Dubai's Real Estate: Towards a Stable Market

Property in Dubai has fallen in price for seven consecutive quarters, writes Hugo Cox in the Financial Times. Prime prices in July were 10 percent below levels from two years ago. In the second quarter of this year, home sales slumped almost a third compared to the previous year.

"Over the past 18 months, the market lost between 6 percent and 15 percent, depending on where you look," says David Godchaux, who runs Core Real Estate, a Dubai-based agency. 

This plummet was forecasted by Standard & Poor's property report released last year. S&P's rating analysts said the pressures on the real estate sector are threefold.

First, declining oil prices have hindered the recruitment and expansion plans of oil exposed companies. Consequently, non-oil private companies' businesses activities have also slowed, with job creation much lower than last year and even going into neutral in the Emirate.

Secondly, the U.S dollar, to which the UAE dirham is effectively pegged, has remained persistently strong over the past 12 months. This made UAE real estate more expensive for international investors holding non-U.S. dollar liquidities.

Finally, foreseen pressures on tourism, the cornerstone of Dubai's economy, in addition to tourists' diminishing purchasing power, has made it perplexing for foreign national to invest in the Dubai market, as we have seen most recently with the British pound post-Brexit.

Consequently, S&P degraded the bond ratings of three major UAE developers; Emaar properties, Damac properties and Aldar properties. The ratings for Emaar and Damac dropped to "stable", while Aldar ratings dropped to "positive". 

Despite these negative insights, real estate investors remain optimistic about the future of Dubai's real estate sector. According to JLL's head of research Craig Plumb, Dubai is well on the way to market recovery and believes that now is the perfect time to invest in the market. While investors may not see a high rental yield or strong capital appreciation in the short term, the long term suggests otherwise. With the UAE central bank imposing precocious measures to secure the market from vulnerabilities and to prevent the formation of a bubble in the near future, the market is now more stable than ever, he recommends.

As part of ongoing governmental efforts to stabilise the market, mortgage caps were introduced and transaction fees were enhanced. Regulation continues to expand in the UAE as new property laws (which include escrow accounts, regulations on off-plan sales, and mortgage limits) came into effect in the past few months and are likely to enhance regulatory oversight. This is predicted to provide transparency to international investors and improve market sentiment and investor confidence in the region.

Additionally, the lifting of geopolitical restrictions, such as US sanctions on Russia and Iran, could benefit the recovery of the UAE property market according to  Maria Morris, who runs Knight Frank's Dubai prime business.

One of Dubai's leading real estate companies, Wasl asset management group, has deemed this decline in value a 'healthy correction'. The company's CEO, His Excellency Hesham Al Qassim, explains: "Following the recovery period that was seen by the real estate sector from 2012 until mid-2015, this year the industry is undergoing a correction phase while maintaining sustainable growth."

Moreover, Expo 2020 is expected to have a significant impact on Dubai's real estate sector. Mathew Green, UAE-based head of research and consulting at CBRE, the world's largest commercial real-estate investment firm says "Dubai Expo 2020 will help generate further sustained investment into the Emirate's infrastructure facilities, which will ultimately make it an even more attractive destination for foreign capital". The event is expected to attract 25 million visitors and boost the economy by 28 billion Euros while expanding the tourism sector around 70%, and hotel revenues by 30%.

Despite all of this, one thing remains certain: Dubai's current real estate market provides ample opportunities for risk-averse investors considering investing in a buoyant market.