Price volatility in Dubai's property market has started to abate as the bid/ask spread began to narrow in May compared to the previous month, while mortgage lending has spiked in the last two months, according to HC Securities yesterday.

"Our transaction survey shows a sudden spike in mortgage purchases above pre-crisis levels to Dh1 billion in April 2010 and Dh0.9bn in May," Majed Azzam, Analyst – Real Estate, HC Securities, wrote in the lastest report on the real sector.

Liquidity seems to be returning to the sector following the announcement of the Dubai World debt resolution terms with the UAE Central Bank data pointing to a Dh4bn rise in total mortgages in the first quarter of this year.

Mortgages, according to the report, accounted for 37 per cent of total transaction value in April and 30 per cent in May, up from an average of 17 per cent in 2009. Mortgage volumes stood at 24 per cent in April and 22 per cent in May compared to an average of 12 per cent last year.

The pickup in mortgages appears to be broad-based with established communities seeing the bulk of transactions, suggesting that deliveries had a limited impact. The Downtown area (mainly South Ridge, Residences, and Old Town), the Emirates Hills area and Dubai Marina saw the strongest growth in leveraged purchases of apartments, while Palm Jumeirah and the Ranches recorded the highest growth in mortgages for villas.

The easing liquidity seems to be driven by foreign banks as local lenders still face funding constrains and continue to follow a more conservative policy.

"That said, since mortgages remained available, albeit more selectively, we believe the recent surge in leveraged transactions also indicates a shift in investor perception. The view being that the market has bottomed and/or rental yield expansion is imminent, compensating for still high mortgage rates [7.5 per cent versus average yields of six per cent]," added the report.

HC Securities' Dubai property price index suggests that the second market trough was formed in January 2010 with prices rebounding by 12 per cent since then, paring most of the losses following the standstill announcement in November 2009.

Price gains

Gains were recorded across the board, but Emirates Hills First, Nad Al Shiba, Rega Al Buteen, and Jumeirah Village First stood out as the areas with the highest price increases. The strong price gains appear to be driven by easing liquidity (particularly apartments), with a strong pickup in leveraged transactions to 429 in April and 376 in May from an average 178 units last year. There was also a strong pick-up in transaction volumes to 1,944 units in April and 2,073 in May from 926 units in January and an average of 1,021 units in 2009. Oversupply remains the biggest concern, but there appears to have been a further slowdown in construction activity recently.

"We understand that development of raw land is being restricted. Also, given the tight liquidity, developers continue to consolidate their projects. Additionally, anecdotal evidence suggests the job market is starting to move again with the services sector leading the way," Azzam wrote in the report.

Land sales subdued

While the unit sales market has shown initial signs of recovery, plot sales remain subdued at levels comparable to those of fourth quarter 2008. Since land is typically a residual play on build-up property and considering that it is usually driven by corporate rather than retail demand, it is likely to take longer for improved fundamentals to be reflected. That said, Sorouh's Dh216 million plot sale in the first quarter 2010 to a private UAE developer at premium prices is an indication that the market has started to see some activity.

"Nevertheless, land sales are likely to remain subdued until we see a strong pickup in property prices. Plot prices in Dubai have recorded a peak-to-trough decline of 88 per cent compared to a drop of 37 per cent for properties. Our plot transaction survey shows a slight pickup in value traded, with Dh10.4bn recorded in April and May compared to Dh11bn in first quarter 2010 and Dh9bn in fourth quarter 2009. Rentals seem to have stabilised – down four per cent in April 2010, but up two per cent in May 2010 – with yields hovering around six per cent since the beginning of the year. Since rentals, unlike prices, are a pure reflection of demand and supply dynamics, the stabilisation since November 2009 suggests the market is reaching equilibrium despite additional supply coming on. Rentals in Dubai were helped by the spillover from neighbouring emirates (particularly Abu Dhabi), which anecdotal evidence suggests gained momentum last year.

While initial signs of rental stabilisation are emerging, forthcoming supply might again pressure rentals in 2010 and 2011. The restructuring of Nakheel, which controls 50 per cent of expected supply on HC Securities estimate, is bound to lead to further project delays and cancellations, which supports sector dynamics. The report said: "There appears to be a further slowdown in construction activity more recently due to reported restrictions on the development of raw land."

"Given the tight liquidity, developers continue to consolidate their projects. The expected recovery in the global economy and stronger economic growth in the UAE this year is likely to support demand," Azzam said.

The strong pick-up in transaction volumes in March, April and May (almost double January and February) meant that despite a 10 per cent increase in the available-for-sale/lease stock, largely on deliveries, the take-up rate dropped to 2.2 months in May 2010 from a peak of 10.1 months in December 2008.

Off plan listings continued to decline, dropping four per cent month-on-month to 313 units in May 2010 from 327 units in April 2010. "We believe this is partly a reflection of projects put on hold, deliveries taking place during the year, and a weaker demand for unready units," the report said.

According to HC Securities, there were 4,223 ready listings in May 2010, around six per cent lower than April's listings of 4,490. Lease listings increased six per cent in May 2010 as able investors increasingly choose to hold their properties, especially with signs of rising rentals and yield expansion.

In contrast to agreed prices, asking prices in Dubai dropped three per cent in February 2010 and another six per cent in March. "They have since stabilised," the report said. Since the onset of the global financial crisis, headline prices have corrected 42 per cent compared to 37 per cent for agreed prices. Advertised prices tend to be more rigid as they are not updated frequently enough to reflect a real-time trend. Besides, the bid/ask spread compressed to 40 per cent in May 2010 – a sign that volatility is abating – after expanding to 51 per cent following the standstill announcement.

Capital prices flat

Abu Dhabi asking prices were flat year-to-date despite a 20 per cent increase in available-for-sale/lease stock, albeit from a low base. While secondary listings remain predominantly off-plan, the proportion of ready/lease units has steadily increased to 27 per cent in May 2010 from one per cent in December 2008 as new supply reached the market.

"However, we believe the risk of oversupply is overstated. Regardless, replacement demand alone is enough to absorb deliveries in freehold areas. Also, new measures undertaken by some public institutions are likely to limit and eventually partially reverse the spillover trend," the report said.