Stronger dollar will deter realty speculators

An appreciating US dollar will deter speculators from entering the UAE real estate sector, as the market becomes more end-user driven than investor driven, according to new research.

"We expect that if the dollar continues to appreciate, demand (especially in the off-plan segment) would slow. However, we feel this would lead only to a slower pace of growth from this year's roughly 40 per cent appreciation," Dubai-based Al Mal Capital said in a research note released yesterday.

"Most importantly it will ease the transition to an end-user driven real estate market and decrease the risk of an inflation driven overheating of the market."

The report stressed the importance of taking this more speculative type of investor out of the market for a better long-term real estate picture.

"We expect that any moderation in prices would ease the transition from an investor driven market to an end-user market. In our opinion, this would lead to a market driven less by liquidity levels and more by the already strong supply and demand fundamentals," said the report.

Significant investments are coming into this sector from the United Kingdom, Europe, Asia and Russia and it is hard to argue that a decline in purchasing power of these investors would not affect their purchasing decisions. Moreover, the value gap for non-dollar real estate investors continues to exist, even in light of the recent strength in the dollar.

However, in euro terms, the real estate prices are yet to reach the same levels of appreciation as the dirham/ dollar levels.

"Therefore, we feel that the value gap still exists for non-US dollar domiciled real estate investors." And if the dollar continues to appreciate (which is by no means a certainty), the report expects "investment demand to dampen somewhat".

Standard Chartered bank said in a report earlier that off-plan sales of properties in Dubai were leading to overheating. As a measure to cool the market, the bank had suggested Dubai should take steps to weed out short-term investors, with the introduction of a capital gains tax on properties that are sold within a year of purchase, or else risk a correction. Rental yields, meanwhile, in Dubai remained flat in July at 6.8 per cent, down by one per cent in comparison to the corresponding period last year, the report said.

The year-on-year decline in rental yields has been driven mainly by higher prices as the median rent in Dubai has increased by 23 per cent over the past year.

For commercial properties, the median rental yield declined slightly to 11.9 per cent in July from 12.4 per cent in June. Although Dubai has experienced significant yield compression (about 100 basis points), the report said yields still have a bit to come down. "We still contend that yield compression will come from real estate price appreciation rather than declining rental prices," the report said.

Dubai real estate price index indicates a year over-year-price appreciation of 39.9 per cent in the residential segment, while prices in the commercial segment appreciated by 40.5 per cent for the same period. The seasonal slowdown continued in July, with prices on the residential segment only increasing a moderate 0.7 per cent over the last month levels. However, the office market has been bucking the seasonal trend and remains quite strong with a 3.7 per cent month-over-month increase.