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29 March 2024

Attention Dubai property investors: These areas saw biggest rally in prices, rents

Published
By Vicky Kapur

Residential prices in Dubai continue to edge higher along with rising business confidence levels and stable economic growth.

Even as 2012 saw villa prices outperform apartment prices, the trend has now reversed, according to a new report by Standard Chartered bank.

According to the report titled ‘Dubai housing: Fundamentals not speculation,’ the strong performance of apartment leasing is pricing out some tenants from more expensive developments, benefiting more affordable areas such as International city, which topped all other areas with an increase in average rental rate of 27 per cent year-on-year and 11 per cent quarter-on-quarter in the second quarter of 2013.

Similarly, the top-performing area in the villa leasing market is the Springs, with an increase in the average rental rate of 35 per cent year-on-year and 10 per cent quarter-on-quarter, the report estimates.

The residential-sale market’s top performers are the Greens, with a 44 per cent increase in apartment sale prices year-on-year and 15 per cent quarter-on-quarter; and Jumeirah Village, with a 40 per cent increase in villa sale prices year-on-year and 25 per cent quarter-on-quarter.

The bank says that Dubai villa prices rose 24 per cent while apartment prices edged up 12 per cent between Q4-2011 and Q4-2012. During the same period, rentals of villas in Dubai saw an increase of 6 per cent while apartment rents rose marginally higher, 7 per cent.

However, the first half of 2013 has seen that trend reversed. Apartment prices and rents are now outperforming the growth in villa prices and rentals, with an overall growth in the number of property transactions that Dubai is witnessing on the back of an improving economy and investor confidence.

“The second quarter of 2013 marks the fourth consecutive quarter of Dubai’s property uptrend,” says the report. “In 2013, the tables turned, with apartments showing a stronger performance than villas. In fact, the second quarter of 2013 saw apartments selling for 12 per cent more and leasing for 7 per cent more than in Q1 2013, whereas villas were selling for 8 per cent more and leasing for 6 per cent more,” the report adds.

Dubai’s housing market is expanding on the back of improving fundamentals, and a number of factors including subdued mortgage growth, low off-plan sales and increasing housing regulation differentiate this price rally from the one in 2008.

In its report, the bank analyses Dubai’s property market during the current rally and finds its behaviour very different to that in 2008. For one, it finds that the increase in supply this time round is in-sync with demand, something that it says was missing during 2008.

In addition, flippers and speculators are conspicuous by their absence this time around, thanks to strict regulatory measures.

“The key difference between the real estate market in 2008 and in 2013 is off-plan sales. Flipping of off-plan properties was the main reason behind the previous boom-and-bust cycle. Authorities are deploying efforts to ensure that off-plan sales are controlled,” the report maintains.

“In fact, the Real Estate Regulatory Agency (Rera) reaffirmed that it aims to limit the dependency of developers on investors’ off-plan sales proceeds by ensuring developers make a 100 per cent land payment and put down a 20 per cent construction guarantee as collateral,” it further adds.

“Additionally, developers are entitled to attach conditions to sales contracts in order to help prevent speculation and flipping. Some developers define a period of six months to a year before a property can be resold,” the report states.

Such clauses act as major dampeners for flippers, who aim to make a quick buck by reselling an off-plan property as soon as they can. In addition, a plethora of new regulation is expected to be unveiled in the next two years, further stabilizing the market and weeding speculators out.

“In the next two years, seven new laws are expected to be drafted in a bid to regulate Dubai’s property market and maintain property values. Introducing controls to limit the fast re-sale of property, the laws will focus on setting thresholds for premiums and percentage of completion of projects before they can be sold,” the report states.

“The land department is also setting the scene for legislation for the Tayseer programme and the Tanmia initiative. The first was launched during the crisis when banks were reluctant to offer credit to developers. Property companies must be registered with the department and have at least 60 per cent of a project complete to benefit from the programme. The second aims to restructure stalled projects so that construction work can resume,” it adds.

Of course, as has been mentioned in the past, a complete disappearance of speculators or short-term investors is neither possible nor desirable in the larger scheme of things. “This does not mean that off-plan sales have disappeared from the market entirely. 2013 uncovered several off-plan releases from major developers such as Emaar, Damac and Nakheel,” the report states.

“It is important to note that mortgages play a small role in Dubai’s housing market, as both the mortgage and real estate markets are new. The market is dominated by cash buyers. During the first half of 2013, more than 80 per cent of the apartments purchased in Dubai were bought with cash (Source: Dubai Land department). Real estate mortgage loans soared during the 2008 bubble, increasing by more than a 100 per cent between 2007 and 2008. The recent uptrend has not seen a similar parallel increase in real estate mortgages, which have remained flat to negative since 2010,” it adds.

This goes to show that Dubai’s property market remains very liquid. “The Central Bank of the UAE announced last December that it intended to cap mortgage loan-to-value ratios. This regulation aims to regulate the market to avoid another boom-and-bust cycle. A final decision is expected later this year; the ratios of any proposed caps are not yet known,” it says.

“The initial caps, circulated in December, announced loan limits of 50 per cent for expatriates and 70 per cent for Emiratis for first-home purchase. Following an outcry from banks, the limits were increased to 75 per cent for expatriates and 80 per cent for Emiratis. For subsequent homes, the ratios would be 60 per cent for expatriates and 65 per cent for Emiratis.

“Since mortgage sales are lower than 20%, we believe that regulating off-plan sales will be far more important than mortgage caps when it comes to avoiding another boom-and-bust cycle,” the report maintains.