The financial crisis sweeping the globe has turned the UAE's property sector on its head in recent months – and left in its wake widespread confusion among many residents.
Emirates Business assembled a panel of experts to assess the situation and to offer advice to investors caught up in the local housing industry.
In a far-reaching interview, they welcomed the end of an era of speculation, which fuelled prices in recent years, and suggested the scales have tipped in the favour of buyers.
Developers face heftier fees in the future and the real threat of having their licenses revoked by the Real Estate Regulatory Agency (Rera) for failing to honour sale and purchase contracts.
They spoke of the options open to investors faced with a property on hold, or a developer that has defaulted on payments. And the panel suggested drawbacks to the recently announced Rental Index.
Finally, they evaluated the best buys for investors with cash and in search of a bargain, and how owning a property near a school or the Metro could be a smart move.
Is the new Rental Index already out of date, given the local market fluctuations caused by the global economic downturn?
Marwan Bin Ghalita (MBG): We started working on the Rental Index in January 2008 by studying the market, collecting data and consulting local agents and management companies. We finished the index based on the 2008-end quarter data. So the prices reflect the rent in 2008 and the rule of the index is to update it every six months based on the data and market condition. This index is the first of its kind in the area and all professionals in Dubai welcomed it as it will increase transparency and confidence.
We need to understand that the downturn is affecting all markets, but our market is still doing good and is full of opportunities. So talk about adjusting the index data will happen after some rent registration occurs.
Ryan Mahoney (RM): The present index, as far as we know, is a rough estimate of the rents for various products in the given areas. However, in the past three months the market has changed and it is difficult for the indices to be accurate under these circumstances.
Should market forces and not regulation be the determining factor in residential and commercial rent?
MBG: No one can deny the importance of regulation for all sectors, especially a market like Dubai. For sure, the market will adjust itself but you cannot leave the market as in the old days where people started increasing rent as they wished and unlicensed people started playing with the prices and hiding information from investors.
The market conditions will help by making landlords adjust the price they are asking for their property. And tenants will have more choice.
RM: I would say, yes, that a temporary rent cap is required to control the market, during this tough period of inflation. However, as the market becomes more balanced, no rent cap would be required.
Is the index enforceable?
RM: Anything can be enforced if it has the power behind it. However, it would be a mistake to enforce any index as they are generally used as guidelines to assist the industry. For example, a high-end, luxury property with a sea view cannot be priced the same as a similar property with undesirable views in the same community area.
And would the registration of all properties give a truer picture of the real rental value of a property?
MBG: Yes, once we have information about a community or block we will have an accurate index and we will not need to adjust or look for more information. Then we will go to the second step which is ranking the building based on the specification.
Are we seeing the beginning of a long-term deflation of property prices?
MBG: The correction we are seeing in the market is good for the sector and, as anyone who knows real estate will tell you, what was happening in our market was not good for the long term. Speculators are bad for the market and all sector stakeholders should watch for that. The market is full of great deals for people who want to invest in this great city. It's all about price and long-term investment.
Mohammed Kamran (MK): I'm unable to project as this is dependent on many factors.
Peter Riddoch (PR): Definitely not. Currently, there is skepticism in the property market but this is not long-term. The Real estate sector is the second largest contributor to the economy in the Middle East after oil, and the region has some of the finest world-class developments within its portfolio.
Defaults – what happens to investors and developers?
MBG: This is a Land Department issue.
Markus Giebel (MG): Defaults are a bad phenomenon not just for the growth of the real estate sector but also for investors since it means losing the value of existing investments, and it must be avoided. However, developers in a strong capital position will be better placed to weather the crisis in the unlikely event of defaults.
MK: Where the developer defaults on the sale and purchase agreement the investor should file a case with Dubai Property Court and file a complaint with Rera. Where the investor is in default the developer can rely on Law No13 of 2008. This law states that, in the event a purchaser defaults on any term of the sale-and-purchase contract he has made with the developer, the developer should notify Dubai Land Department of the default.
PR: Rera states that buyers will have to forfeit 30 per cent of the property's contracted value in the case of defaults. On the other hand, in the event the purchaser defaults on any term of the contract he made with the developer for the sale of the real estate unit, the developer should notify the [Land Department] and the department will then give the purchaser 30 days' notice to fulfil his contractual obligations, by hand, registered post or email.
What's the outlook for payment schedules for investors in off-plan properties?
MG: A positive outcome from this crisis has been the end of speculative demand for off-plan property. This will help stabilise property prices and encourage end-users to enter the market. It's a time for developers to positively use the gains made over the past few years [to] offer enhanced payment schedules and a personalised customer service.
PR: The outlook will be better regulated and safeguarded to protect the interests of the investors. This means that developers will now need to undertake considerably more preparatory work.
RM: Developer attitudes vary, with some being more flexible than others. The factors influencing this include finance available to developers, the construction phase of the projects, existing contracts in place and the client relationship with the developer.
MK: Rera said of off-plan property being sold in Dubai that a maximum of 20 per cent of the purchase price is to be paid to the developer upon booking the property and the balance of purchase price is to be paid to the developer in line with the construction milestones of the project.
Is there now, in practice, a hold on outstanding payments on off-plan properties?
MK: There has been no hold on outstanding payments for off-plan properties issued by Rera. However, Rera is advising developers to collect payments in line with the construction milestones for new projects. Developers of existing projects are able to collect payments as per the terms of the sale and purchase agreement executed with purchasers. All new projects follow the payment schedule in line with the construction milestones of the project with a maximum of 20 per cent of the purchase price paid to the developer as a down payment upon booking the property.
PR: The hold on outstanding payments on off-plan properties depends on its registration into the Land Department's register. The off-plan sales regulation introduces a system of mandatory pre-registration for all off-plan sales before the transactions are finally entered into the register. Any sale or other disposition that transfers or restricts title or any ancillary rights shall be void if not recorded in the register.
How about on properties where construction has been stopped or delayed?
MBG: Rera is dealing with this issue and handling the matter case-by-case.
MG: Developers are currently under some liquidity pressure. We may see a slowdown in the pace of construction, and a few projects could be temporarily halted. However, Deyaar, on its part, does not plan to cancel any of its currently undertaken projects. We reckon that short-term rescheduling of payment plans and tie-ups with financial institutions would provide investors with the necessary support mechanism required to overcome the current credit market conditions.
MK: If the developer is in breach of the terms and conditions of the sale and purchase agreement entered into with the purchaser, the purchaser should file a complaint with Rera. The developer must commence construction of the project within six months of obtaining approval to construct the project from Rera. [If] the developer does not commence construction in this time, Rera would restrict the activities of the developer and can ultimately revoke the license issued to the developer.
PR: As property prices start to fall and unfinished units lose their lustre, some investors searching for liquidity could decide it is more beneficial to them to default than carry on making payments.
RM: Our advice in all instances would be for the clients to get in touch with the developer. Little information is coming to the brokers as most developers have the relationship with the buyer directly.
What about in the case where construction has not started yet? Can investors recoup their payments already made until it begins?
MBG: Rera has rules for that. The developer can only take up to 30 per cent before construction. And the rest of the payments link to construction phases.
MK: Rera has the task to regulate developers, Rera is not party to the sale and purchase agreement entered into between the developer and purchaser. The purchaser would need to file a case in Dubai Property Court to claim back the money paid where there has been a breach of the sale-and-purchase agreement by the developer.
PR: Such situations are dealt on a case-by-case basis and it depends on the terms of the contract between the developer and the customer.
RM: This would be handled on a case-by-case basis. They can evaluate their case with a lawyer and speak to Rera.
What new regulations for the property market do you anticipate coming into force over the next few years?
MK: I expect the government will introduce regulations that will be weighted towards the end-user. The main component of this environment will be the strata regulations that will be introduced shortly. The regulations will protect purchasers with more disclosure at the sale and marketing stage.
PR: New regulations to be introduced in the coming years will offer no room for speculative buying. Laws will be more investor-driven and will aim to bring back customer confidence. The long-term sustainability of the property sector is clearly dependent on an end-user driven market.
Will there be limits on 'flipping' property?
MK: This is up to Rera. However, some markets have discouraged speculation wherein taxes and penalties are imposed upon these speculators who sell properties before a certain stipulated time.
PR: There are two distinct areas that need to be addressed. The first is that of land itself and the second is off-plan property. Yes, we have already seen some developers limit flipping property. The government is introducing restrictions on flipping property as it has been partly blamed for the unrealistic prices of real estate prevalent in the UAE last year.
Andrew Chambers (AC): Yes, we will definitely see a decrease in flipping property as new regulations come to play tightening the loopholes in the property market.
What is your outlook for property prices – primary and secondary – for 2009?
MK: I wouldn't call it primary or secondary, but completed and off-plan properties. The completed properties will have fallen significantly and should bottom-out in the second quarter. Off-plan property lacks clarity on when the prices will slow down due to shortage of demand and lower sales.
PR: The outlook for property in Middle East is well-positioned and the underlying demand is still strong. In line with this, the outlook for property prices in the primary market is expected to witness slow but steady growth with a gradual increase in prices. Outlook for the secondary market does not seem to be very bright this year as property prices have softened and many investors are looking to sell at a discounted price.
AC: At present, we are seeing secondary sales at lower levels than developer prices in certain areas primarily owing to distress sales. We will see prices coming down in the medium term as investors are cautious of the market condition at present and developers will need to make prices more competitive to attract buyers, especially projects coming on line in the next few months such as Jumeirah Village and Victory Heights.
And over five years?
MK: The next two to three years will see very little development of property which will increase demand growth and create a rise in property value. However, no one really knows as the market is unstable at this moment and we are unable to get a handle hold on demand and supply.
PR: The property market is set to stabilise in the coming years and the outlook seems positive.
Which areas are likely to sustain price levels compared to others in Dubai?
PR: The government is already planning zonal divisions within the cities which means each area will have its own price index. Areas offering closer proximity to business, education, recreational and entertainment facilities will definitely have an upper hand in comparison to the others.
MK: While the market continues to experience corrections, areas that will sustain prices are prime locations within Dubai and properties within the various communities themselves. As with most markets, location is key as well as other contributing factors such as finishing, views, facilities, and so on.
AC: Quality developments that are well-planned and at good locations will command better price levels – as is seen in most mature property markets. Completed projects which are ready to move in will have an added advantage.
What factors will strengthen prices in areas? For example, will a Metro station boost values?
PR: The government is currently encouraging public transport in the city and the opening of the Metro will enable access to various localities within the city hence close proximity to Metro stations are expected to boost values.
MK: Proximity to a Metro station, shopping mall and accessibility, parking, management and maintenance, are some of the factors that drive the price of a property.
AC: At the moment, perhaps not, but once the Metro is completed and running, prices in neighbouring areas will strengthen. The same has been seen in international markets such as Thailand, for example, where significant price increases in residential and commercial values were recorded once the local Metro was operational.
What other factors will be key for property investors going forward?
PR: Pumping liquidity in the banking system to re-activate timely loans to customers; introduction of user-friendly payment plans; establishment of investments funds and task forces are some of the key factors to motivate property investors going forward.
MK: Price and financing are the most urgent factors.
AC: Location is key. In addition quality developments with sound infrastructure, good property management, parking facilities and supporting facilities such as banks, convenience stores, food and beverage outlets etc. will enhance the value of a property in the long term.
What about the strength of villa prices versus apartments?
PR: A Colliers report said apartments had an overall average price fall of 11 per cent in Q4 2008 from Q3 2008 and villa prices fell by three per cent during the same period. However, we believe villa prices will continue to be strong as they are few in number compared to apartments.
MK: This varies from community to community, depending on the supply and demand as well as the ratio of villas to apartments. However, the market has seen a greater correction and reduction of prices of villas vs apartments.
What's your outlook for mortgage availability in 2009 and over the next five years?
PR: Considering the current financial crunch, mortgage rates have increased considerably. These are expected to soften, which will offer some respite to buyers. Mortgages contribute significantly to a developing property market.
MK: At some point in 2009, mortgage availability will improve. The only security mortgage lenders/banks are looking for is that the property being mortgaged does not drop in value. If prices stabilise, we can expect mortgage lenders/banks to get a sense of comfort and confidence in lending.
Will rates and fees come down?
PR: The rates and fees adopted by the mortgage lenders were in line with the prevailing market scenario. Prior to the credit crunch, the property market has witnessed phenomenal growth with speculative buying and pent-up demand from investors. As of now, the market has come to lower price levels and the rates and fees on mortgages are expected to differ.
MK: They may come down for buyers and tenants and may increase for landlords and sellers.
Will any new projects be launched this year? How about in 2010?
MBG: All under process.
PR: New project launches are likely to take a back-seat this year. Delivering properties will be the key this year. As the market gains momentum, new project launches are expected to see the light of the day by 2010.
MK: Some launches will happen this year, and not many next year.
AC: The later half of this year and early to mid-2010 will see the launch of projects, especially those kept on hold in the last quarter of 2008 due to the market condition. We also expect the new developments being launched to be better planned and designed with improved quality aimed at attracting end-users.
What's your outlook for completions and delays of projects in 2009?
MG: Deyaar remains well on track to deliver many of its key projects in 2009. We just handed over the Seef II development at Jumeirah Lake Towers and construction is progressing on the Citadel and Madison developments.
PR: The outlook for completions of projects in 2009 appears to be very positive as developers across the region along with the government place investors centre stage and take every required action to safeguard their interests. The need of the hour is to rebuild confidence within the market, while attracting foreign interest and investments.
Over the next five years, will there be a slowdown in the number of completions compared to previous years?
PR: During the beginning of the year, completions will be at a slower rate but it is expected to pick up later. According to estimates, investments in Dubai's property sector crossed Dh158 billion in 2008, after considering the number of sales registrations, leasing and mortgage transactions. Considering the general outlook that investments and growth have a cascading effect on project completions, we will not witness a slowdown but a gradual consolidation of the sector. Moreover, with new regulatory frameworks by the government and Rera coming into force, the performance within the sector is set to get a major impetus. Concurrently, the banks and mortgage lenders are expected to come up with flexible payment plans and mortgage products that will give the required boost to the sector. Developers will focus on completing projects first and new launches will take a back-seat.
Will more areas, developers or developments be given financing and mortgages to boost the market?
PR: Once speculation is eliminated, more areas, developers and developments should be given financing and mortgages to boost the market. To overcome the liquidity crisis and to maintain movement within the market, it is important for lenders to initiate interesting and attractive payment plans, schemes and mortgage products to attract investors.
MK: We hope so, but this is a bank decision.
What effect will delays have on supply to the market and property prices?
PR: The underlying demand for property in the Middle East is still strong and the predicted shortfall of residential property supply against demand in 2009 is estimated at around 125,000 dwelling units. Delays will further aggravate the current instability and have a detrimental effect on the future of the sector. Regaining consumer confidence is the key to sustainability in the current market scenario.
MK: These delays will create shortage in supply within two to three years thereby increasing demand and property prices.
Will mortgages become more competitive now that the property market has slowed?
RM: No. The property market slowed down because banks are not willing to loan money for property and are not looking to grow business in the mortgage industry.