Can visas and regulation revive Dubai real estate?

Nero was once accused of fiddling while Rome burned in ancient times. Unkind observers might argue that Dubai’s belated introduction of rules and regulations to govern its real estate sector, and now a federal law on visas for freehold property owners, are pretty much the same thing.

Hard evidence establishing what everybody already knows – that the Dubai real estate market is almost dead – is beginning to emerge.

The Dubai Land Department’s director general Mohammad Sultan Thani told Gulf News: ‘We are noticing that in some areas there are almost no transactions at all. People are not willing to sell at lower prices and they are holding on to their property.’

Transactions slump

In Mirdiff, for example, in the first 10 months of 2008 the department processed an average of 18 transactions a month, compared with two or three per month over the past three months.

‘The real estate market has just started the downturn,’ Thani commented at a seminar arranged by Landmark Properties. ‘It will take time. Dubai has had two real estate crises before and it took 18 to 24 months for the market to adjust and sentiment to change’.

This is a sober and realistic assessment from the Dubai Land Department. However, the absence of buyers is also a big factor in the market, it is not just a question of people being unwilling to sell at lower prices, they can not necessarily do so.

In this context the moves to clean up the real estate sector should be seen as useful but not sufficient to revive the market. The Real Estate Regulatory Authority has introduced a whole raft of measures – from escrow accounts to cancellation repayments – to bring order where there was something close to anarchy.

Visas for all

Freehold visas for home owners are a more immediate measure that will encourage new buyers into the market. The discontinuation of developer-visas last year was a blow to sales as buying a home with out a legal right of settlement eliminates a slab of potential owners.

Nonetheless, the law expected in March is only likely to grant six-month visas and not the former three-year residency visas, and real estate companies have been quick to argue that this is not long enough for many buyers who want the security of being longer term residents.

On the other hand, the depth and speed of the collapse of the Dubai real estate market, with building sites now idle across the emirate and transactions almost at a halt, suggests that time will indeed be needed before confidence is restored.

But we can be certain that confidence will return. The Middle East is not about to go out of business and stop exporting oil. The oil price is bound to recover at some stage simply due to shortage of supply. Dubai is the regional hub city and its trade, business and finance is leveraged against oil and global trade flows.

Less supply

There is even a good argument that the real estate slump will provide a solid base for even higher prices in the future. Projects cancellations mean that future supply of property will be less than forecast, and if demand picked up suddenly the impact on prices would be swift.

Perhaps then it is not a view on the real estate cycle in Dubai that you need to consider – and developments like visas, regulations and more importantly low-cost home finance will help – but the global business cycle. Dubai property might prove a very good play on a global economic recovery – but when is that likely to happen?

In a recovery phase the US dollar is likely to devalue and inflation rage across the globe forcing up oil prices, and Dubai property could well prove a leveraged play on this recovery as well as a protection from the ravages of inflation on cash positions.
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