Residential property prices in Dubai are holding up much better this time despite the price of a barrel of oil down by more than 70 per cent since June 2014.
It’s market fundamentals coupled with a prudent regulatory environment that have managed to support the property sector this time, say analysts and market experts.
“While oil prices remain well below the long-term average, which is clearly having an effect on market confidence, Dubai’s improved regulatory environment, broader investor profile, and increased maturity are all indicators that its real estate market should eventually self-correct,” says Sidharth Mehta, Partner and Head of Building, Construction and Real Estate with KPMG Lower Gulf.
On Thursday, global oil prices sank to a 13-year-low before bouncing off, but medium-term forecast for crude remains dismal.
Last time oil was at these levels – in 2003 – Dubai was just opening up its property market for expat investment. There were only a couple of localities on the outskirts of the emirate where non-nationals were allowed to buy property.
In the ensuing years, more freehold localities were added to the mix and property prices continued to move northwards in a near vertical trajectory.
That changed when the global economic slowdown of 2008-09 saw some property prices in some Dubai areas lose almost half their values in a matter of months.
While the issues were global in nature, a West-induced credit crunch meant that speculators who had spread themselves too thin were caught on the wrong foot. Their desperation, coupled with a general lack of confidence in the near future, saw prices hurling down.
Prices started recovering in 2011, and by 2013, they were mimicking the same trajectory as before. However, the authorities were quick to address the rise with the lessons learnt during the 2008/09 slowdown, and a slew of steps saw the market slow down to a more manageable rate.
“After 2008, a number of measures were put into place to regulate the Dubai real estate market. The Real Estate Regulatory Agency (Rera), the introduction of mortgage caps and the establishment of the Al Etihad Credit Bureau have mitigated a lot of uncertainty in the market – even in the face of economic pressure from falling oil prices, currency fluctuations and geo-political uncertainty,” says Kaushal Dayal, Director with KPMG’s Management Consulting practice.
This time around, five key factors have – and are expected to continue to – keep prices stable even as the trend may remain negative this year too.
The five key factors are:
A diversified economy: Dubai and indeed the UAE economy is no longer entirely dependent on oil. The country’s government has solid financial buffers, and has demonstrated its willingness to dip into such resources to keep up investment in infrastructure and other critical projects. Non-oil sectors continue to grow and, therefore, provide a stable base for the UAE's ecinomy to grow.
Regulatory environment: A vastly improved regulatory environment – for real estate in particular and for business in general – has been a primary factor in keeping prices stable this time around. Several UAE laws supporting transparency and better regulation have been introduced since 2012. The Investor Protection Law and the Code of Corporate Governance for Developers, drafted by the Dubai Land Department, were announced in 2012. The Central Bank has introduced stricter loan-to-value ratios for mortgages, and the Dubai Land Department doubled the registration fees to keep speculators at bay.
Stable confidence: Despite oil prices slumping, consumer and corporate confidence has remained stable, with the country’s firms continuing to hire staff and expand their presence although no longer at a breakneck speed.
Realistic rentals: With no job-losses this time around, rentals have held much better despite new properties being added to the market on a regular basis. This has meant a handsome ROI for investors, which in turn has kept prices from falling too steeply.
Expo 2020: Finally, the light of the end of the tunnel is Dubai’s winning bid for Expo 2020. The emirate will see 25 million additional visitors for the six-month even, which will need the city to keep infrastructure spending at an even keel for the thousands of additional hotel rooms required, not to mention the road and metro connectivity and retail options.
“When preparation for Expo 2020 picks up, we expect to see a significant amount of job creation and an increase in demand for residential real estate. Although 2016 could be challenging in the short term, with effective regulations in place and the infrastructure investment that is committed as part of Expo 2020, we should see an upturn in the real estate industry in 2017,” says KPMG’s Mehta.
A new report titled ‘Building Confidence’ by KPMG reviews Dubai’s residential real estate market and predicts that while 2016 may be a challenging year for the emirate’s housing market in the short term, the market should see an upturn in 2017.
The report indicates five key trends that will drive the Dubai residential real estate market in 2016 and beyond:
(1) Liquidity is likely to become increasingly important as markets continue to tighten.
(2) A second important trend relates to the oil price, which seems unlikely to recover in the short term.
(3) As supply and demand are not currently balanced, certain areas and segments are significantly more attractive than others – with a premium for quality.
(4) There is also going to be a drive towards affordable housing, with increasing amounts of housing coming onto the market at prices that both compete with the rental market but also - and probably more importantly – appeal to a much wider demographic.
(5) And, finally, Expo 2020 is likely to have both a direct and indirect impact on the real estate market – and is increasingly on the horizon for both the private and the public sector.