What will reverse the UAE property slump?
Posted on 22 December 2008 with no comments from readers
Last week Engel and Volkers tried to kick start sales in the stalled secondary Dubai property market with $48 million knocked off the selling price of 150 homes in New Dubai for one day. Not a single unit sold, despite marketing to dozens of clients supposedly interested in bargains and a mortgage company on hand to arrange finance.
In my view three things need to happen before the buyers will return: the oil price must rise and stop falling; the dollar must weaken; and liquidity must return so that home finance costs fall.
Liquidity solution
Standard Chartered Bank’s latest UAE report gave some hope that liquidity will return from next spring with oil money injected directly into the local economy rather than going to sovereign wealth funds.
Something needs to be done. A combination of a withdrawal of money by dirham-revaluation speculators and stock market investors has left banks very short of dirhams, so they have raised local interest rates to attract money. UAE mortgages cost around twice US mortgages despite the supposed dollar link, and this is dreadful for real estate.
The US dollar’s recent strength is not only bad for tourism, it is bad for foreign investment in UAE property as it has become more expensive. Indeed, it encourages people to sell here and buy overseas, if they can sell.
However, with the US now mired in the worst recession since the 1930s it surely can not be long before the dollar weakens. The US bond market is the last bubble and when that pops the dollar will fall, perhaps as soon as the middle of next year.
Oil prices
Then we have the oil market to consider. It has dropped like a stone from $147 a barrel in July to $33 last week. A severe recession could keep oil prices down for a period, but the fundamentals of tight supply will mean that any recovery in demand quickly translates into higher prices.
Indeed, this is one of the best reasons to be optimistic in the long-term about the UAE economy with its low-cost oil output and huge reserves, and therefore its property market over time. But oil could touch $25 and scare people stiff next year which will not assist a recovery in property prices.
Engel and Volkers said people are really looking to buy at less than half present asking prices, and it could be that the market will stall until they get what they want. But holding on still makes sense for all but the most desperate sellers because the UAE recovery is already in the stars.
The recovery hat-trick of high oil prices, cheaper finance and a weaker dollar is coming but will likely not be fully in place until almost 2010. Add to that the loss of supply due to the severe squeeze on property developers in 2009 and you could see a very sharp price recovery, especially if global stimulus packages produce expected inflation.
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no Comments posted by readers:
What really needs to happen is that the market buyers should change from punters to end users. In last weeks main story in Xpress, they wrote about how entire buildings in the JBR community are “switched off” because all the home owners are only interested in selling rather than being a landlord or living in it themselves.
Also, the government has to do something about the problem looming round the corner -oversupply. By razing down satwa and parts of jumeirah as they originally planned, both high and low end properties would have either seen their rentals or sales value go up as thousands of those now evicted tenants of large villas and small apartments would need new living quarters.
Not only do UAE mortgages cost twice as much as US Mortgages but so do the costs of Telecom, food, Local community fees and a whole list more. Dubai’s Government needs to cut rates and prices on a lot of things to see some growth during these bad times. I think it will be too late when the government of Dubai reacts but that is my $.02..
For a start the Government of Dubai needs to cut the ridiculous community fees all new home owners have to pay, drop current bank rates for loans, drop telecom fees and call fees by 50%, drop transportation fees for local taxis, and drop mall rental fees so that retailers can drop retail prices on to consumers. Since most laborers are imported foreign laborers which are under paid there is no reason why things should cost so much in the UAE. Prices in Dubai need to drop to make Dubai attractive during these bad times. When times are bad there aren’t many people that are going to fly to Dubai and fork out $300+ per night, $40+ per day on Taxi fees, $50+ per day on Etisalat mobile fees/calls, and $50+ per day on food.
The market will turn, amongst other factors, if :
1- Villas sold, initially, for 2.5 Million Dirhams are offered again @ 3 to 4 Million range , They will NEVER sell @ the current 5 to 7 Million range, EVER…..
2- The rents for the same must be reduced to less than 200, 000 rents are just too high at the momemt. The international companies can NOT afford to pay the rent for their staff at these ranges .
3- Oil price recovers to $ 75 (maybe possible in 2-3 years)
4- Speculators to leave the market altogether.
I suspect that quite apart from ludicrous prices and lack of supporting infrastructure (sewage etc ) potential owners/residents would hope for a permanent residency; who wants to own a property when you have no legal right to enter the country?
From some of the feedback I have not published I think a word of explanation is called for. Yes I have been caught out by the sudden collapse of the Dubai property market which continued to boom until September when it stopped.
Should I have stopped writing about it two years, one year or six months before that? I am afraid a trend is a trend until it is not – and there have been plenty of voices warning on Dubai property all the time since 2002 when it was launched. All the people who took my advice then to buy – and my AME Info column was very popular – have done extremely well. My book documents this story and is The Daily Telegraph’s No1 bestseller this week.
My advice was always laced with warnings about picking good locations and the best developers – and this helps now in the downturn. But I decided not to try to call a top to the market. I did that in the UK in 1998 and it lasted until 2007.
However, my personal view is that the Dubai real estate cycle – for property in good locations at least – will be a violent correction followed later by a sharp recovery – on high oil prices, a return of inflation, dollar devaluation and much improved liquidity as the new UAE lenders get funds rolling. I could be wrong but I hope you find this free advice useful, if not then you should ignore it.
As Peter Said:
“However, my personal view is that the Dubai real estate cycle – for property in good locations at least – will be a violent correction followed later by a sharp recovery – on high oil prices, a return of inflation, dollar devaluation and much improved liquidity as the new UAE lenders get funds rolling”
I agree with the above about a strong recovery once oil prices recover. I think once homes bottom out along with oil, Dubai will see a very strong recovery. I expect oil prices to rebound sharply after bottoming out and key locations in Dubai’s real estate to also rebound but for the time being oil,stocks and real estate prices are going only one way and that is downhill until they both bottom out.
Today’s news on oil prices and today’s stock market dip in the UAE show that my previous posts were correct.
http://biz.yahoo.com/ap/081224/oil_prices.html
I think it is a matter of time. Crude oil has touched a low of $33 a barrel and that is really not good news for UAE. But Dubai is still not stopping on in progress work and surely Dubai is an attractive real estate market. There are many factors that will lead to a reverse in the UAE property slump.
Peter, you are wrong. Property will not sell until the prices fall back to at least off-plan/launch pricing. I predict that in Q2 2009, you will begin to see property prices at off-plan/launch pricing and below those prices in Q1 2010. Investors that want to get their money out at par before taking a loss, developers who NEED to sell. Any buyer with half a brain will never buy today, knowing that tomorrow holds thousands of distressed property sales. I would keep an eye on the local banks in 2009 as a pileup of foreclosed properties piles-up on the banks balance sheets and their need to offload them at a discount becomes the focus. Prices lower than off-plan/launch are on the horizon. Patience will be a virtue and non-dollar denominated cash will be king in 2009.
Not sure I can see 2002 prices in Dubai again but there is a tendency to over-correct on the downside. Remember this market has seen a 5 or 6 fold increase to the top. Which non-dollar currency do you think will be king? They all look pretty weak going forward, but then again dollar weakness has to resume sometime – but when?
The recovery in Dubai will only happen when the powers that be acknowledge that there is a serious problem and start taking concrete steps to tackle it. Simply hiding behind the “global downturn” excuse and hoping it will all go away is not gonna work. Build a decent infrastructure before putting up more buildings and encourage end users with more incentives in the form of cheaper mortgages and quality build and get rid of the speculators that have done so much damage to the market once and for all.
There is a possibility that the combination of factors mentioned in the article will kick start a recovery at some point but anyone who thinks that the market will bounce back to its glory days of the past 5 years is living in cloud cuckoo land. At best prices will stay level with more buyers coming into the market, but that is not such a bad thing given that right now buyers in Dubai are almost as scarce as the proverbial Dodo.