Thursday, September 05, 2013

Dubai realty market now thrives on strong fundamentals, rather than speculation

Residential real estate prices in Dubai are amidst another boom, but, this time there are strong fundaments at play, and the rally will continue, as long as the fundamentals are in its place, a leading global bank revealed in its report.

The primary factors that have contributed to the remarkable recovery in residential prices in Dubai, after its bottoming out in 2009, are economic growth, improving demographics, return of investor confidence and better regulations.

The report titled ‘Dubai housing: Fundamentals not speculation’, published by Standard Chartered bank said that housing market in Dubai is growing due to improved fundamentals, and several factors, including subdued mortgage growth, low off-plan sales and increased housing regulation, makes this price rally different from the boom in 2008.

The author of the Standard Chartered report, Carla Slim, writes that confidence has returned to Dubai market, slowly, but steadily.  The pace of recovery has gathered considerable momentum now, as villa prices are climbing almost by a quarter, while apartment prices are surging by two-fifths in the past year, even as rental growths have been trailing these price-rises.

The second quarter of 2013 shows fourth consecutive quarterly growth in residential prices.  Over the past one year, residential prices have grown by 38 percent for apartments and 24 percent for villas, while rentals increase by 20 percent and 17 percent respectively, Slim said.

According to analysis by the Bank, unlike in the past, the current rally is not driven by speculative excesses. The report noted that price hikes this time has been steady rather than sudden, which adds credence to the rally.

The sharp increase in real estate prices in 2008 have been driven by excessive short-term speculative activity, particularly on off-plan properties. Further, the buyers had to invest 10 percent deposits for these properties, and so the market became highly leveraged. Several buyers had no intention to pay future instalments, back then, as they planned to flip the property before payments were due, and this turned housing market into an unsustainable, highly-leveraged derivatives market.

However, the price declines of 2009, 2010 are well documented, with prices having declined by up to 50 percent in some cases.  The year 2011 marked the beginning of housing market recovery with villa rent and sale prices beginning to show positive changes in signs, outperforming the apartment market, which experienced the same in 2012.

Last year, there has been a positive uptrend in sale and rental prices, with selling prices having grown faster than rentals. The villa prices outperformed apartment prices with 24 percent and 12 percent growth respectively during fourth quarter of 2011-12.

Some of the strong factors that have been the driving force in Dubai housing market are:
Economy: The report highlights that housing market has been influenced by broad economic trends. The Dubai economy has seen solid and sustainable rates of growth over the past three years, the major drivers being logistics, hospitality, and retail. Trade is likely to increase in the years to come, given, the huge spending plans of most governments in the region, including Abu Dhabi, Qatar and Saudi Arabia.  Tourism is also likely to grow at an average of 6.5 percent per annum between 2011 and 2021, further increasing employment growth for the sector by 4.1 percent annually.

Demographics:  With the improving economy, the population of the emirate is also likely to grow, and so does the demand for housing, and simultaneously the sale and rental prices.  The statistics by Dubai Statistics Centre shows that the population in the emirate stands at 2.17mn, marking an increase from 1.97mn couple of years ago. Dubai is strengthening its status as safe haven in the region of political and economic turmoil, thereby attracting population from unstable countries in the MENA region, and hence real estate agencies are reporting increased interest from buyers from countries in political turmoil. Further, school registrations reflect increase in influx of families as end-users in the housing market.

Return of confidence: Improving fundamentals and price growths have led to improved confidence in Dubai market, which could drive up prices and investments further, with both feeding off each other, the report said.

According to Business Confidence Survey conducted during first quarter this year by the Department of Economic Development (DED), more than 55 percent of businesses surveyed are seeing improve sale revenues during second half of this year, and 30 percent are seeing stable sales, owing to growing activity and volume.

Improving regulations: Last year, there has been a major shift in the real estate market with release of two new laws aimed at improving transparency and better regulation. The Investor Protection Law, and the Code of Corporate Governance for Developers drafted by Dubai Land Department were announced. These protected property investors from delayed completion and handover, and from unilateral changes comprising of violations of terms and conditions by developers. It also allows investors to cancel their contracts in these situations and have their money refunded. Further, the laws require developers to disclose to investors information about their properties, including alternatives in case of delays.  Therefore, home-owners and tenants have regained confidence in the property sector, resulting in recovery of market prices.

Expo 2020: Dubai has been a frontrunner in the bid to host the Expo 2020, and successful bids are expected to result in massive shot in the arm for overall economy, as well as property prices in the emirate and across the UAE. Hosting the event would lead to creation of more than 300,000 jobs, while more than 25 million people would visit Dubai. 90 percent of the job opportunities would occur from 2018-2021, with most of the jobs created in travel and tourism sector. Majority of these would be converted into permanent jobs, which will help the expanded economy in the post-Expo period.

On the whole, the report maintains that the current rally is based on strong fundamentals, which will continue for the foreseeable period. The recovery of Dubai housing market began in 2011, and the there has been a slow, strong and persistent growth in housing prices, coupled with real demand for housing from end-users and steady supply of fresh developments to match it.

The market is driven by fundamentals now, rather than excess speculation, and the overall outlook of the market depends on how these fundamentals evolve over time. At present, there are no serious indications of a speculative bubble in the housing market, the report concludes. 

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