the oversupply continues to increase by the day as developers proudly handover completed units. The Goldcrest Tower in Jumeirah Lake Towers alone added another 500 units last month. Developer Damac has even placed a AED500m contract with Arabtec to build another 600-apartment tower in the Dubai Marina, claiming that by the time it is finished in two years the demand will have returned for this new supply.
This is a truly heroic assumption in the face of current existing oversupply in Dubai and the upcoming completions. For where are the new buyers and tenants going to come from?
The UAE is now recovering from the local recession of 2009 but the most optimistic government estimates are for modest economic growth over the next couple of years. There will be some expansion of employment in tourism and aviation with new hotels and aircraft to supply with staff and accommodate. But this will likely not compensate for those who lost their jobs in the 20 month downturn.
Economic outlook
Then again nobody is expecting a sudden burst of growth in the global economy, outside perhaps of Asia where talk of overheating is already depressing local stock markets. In fact, Europe, including the UK, seems heading back into recession in a new age of austerity and that will not be good news for UAE tourism for which this is the biggest market.
Oil prices have slipped back over the past few weeks and if the downturn in global markets gains traction – with a double dip recession perfectly predictable from past precedents of major financial crises – then the UAE is going to be left knee-deep in unsold and un-let apartments and to a lesser extent villas.
Further house price and rental reductions look inevitable in such an economic environment and the supply and demand situation will exaggerate this problem to the downside. But there will need to be a trigger to start this price correction process.
Repossession auctions
Step-forward the repossession auctions due to begin very soon to allow developers to sell off-plan units where buyers have defaulted on their payments. The aim is to permit developers to raise funds to complete their projects. This is the final stage of clearing up the mess left by the Dubai off-plan sales collapse more than 18 months ago.
Unfortunately repossession auctions are a double-whammy for house prices. First, auctions reset market prices at lower levels by matching prices with the true level of market demand. Secondly, if successful auctions will allow developers to complete their projects, adding to the oversupply of property and therefore depressing prices.
Unless something happens very soon to ramp up oil prices to a level that revives the economic boom that formerly prevailed in the UAE – always a possibility as the current boom in China demonstrates, then a second day of reckoning seems to be dawning for the local real estate sector.
That will throw up some deals of a lifetime for buyers and tenants but will present a new challenge to developers and their bankers. But for sellers none of this is good news.
3 Comments posted by readers:
What goes up must come down! For centuries this has been a tried and time tested maxim and yet it’s amazing how planners, developers and investors fail to understand this most elementary of investment concepts.
The pain is not over for the real estate sector in Dubai. Real Estate prices will head even lower and swiftly so. They will not stop until they reach the year 2005 levels. It’s unfortunate that residents and small investors will have to bear the brutal consequences of this contraction.
Dubai is one of the best cities in the world and has a glorius future ahead of it. One hopes that it’s spirit survives this downturn and it emerges stronger and hopefully wiser.
Dubai has committed financial suicide by ignoring the investors; both small and large; justified complaints concerning developers, that deliberately delay construction in order to bankrupt the small investors, thereby denying them any return on their investment.
Especially now the Government are allowing the developers to wait until the investors refuse, or cannot, pay any more money to these corrupt developers in order for these very same developers to steal the money already paid and resell the stolen properties to even more victims.
The constant cry of “it’s not cancelled, it’s an ongoing project so you cannot get your money back” is deafening. Even when developements are years behind their contractual completion dates. Without recourse to an honest and reputable legal system to protect investors when developers fail to abide by the contract, there can and is a total failure of trust in any investment in Dodgy Dubai.
Good point Matthew !
And some of these developers are State owned entities such as Nakheel, which has no response for investors who are demanding their money back for projects like Badrah which have been cancelled by Nakheel.