New laws will strengthen Dubai real estate industry

The summer months have seen three major innovations which mark a further maturing of the Dubai real estate boom. There has been a comprehensive new mortgage law, a tightening up and regulation of off-plan sales and clarification about the link between property ownership and residency visas.

Is this good or bad news for existing owners of property in Dubai? Is it positive or negative for house prices? Do off-plan buyers have anything to worry about? Does it make buying off plan not such a good idea in future? This article will attempt to answer these questions.

The first general point to make is that the Dubai authorities are acting at the right time. The property boom has grown and grown since 2002 and is now in need of regulation to prevent it surging out-of-control. A proper mortgage law is particularly timely as many developments are coming up for completion, and the provision of competitive home finance is essential. Dubai needed to clarify the rights and obligations of parties in mortgage contracts, and by reducing market risk the main impact should be to lower the cost of mortgages.

These have been high by the standards of comparable dollar-linked economies around the world. And bringing the cost of home ownership down should underpin the long- term stability of the local residential property market, and it has to be said higher house prices usually go with cheaper mortgages.

Tightening up on off plan sales is more of a double-edged sword. In limiting the flow of property to the market this will ultimately reduce supply and maintain real estate values. But its impact on those who have bought under the old rules and now find that they cannot sell until 30 per cent has been paid on a unit is mixed.

For those who have been buying for their own occupation, it will make little or no difference, and if this keeps supply lower then their property may well gain in value as a consequence over time. But for anybody who has been looking to flip property after a 10 per cent deposit, and has been doing so with borrowed money then this could be the end of the road.

Developers who correctly read the writing on the wall when the Real Estate Regulatory Authority (Rera) was created just over a year ago will probably have scaled back their project launches and will be concentrating on getting units completed in the face of surging construction costs. There have indeed been far fewer new launches since Rera came into existence. On the other hand, the new approach to off-plan sales – with a minimum amount to be paid before resale and compulsory registration of sales with the Dubai Land Department – means that anybody buying in the future knows that they are being provided with some level of security. It is very much in the buyer's interest not to be given their money back three years hence, and not to get a property, as has been happening on a few Dubai projects recently.

Also the bizarre situation where low deposit levels have meant that off-plan sales command higher prices than in the secondary market will no longer apply. This encourages rash speculation. And while early buyers could do very well in the longer term things are bound to turn out badly as there will probably not be enough end-users to allow a profitable exit for everyone.

With its new laws and regulations Dubai is trying to move from being a speculator's paradise to being a mature property market without the usual sharp real estate crash in between. It could well be that at this stage in its development the Dubai property market is small enough and sufficient under government control to allow this smooth progress. It is also a time of high liquidity and great prosperity in the city.

There is, after all a good historical precedent to consider and not very long ago either. In the late 90s this correspondent can recall worries in the local banking community that Dubai was about to undergo a nasty real estate correction. At that time the Emirates Towers, one of them the tallest building in the Middle East, and the Burj Al Arab, the world's tallest freestanding hotel, were under construction, and oil prices dropped below $10 in 1999.

The stock market crashed and in particular the shares of Emaar Properties suffered a dramatic fall from a split-adjusted Dh160 down to Dh10. However, local real estate rentals hardly budged, and within a couple of years any voids were filled. Landlords, and the government, kept space vacant rather than slash rents and the whole market rolled over into a much bigger boom, the one we have today.

The latest storm in a teacup is over the link between visas and Dubai property ownership. Anybody investigating this in the past would have realised that the link between residency and ownership is always going to be tenuous unless you are a citizen of a country. No developer is ever truly going to be in the position of a country to guarantee residency, and if some have done so this is a matter of false advertising claims rather than any change to the status quo.

That said very few buyers of Dubai property are going to find it hard to obtain residency, although it might be an inconvenience and additional expense to have to do this. Besides most people who live in Dubai will also want to work in Dubai, even just as passive investment managers, and will require a labour card. As far as I know Dubai has attracted very few retirees and there will still be nothing to stop them applying for residency. It has never really been guaranteed by developers as residency is not within their power to bestow.

All the evidence suggests that Dubai house prices will spike upwards again this autumn. The supply of completed property remains insufficient to meet the demand of the continued influx of new residents, and there will be many of them. Dubai is a boom town with huge inward investment in infrastructure and opportunities for employment abound. Trade grew by 50 per cent in the first half of the year, and GDP growth is up with the highest levels in the world.

It is like Hong Kong was in Asia in the early 1990s, and suffering the same curse of rising rental and property prices as far as residents are concerned. Dubai house prices have yet to increase to anything like the peaks achieved in Hong Kong, and perhaps the upcoming supply of new property will prevent this level of super valuation.

However, even if oil prices collapsed tomorrow the 1999 precedent suggests Dubai would handle a downturn with skill, in the same way the authorities are now managing the boom, purging its excesses in off-plan and creating a world-class real estate market that can sustain and maintain high valuation levels. Yet this remains a most unlikely scenario.

Goldman Sachs has oil prices high for another two years at least with a spike to $200 and $149 this autumn. The bank's partners have just established their own $300 million fund to invest in the Middle East so they are confident enough to back their words. In this environment the only way for Dubai house prices is up, and that will allow the off-plan market to be sorted out without a major collapse of confidence. But for residents who would like to buy in a slump that will remain a distant dream and high rentals will be the price to pay for working in a boom city.