Although Dubai's real estate prices fell by 23 per cent in December 2008, the property sector is set to see a rebound in confidence as liquidity improves, said a new report.
Apartments prices were down 20 per cent from their peaks in September 2008, and prices on villas were also down by around 30 per cent from peaks in September 2008, according to a recent HSBC Holding report titled "Property Ladder".
According to the report in the first two weeks of January, however, the sales volumes were up by six per cent from December 2008 recording a total of 1,782 transactions for the first two weeks in January. There were just more than 5,800 transactions booked in the fourth quarter of 2008, up by 226 per cent year-on-year.
"We believe this highlights some return of confidence and liquidity to the market."
The report includes the inaugural Dubai transaction price index (a survey of actual prices rather than advertised), as well as a UAE building materials index.
The big concern of UAE investors seems to be Dubai's property market and the level of speculation involved in the sector and the lack of volume. Moreover, there is a perception that transaction prices have already fallen below levels of a year ago. The HSBC transaction survey suggests that while the market is difficult, volumes and pricing are not as bad as implied by the stock market.
"Should we start to see some form of stabilisation in pricing, greater confidence is likely to return to listed stock market plays as well," said the report.
"Our transaction price survey of the Dubai housing market points to a 19 per cent year-on-year rise in average prices per square metre in December 2008. The data indicates that the market recorded price growth of 61 per cent over the first three quarters of 2008."
Villas recorded 156 per cent price growth over the first three quarters of the year, compared to 44 per cent growth by apartments. "We believe this partly reflects villa market tightness, but also suggests a high level of speculation." The steeper decline in villa pricing appears to have more to do with affordability, in light of lower mortgage loan-to-values. HSBC said that its transactional data suggested some signs of distressed selling in the fourth quarter of 2008.
"Our analysis of December data indicates there were a small number of units sold at prices that fell short of estimated construction costs. Also, while not definitively pointing towards distress, we note a higher level of bulk buying activity, with multiple floors being purchased at fixed prices.
"While January data is far from complete, the initial transactional pricing data suggests that there may be some further price weakness ahead. However, we would sound a note of caution surrounding this statement."
Many of the transactions were likely to have been struck during a period (late November/December) populated by a large number of holidays and may not be fully representative of true market forces. Transaction volumes, while down from the November 2008 peak, remain healthy.
"Dubai advertised listings were up 10 per cent month-on-month (mom), suggesting that more units are being put on the market. However, in December, there was a clear shift in mix towards lease listings, which in our opinion highlights a reversal from selling to holding. The number of lease listings increased from three per cent to six per cent (mom)," said the HSBC report.
While the gap between demand and supply narrows, rentals are likely to start to ease. Anecdotal evidence suggests that this is already taking place in some areas.
According to the report, the Dubai advertised prices were up again in December, rising by two per cent every month. Apartments rose by three per cent while villas gained two per cent (mom).
"Our analysis of transaction data suggests that there remains a disconnect between advertised and agreed prices," the report said.
"At the peak, agreed prices were around a 20 per cent discount to asking prices; now the discount appears to have deepened. While asking prices seem to be holding up for now, eventually they are likely to track transaction prices, in our view," the report said.
However, there has been no change in the policy concerning the UAE mortgage market.
"We believe that lenders may be watching the broader market to gauge strength and clearance levels on price," the report said.
HSBC continues to believe that Abu Dhabi, particularly Aldar is likely to offer the best shelter for UAE real estate investors, while also providing good capital appreciation potential when visibility improves.
"We expect the market in Abu Dhabi to remain tight near term as pent-up demand alone is more than enough to meet supply coming on to the market in the next two years. We prefer Aldar because of its shareholder ties. We also think Aldar's strong liquidity position should provide a buffer against financing risk near term. We like Aldar's centrally located land bank, which we think is likely to remain in demand."
Emaar's investment property portfolio is likely to generate decent cash flows. "We like the company's less leveraged balance sheet, with a net debt to equity ratio of two per cent. We acknowledge Emaar's strong track record, with roughly 25,000 units delivered in Dubai to date. The sheer scale of development at Emaar will stretch management and operational capacity, introducing the risk of delays and/or even project cancellation."
According to the report, Emaar still operates in an underdeveloped regulatory environment, where minority interests can be overlooked.