News
Price correction expected in Dubai property market
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Property prices in Dubai are expected to decline by 10 per cent, while Abu Dhabi may see an increase of 25 per cent by 2010, according to new research released yesterday.
Investment bank Morgan Stanley, in a report titled "Winners and Losers in Middle East and North Africa (Mena) Property", took a cautious long-term view on the Dubai market and had a neutral outlook for the Abu Dhabi market.
"The regional property market is in the early to mid stage of a 'super cycle'. Dubai stands out as the most advanced market, with a possible price correction in 2009 driven by oversupply. But, Abu Dhabi, Qatar and Saudi Arabia are likely to remain undersupplied through to at least 2012," it said.
Prices of properties in Dubai have continued to grow well into 2008, despite increasing concerns about a possible oversupply in the coming 12 months. In the first half, prices increased by 25 per cent from December 2007 levels. Although the biggest increases occurred in January to May, price softened in June, especially within the low and middle-income segment, such as International City, the report said.
Although Dubai is the bellwether for the whole Gulf Co-operation Council property market, in a worst-case scenario, Dubai property prices would follow the pattern of Singapore in the late 1990s, when residential prices plunged 80 per cent over an 18-month period, exacerbated by a sharp economic slowdown. However, Morgan Stanley calls it a "low probability event" for the region, given the support it enjoys from oil prices, diversification of economies and strong underlying economic growth.
However, in a "bullish" scenario, improved sentiments in Dubai property market will be extended to a wider Mena market.
"Improved sentiment on Dubai would be positive for Abu Dhabi, Saudi Arabia and Qatar. Although sentiment is already positive on these three markets, with investors clearly favouring them over Dubai given their very early stage on the growth curve, we believe that higher confidence in Dubai's property market would have a favourable impact on the remaining Mena region."
The property boom in the Mena region began in Dubai three years ago, when the emirate began to promote itself globally as a potential business hub in the Middle East. The boom in Dubai property extended to several other markets across the region from 2006. Prices have risen by an average 60 per cent in Egypt since 2006, and Abu Dhabi property prices are up 52 per cent to date.
According to Morgan Stanley, rental rates in Abu Dhabi have been on the uptrend since 2004, with major increases witnessed from 2007. Rents rose further this year to be in line and in some cases higher than in Dubai. Prices in Al Reem Island saw the highest increases, rising 75 per cent compared to a market average of 52 per cent.
Moreover, Dubai's success in establishing itself as a major service hub, not only in the region but also on a more global scale, has driven robust demand for housing units for the influx of expatriates. The number of expatriates moving to Dubai significantly outpaced the delivery of housing units, creating a severely undersupplied market. Speculative investment added to these fundamental drivers, notably following the opening of the sector to foreign ownership in 2005. Investment in real estate assets became increasingly attractive in view of the high rental yields and rising property prices.
The Dubai story has been replicated in a number of other countries and cities, including Doha and more recently Abu Dhabi. In Egypt, the story is different: property prices were driven by increased demand, due to improved economic conditions, higher purchasing power, especially among high earners, and to some extent speculative investment.
Last month, Standard Chartered Bank said off-plan sales of properties in Dubai were leading to overheating mainly due to "ultra loose monetary conditions".
As a measure to cool the market, the bank had suggested Dubai 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. However, long-term outlook for housing market remained positive. "Excessive short-term speculative activity has been further triggered due to loose monetary policies that have resulted in excessive liquidity in the market with investors seeking to purely leverage from their invested property, especially when it comes to off-plan housing properties," said Marios Maratheftis, Regional Head of Research Middle East, North Africa and Pakistan Global Markets for Standard Chartered Bank.
In the same month, Jones Lang LaSalle said Dubai and Abu Dhabi had moved in the transparency ladder and were currently placed in the "semi-transparent tier" (tier three). "Dubai needs to improve overall transparency levels by introducing property performance indices, make available more information, introduce dispute resolution mechanism and [offer] indirect ways of investing in real estate markets. If they do so, we expect them to be in tier two in 2010," Craig Plumb, Head of Research (Middle East and North Africa) of Jones Lang LaSalle, told Emirates Business.
Besides, Morgan Stanley believes that a hard landing in real estate prices in any of the GCC real estate markets, especially Dubai, would damage investor sentiment throughout the region and would leave demand dependent on real long-term housing needs.
"While we expect these price declines to be limited to Dubai, given the level of undersupply in surrounding markets, we cannot rule out a 'contagion' effect on the Mena property market, as investor confidence suffers."
The report further emphasises that 2009 is the year to watch, with excess planned supply and current negative sentiment. Both may cause a higher than expected negative impact as the demand-supply gap widens in 2010.
"Long-term picture does not look as bad. We see room for possible industry consolidation potentially driven by the 'big' three master developers who have sound financial positions," the investment bank said.
Confidence drivers
Morgan Stanley believes that improved investor confidence about the prospects for the Dubai property market is crucial for the performance of the sector and the wider Mena region. The following are the five potential drivers for improved confidence in the Dubai market:
- Controlled sales launches of new projects may increase confidence in developers' and regulators' views on sector potential
- The market needs a break: slower property price rises, more stability
- The economy continues to grow through successful diversification efforts, leading to a greater influx of expatriates than we currently expect
- Continued low interest rate environment drives higher mortgage penetration. This would have an impact on the banking sector, quality of loans, existing mortgages (especially in high inflation environments) and new mortgages.
- Easing geopolitical risk
Investment bank Morgan Stanley, in a report titled "Winners and Losers in Middle East and North Africa (Mena) Property", took a cautious long-term view on the Dubai market and had a neutral outlook for the Abu Dhabi market.
"The regional property market is in the early to mid stage of a 'super cycle'. Dubai stands out as the most advanced market, with a possible price correction in 2009 driven by oversupply. But, Abu Dhabi, Qatar and Saudi Arabia are likely to remain undersupplied through to at least 2012," it said.
Prices of properties in Dubai have continued to grow well into 2008, despite increasing concerns about a possible oversupply in the coming 12 months. In the first half, prices increased by 25 per cent from December 2007 levels. Although the biggest increases occurred in January to May, price softened in June, especially within the low and middle-income segment, such as International City, the report said.
Although Dubai is the bellwether for the whole Gulf Co-operation Council property market, in a worst-case scenario, Dubai property prices would follow the pattern of Singapore in the late 1990s, when residential prices plunged 80 per cent over an 18-month period, exacerbated by a sharp economic slowdown. However, Morgan Stanley calls it a "low probability event" for the region, given the support it enjoys from oil prices, diversification of economies and strong underlying economic growth.
However, in a "bullish" scenario, improved sentiments in Dubai property market will be extended to a wider Mena market.
"Improved sentiment on Dubai would be positive for Abu Dhabi, Saudi Arabia and Qatar. Although sentiment is already positive on these three markets, with investors clearly favouring them over Dubai given their very early stage on the growth curve, we believe that higher confidence in Dubai's property market would have a favourable impact on the remaining Mena region."
The property boom in the Mena region began in Dubai three years ago, when the emirate began to promote itself globally as a potential business hub in the Middle East. The boom in Dubai property extended to several other markets across the region from 2006. Prices have risen by an average 60 per cent in Egypt since 2006, and Abu Dhabi property prices are up 52 per cent to date.
According to Morgan Stanley, rental rates in Abu Dhabi have been on the uptrend since 2004, with major increases witnessed from 2007. Rents rose further this year to be in line and in some cases higher than in Dubai. Prices in Al Reem Island saw the highest increases, rising 75 per cent compared to a market average of 52 per cent.
Moreover, Dubai's success in establishing itself as a major service hub, not only in the region but also on a more global scale, has driven robust demand for housing units for the influx of expatriates. The number of expatriates moving to Dubai significantly outpaced the delivery of housing units, creating a severely undersupplied market. Speculative investment added to these fundamental drivers, notably following the opening of the sector to foreign ownership in 2005. Investment in real estate assets became increasingly attractive in view of the high rental yields and rising property prices.
The Dubai story has been replicated in a number of other countries and cities, including Doha and more recently Abu Dhabi. In Egypt, the story is different: property prices were driven by increased demand, due to improved economic conditions, higher purchasing power, especially among high earners, and to some extent speculative investment.
Last month, Standard Chartered Bank said off-plan sales of properties in Dubai were leading to overheating mainly due to "ultra loose monetary conditions".
As a measure to cool the market, the bank had suggested Dubai 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. However, long-term outlook for housing market remained positive. "Excessive short-term speculative activity has been further triggered due to loose monetary policies that have resulted in excessive liquidity in the market with investors seeking to purely leverage from their invested property, especially when it comes to off-plan housing properties," said Marios Maratheftis, Regional Head of Research Middle East, North Africa and Pakistan Global Markets for Standard Chartered Bank.
In the same month, Jones Lang LaSalle said Dubai and Abu Dhabi had moved in the transparency ladder and were currently placed in the "semi-transparent tier" (tier three). "Dubai needs to improve overall transparency levels by introducing property performance indices, make available more information, introduce dispute resolution mechanism and [offer] indirect ways of investing in real estate markets. If they do so, we expect them to be in tier two in 2010," Craig Plumb, Head of Research (Middle East and North Africa) of Jones Lang LaSalle, told Emirates Business.
Besides, Morgan Stanley believes that a hard landing in real estate prices in any of the GCC real estate markets, especially Dubai, would damage investor sentiment throughout the region and would leave demand dependent on real long-term housing needs.
"While we expect these price declines to be limited to Dubai, given the level of undersupply in surrounding markets, we cannot rule out a 'contagion' effect on the Mena property market, as investor confidence suffers."
The report further emphasises that 2009 is the year to watch, with excess planned supply and current negative sentiment. Both may cause a higher than expected negative impact as the demand-supply gap widens in 2010.
"Long-term picture does not look as bad. We see room for possible industry consolidation potentially driven by the 'big' three master developers who have sound financial positions," the investment bank said.
Confidence drivers
Morgan Stanley believes that improved investor confidence about the prospects for the Dubai property market is crucial for the performance of the sector and the wider Mena region. The following are the five potential drivers for improved confidence in the Dubai market:
- Controlled sales launches of new projects may increase confidence in developers' and regulators' views on sector potential
- The market needs a break: slower property price rises, more stability
- The economy continues to grow through successful diversification efforts, leading to a greater influx of expatriates than we currently expect
- Continued low interest rate environment drives higher mortgage penetration. This would have an impact on the banking sector, quality of loans, existing mortgages (especially in high inflation environments) and new mortgages.
- Easing geopolitical risk