Five years after the real estate crisis, Dubai is on track for another property upswing.
According to the recently released Phidar House Price Index the residential market has found a fresh buoyancy and traction reflecting a marked upward trend in all segments. In the last quarter of 2013, villa prices (single family homes) rose 45 per cent since bottoming out in Q1 2011. Studies conducted by Phidar show that apartments (condominiums) have increased 42 per cent since the trough in Q4 2011.
Phidar Advisory is a recently established advisory firm specializing in real estate in the UAE.
Jesse Downs is the Managing Director and co-founder, joined by 9 founding shareholders, a mix of GCC family offices and senior international real estate and finance professionals. Prior to establishing Phidar Advisory, Jesse was a Director at Jones Lang LaSalle and prior to that she was the Director and Head of Landmark Advisory.
The Phidar Index based its findings on an assessment of condominiums (or apartments) in 9 investment zones and villas in 5 investment zones across Dubai, thereby covering a comprehensive cross section of the property market. The pivotal aim was to assess the price performance of completed residential projects in Dubai. The index tracks sub-developments and buildings that have been completed since Q1 2009.
The apartment index tracks Downtown Dubai, Palm Jumeirah, The Greens, Dubai Marina, Jumeirah Beach Residences, Jumeirah Lake Towers, Discovery Gardens, Motor City (Uptown Motor City), and International City (Country Clusters). The villa index includes: Arabian Ranches, Jumeirah Islands, Palm Jumeirah, The Lakes, and The Springs.
An examination of these properties underscored some salient features.
The report categorically states that to truly appreciate real estate price trends, completed properties must be separated from off-plan units because these are not comparable assets.
The study also cautions that comparing current pricing to the peaks of Q3 2008 provides limited analytical insight. At that time the market was in a severe disequilibrium and prices ballooned.
Stating that the villa market currently lags 21 per cent below the last market peak while the apartment/condominium market is 34 per cent below only compares the current market to a historic point in the past but is not to be seen as an absolute. According to the IMF, housing busts in advanced economies are associated with 30 per cent average price drops over 18 quarters, while housing busts in emerging economies decline an average of 40 per cent over 15 quarters.
Although Dubai’s property decline was not an isolated incident and occured the great context of a global recession, the report suggests Dubai’s housing bust was more severe than the average, but relatively short-lived, culminating in a substantive and potentially sustainable rebound.
On the back of a strong and ongoing population growth, residential rents have also increased over the past two years. Villa rents increased 12.6 per cent QOQ and 21.6 per cent YOY. Apartment rents increased 12.7 per cent QOQ and 24 per cent YOY. Phidar identified a correlation between recent price appreciation and fundamentals, but warns against over speculation. While the UAE Central Bank is introducing waterfall caps on LTVs to curb mortgage-facilitated speculation, the impact will be limited on a market that is dominated by cash transactions (75 per cent in 2013).
Based on its analysis, speculation over the past 12-18 months has already priced in the next 4 years of additional demand from Expo 2020.
Phidar is clear that the appropriate premium for completed properties depends on a combination of location, quality, financing availability, and most importantly, developer track record.
The Phidar report uses residential electricity and other utility consumption rates to estimate historic population figures which accurately correspond with a recovery in rent rates.
Phidar predicts there will be a strident call for ‘Affordable Housing.’ And this could well be the cornerstone of Dubai’s steady growth.
Approximately 90 per cent of the additional 277,000 Expo-jobs will only be generated from 2018 onwards, according to Oxford Economics.
Over 80 per cent of employed residents living in Dubai earn less than Dh10,000 per month. Consequently, if the statistics are overblown they can lead to inaccurate conclusions.
According to affording housing principles, Phidar indicates that a household should spend 30-33 per cent of income on housing. A higher proportional housing spend creates unsustainable strain on household disposable income.
Isolating and examining the top three income brackets with households earning more than AED 180,000, and assuming an affordable housing spend of Dh60,000 as the base mark, this market segment is 25 per cent oversupplied.
Considering the average household size of the total population is 4.4 and for expatriates is 3.8 of Dh100,000 does not currently equate the appropriate unit size, even in many outlying areas. Phidar does not include labor camps as a group in its study.
The majority of Dubai residents are forced to increase housing spend thereby reducing their standard of living. Many households have relocated to outlying areas in Dubai or other Emirates, again facing congestion and long commutes, which drives down efficiency for businesses, negatively impacts the aggregate economy and reduces government revenues.
Affordable housing, therefore, has to be placed on the front burner.
Phidar’s assessment also suggests that stalled projects could fill some of this supply needed to meet growing demand, but, to meet projected demand, a new development cycle must commence in 2014.
Phidar identified the top performing condominium buildings in Dubai: The Address Downtown, Old Town Island, Index Tower, Tiara Residences and Le Rêve. All five outperform the closest comparables in their area with associated project premiums of 25-121 per cent.
The analysis further indicates that small is good, that the yardstick for success will be quality, durability and after occupancy services.
Regulation allowing for the adjustment of old rents closer to current market rates could help temper further overall rent inflation. In October 2013, the Land Department’s increase of property transfer fees from 2 per cent to 4 per cent was a positive step to reduce the probability of property flipping, especially for off-plan units.
The report concludes there are two main development opportunities during the nascent upcycle: affordable housing and genuine luxury. Achieving these objectives and building for Dubai’s future requires a sensible expansion of lending to development and construction supported by balanced investor sentiment. The successful developers and projects will be those that return to the fundamentals of building: classic use of open, flexible space planning, employing rectangular layouts with a focus on the construction quality.