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Dubai Market Takes Centrestage in International Property Landscape

Sheikh-Zayed-Road

1 August, 2014

On the back of positive economic performance, its regional ‘safe haven’ status and maturing market conditions, Dubai once again cements its place as the region’s preferred real estate investment market.

Dubai’s economic recovery is well entrenched and gaining pace with 2014-15 GDP growth expected to accelerate towards 5 percent, according to research released by the Bank of America-Merrill Lynch in July.

Not surprisingly, both the real estate investment and development markets are benefitting from the emirate’s robust economic growth and rising business confidence.

Investor attraction

Cluttons’ 2013/14 International Private Capital Survey last year positioned Dubai just behind London as the world’s second most sought after real estate investment destination by High Net-Worth Individuals (HNWI).

“The survey revealed that the intentions of HNWI individuals in selecting Dubai as an investment destination were underpinned by the emirate’s ability to provide a safe haven for ‘refugee capital’ from the rest of the region,” commented Faisal Durrani, International Research and Business Development Manager at Cluttons.

“In addition, the city offers safety and security that is unmatched elsewhere in the wider Middle East, and investors clearly take comfort in this. Furthermore, the attractiveness of the real estate market in terms of the returns available also made it highly attractive. The third most significant draw for Dubai is the lifestyle offered through second home ownership, which is again unrivalled across the region, Durrani added.
Durrani also pointed out that aside from these key drivers, the regulatory framework in Dubai has significantly improved since the freehold market was first created in 2002. “Investors can take confidence in the fact that the authorities are constantly striving to improve the transparency in the market and are also collaborating with global agencies such as the IMF in pre-empting a repeat of the 2008 market correction through the implementation of effective cooling measures,” he said.

Dubai is ranked 1st in the MENA region in JLL’s 2014 Transparency Index Survey, a key factor that makes the emirate stand out as a preferred investment market, commented Dana Salbak, Senior Research Analyst, JLL MENA.

Real estate in 2014

With the rapid price recovery, especially in the residential sector, concerns have emerged that the Dubai real estate market might be heading towards another overheating scenario, similar to the pre-crash conditions of 2008.

However, experts mainly agree that today’s real estate market climate in the emirate differs from the previous boom time, both in terms of its regulatory environment and market fundamentals.

“Dubai’s residential market landscape today is worlds apart from the days of the 2008 boom. For a start, the market fundamentals are very different,” commented Cluttons’ Faisal Durrani.

He explained that instead of being driven by the fly-by dealers of the past who were lured to the market by the rapid acceleration in residential values and a regulatory environment that was striving to keep pace with the tremendous growth in the market, now the market has matured significantly.

“The memories of the 2008 market correction are still fresh in people’s minds and the authorities have had the opportunity to further regulations and implement measures that will assist in the creation of a much more sustainable residential market over the long term,” Durrani said.

The analyst explained that governmental moves such as the doubling of the Property Registration Fee to 4% and the introduction of the Federal Mortgage Caps have helped to significantly reign in growth.

“Furthermore, we have seen some developers embark on a path of self-regulation, with many putting measures in place to curb the resale of off-plan properties, either by linking the right to re-sell to construction milestones, or in some cases until handover,” Durrani added.

According to John Stevens, Managing Director, Asteco, many investors today can only re-sell the property at a time after a 10 to 50% payment of the purchase price has been made.

“Most of the leading Dubai developers have increased their requirement to 40% before they will allow a resale; thus slowing down rampant speculation. All these measures are contributing towards a more structured market with a sustainable long-term outlook,” Stevens said.

According to Cluttons’ Durrani, it was crucial that these measures were put in place before the market had a chance to surpass its 2008 peak. “In fact, at the end of Q1 2014, values stood 19% below the Q3 2008 peak,” he said.

According to Asteco’s John Stevens, the key difference between the real estate market in the pre-crash era and in 2014 is definitely the off-plan sales scenario. He says that the government’s introduction of new laws and regulations to ensure that off-plan sales are executed in a controlled manner are bearing fruits.

Additionally, while in the past, land could also be purchased without an escrow account being in place, new government laws dictate that an escrow account must be established in order for any sales to proceed.

“The market has particularly benefited from two new property-related pieces of legislation drafted by the Dubai Land Department (DLD) – the Investor Protection Law (Law No. 7 of 2013), also known as ‘Tanweer’, and the Code of Corporate Governance for Developers,” Stevens said.

In October 2013, the DLD also doubled property registration fees from 2% to 4% (broken down as 2% brokerage fee and 2% transfer charges payable by the buyer).

Furthermore, “the UAE Central Bank has also limited home loans for expatriates to 75% of the property’s value for a first-time investment of less than AED5 million. Emirati investors, meanwhile, have an 80% borrowing limit; mortgage terms will also be limited to 25 years,” Stevens commented.

According to Dana Salbak from JLL, other important differences between the market now and in 2008, are the higher level of current availability and supply (which provides investors with more choice of product), more emphasis on phasing of major projects in line with investor and occupier demand and less involvement of sub-developers (with more of the projects being undertaken by the major master developers).

As a result of the increased awareness of the dangers of allowing the market to grow at an unsustainable level, Salbak said that JLL believe the next correction in the Dubai residential market will be less dramatic in magnitude than that in 2008/9.

Residential price growth

The residential sector has led Dubai’s real estate market recovery over the past eighteen months. Price growth continued in Q2 2014, albeit at a much slower rate as opposed to 2013. How will residential price development unfold over the remainder of the year, according to the experts?
Asteco’s Stevens commented: “Over the next two years and beyond into 2016, Asteco research indicates that we should expect residential apartment and villa rental increases to continue steadily but at a more gradual rate compared with last 12 months as new supply enters the market particularly in the next three to five years.”

According to JLL research, average residential sale prices grew by 6% in Q2, down from 10% in the previous quarter. “With signs of reduced sales activity (particularly in the secondary villa market), it is likely that asking prices in the residential sector will decline further in the year,” Salbak commented.

Reasons for the recent decline in residential price growth were mainly the Federal Mortgage Cap, the doubling of the property registration fee to 4% and the restrictions on off-plan re-sales by some developers, Cluttons’ Durrani said.
“While no declines are forecast for the remainder of the year, we may start to see growth levelling off as the year progresses, with little or no growth over the course of the next six months. However we must remember that residential values have already risen by 3.1% in Q1, which still leaves them 44.8% ahead of the same time last year,” Durrani commented.

Market driver Expo 2020

Dubai’s successful bid to host the World Expo 2020 certainly helped boost confidence in the real estate market in the immediate term. In the longer term, the main sectors to be impacted are retail and hospitality, expert say.

“The Expo 2020 announcement has undoubtedly had a positive impact on the overall sentiment and confidence in the real estate market, as witnessed by the increased level of project announcements,” commented JLL’s Dana Salbak.

John Stevens from Asteco added: “In any real estate market, ‘sentiment’ plays an integral part and confidence was almost palpable after the successful Expo 2020 bid. It certainly reinforced the market’s perception that economic growth will be sustainable with the UAE population expected to grow by about 25% to hit ten million by 2020. So given that, the real estate sector will grow organically between now and then.”
Cluttons’ Faisal Durrani pointed out that since the event will be a key pillar in driving Dubai’s vision of being the most visited city in the world in the next six years, the biggest immediate beneficiary of the Expo 2020 announcement will be the tourism, leisure and hospitality sectors.

“However, in order to facilitate and drive this growth, “we will need to see a significant boost to the hotel supply pipeline, particularly given that the emirate’s 80,000 or so hotel rooms and serviced apartments are operating at roughly 80%-90% occupancy at present, which translates into roughly 11 million tourist arrivals at the moment,” so Durrani.

And it won’t just be a case of boosting hotel room keys, the Cluttons analyst explained, but the supporting tourist infrastructure in the form of retail and leisure attractions will also have to be significantly expanded. He added that the residential market will also benefit over the short to medium term as with the exponential growth of the retail, leisure and hospitality sectors comes a significant boost to the level of jobs being created.

“The overall impact is significant in the short term, but one must remember that Expo is just a vessel to help drive Dubai’s vision and the city will continue to reinvent itself in an effort to deliver its vision of being the region’s premiere business and finance hub,” Durrani said.

Challenges

Dana Salbak from JLL identifies several main challenges the Dubai market currently faces that potentially impede on its ability to grow at a sustainable level. She noted that the market is currently too expensive and therefore uncompetitive. Furthermore, there is a risk of oversupply should all projects announced be completed in an un-phased manner. Looking at transparency, although Dubai ranked 1st in JLL’s latest Transparency Survey, it made little progress from 2012, Salbak said.

Asteco’s John Stevens agreed: “A continued focus on creating and maintaining a transparent investor environment in which all parties are protected, and where legislation and regulations are clear and unambiguous is essential to driving sustainable real estate sector growth for the future.”

Stevens added that all industry stakeholders such as developers, brokers, etc. also ned to act responsibly and cautiously going forward in order to avoid another property asset bubble.

Looking at the residential sector in particular, Cluttons’ Durrani commented:

“The residential market in Dubai is considered to be far more mature than its regional counterparts, but there still remain areas that need to be addressed. The issue surrounding the resale of property is something I expect to see authorities start to look at more closely going forward. Although we have seen some developers start to self-regulate themselves by imposing restrictions on the resale off-plan properties, this is an area that remains a threat to the stability of the market.

“The government has worked hard to stem the tide of property flipping that was in large part responsible for fuelling the 2007-08 boom and while in order to maintain a free and open market, this is something that needs to be permitted to an extent, some basic rules governing the duration for which an investment must be held would be a good starting point.”

The way forward

Experts agree that the key factors necessary in order for the Dubai market to be able to achieve sustainable growth and greater maturity, are creating increased transparency, passing increased regulations as well as a commitment from all industry stakeholders to act responsibly and cautiously going forward in order to avoid another property asset bubble.

“Curbing speculative property purchases and limiting the volume and loan-to-value levels of mortgage credit granted to buyers are two simple, but effective solutions. In October 2013 the UAE Central bank announced a new mortgage law to regulate the sector and prevent a similar crisis from happening in the future with the proposed mortgage cap just one of these types of initiatives,” Asteco’s John Stevens said.

However, Stevens also pointed out that curbing the number of speculators is a little more challenging; “the smaller the down payment and the more relaxed the payment schedule, the more attractive the project becomes – especially if market liquidity is restrained. Many Dubai-based developers are able to maximise their sales by offering extremely attractive payment plans.

“One such current market example is 20% deposit within 30 days of signature and the 80% balance on completion in 2016; and this type of flexible payment plan undoubtedly attracts a high volume of eager ‘flippers.’

“Time to completion is another key factor; a project that is 100% ready will not be as attractive to speculators as an off-plan project because of inability to gain significant capital growth and capital appreciation before flipping the unit,” Stevens explained.

The third factor, according to Asteco’s expert, is the re-sell criteria as set by the developer; developers such as Emaar have increased its requirement to 40% on some projects before they will allow a resale; thus slowing down rampant speculation.

However, when speaking about sustainable growth in the real estate market, one cannot ignore to look at the sustainability of Dubai as a growing community.

“As the market continues to mature, it will be important to start thinking about the longevity of the communities that are being created across the city,” commented Cluttons’ Durrani.

“In order to create sustainable communities, this needs to be looked at more broadly and the benefits of an ‘investor visa’ or ‘retirement visa’ may help to sustain long term momentum in the real estate market.
“While some developers have in the past made attempts to offer renewable residency visas to property owners, such schemes faded shortly after the market completed its first property cycle; it would be good to see the re-emergence of this scheme at a Federal level,” Faisal Durrani concluded.