Dubai’s real estate sector has become synonymous with volatility, therefore, any movement in the market is closely scrutinised as analysts and investors alike continue to fear a repeat of the 2008-09 crash.

Dubai is a sensitive market driven by perception, and with falling oil prices, a stronger dollar and the weakening of the euro and rouble, the market is beginning to suffer amid a lack of previously enjoyed capital inflow from abroad. Internally, the market has also been affected by tighter mortgage laws, increased registration fees and growing concerns surrounding supply and demand fundamentals.

It is, therefore, no surprise that real estate analysts, such as the US’ JLL and the Dubai-based Phidar Advisory, have predicted a minimum 10 per cent decrease in property prices over the course of 2015. They add that the figure may actually be closer to 15 or 20 per cent, if market conditions remain as they are.

Cloudy forecast

While a devastating storm may not be imminent, dark clouds are certainly gathering on the horizon as Dubai’s property market enters a subdued state, following strong growth in 2013 and the first half of 2014.

It’s a good thing, because it means Dubai becomes a more affordable place to live and makes the city a lot more competitive

Craig Plumb, JLL

In a research note published in December, Phidar Advisory foresees a softening of residential sale prices in 2015, with the slowdown starting in the final quarter of 2014. According to the report, the fourth quarter of 2014 saw apartment sales prices fall by 3.3 per cent from the same period in 2013, and villa prices falling by 0.9 per cent.

JLL reports a similar picture and states that the number and value of transactions dropped 30 per cent and 14 per cent respectively in 2014, with further decreases expected this year.

As the outlook for the market darkens, the conditions facing Dubai seem to be more long term than many analysts like to admit.

JLL head researcher, Craig Plumb, tells MEED: “It’s a good thing, because it means Dubai becomes a more affordable place to live and makes the city a lot more competitive. It is only a 10 per cent fall – when it came down last time it was a 50 per cent drop, this is a more modest adjustment.”

Mismatched supply

But it is difficult to project when growth will return to the market with weak oil prices, foreign currency fluctuations and supply and demand economics proving to be longer-term issues. Dubai’s residential sector is set for a period of oversupply with approximately 25,000 units expected to enter the market in 2015. This number is significantly higher than in recent years as many of the projects that stalled in 2008-09 are now being delivered.

Phidar Advisory says that over the next three years, the annual growth in supply is expected to be 4.5 per cent, while demand will increase more slowly, at 3.7 per cent a year.

Most of this supply is expected to come in the form of mid- to high-level income properties, which will create distortions in the market as it is only in the affordable housing segment where demand continues to gather pace.

“There is too much focus on middle- to high-income properties and I think there will be an oversupply in that sector – but when you talk about affordable housing the story becomes a bit more nuanced,” says Jesse Downs, managing director at Phidar Advisory.

“There is definitely an undersupply in the mid- to low-income bracket and, based on the projects we are tracking, there will not be enough delivered for the mid-low segment in 2015.”

Regulatory changes

An important factor behind the slowdown in demand for high-end property is the regulatory changes introduced in the past couple of years that limit mortgage lending, and the increases to property registration fees.

The 2008-09 crash is often blamed on the lax regulatory environment that presided in the years leading up to the crisis and which resulted in inflated prices and facilitated unsustainable growth.

It was only in 2013 that the authorities decided to introduce the mortgage cap. The increase in deposit expectations from the regulators and developers has meant many buyers who might have previously looked at the higher end of the market are being forced to consider options on the lower rungs of the property ladder, and with a limited supply of cheaper options, the market has suffered.

“A lot of end-users are those looking for family homes,” says Faisal Durrani, international research and business development manager at Cluttons Real Estate. “These are households that would need to seek out a mortgage.” He adds that the new requirements for large down payments is putting off many people who simply do not have the capital.

There are also restrictions in the off-plan market, introduced to deter speculation, with developers limiting the ability of a buyer to quickly resell their property.

When a market is overheating, regulations such as these have a calming effect, but inevitably they act as a drag when business is slow.

Foreign vulnerability

External factors are also exerting their influence on the Dubai property market. A stronger dollar combined with a weaker euro and rouble has meant capital flow is more limited.

Russian investors, who according to JLL were the fifth biggest buyers in 2014, have dramatically slowed down their activity as their currency has devalued in recent months. Compounding this is the fact that the dirham is pegged to the dollar, meaning any investment in the UAE has become more expensive.

A weakening euro, meanwhile, has deterred European investors. “As the dollar strengthens, it encourages capital outflow but hinders capital inflow – so Russian or British nationals may take a loss on the sale price of the unit, but actually gain on the currency exchange,” says Downs.

Then, there is the much-reported fall in oil prices. While Dubai is not heavily dependent on hydrocarbons revenues and has seen its diversified economy perform well in recent years, it is vulnerable to the wider federal realities of reduced income and the changes in market sentiment that follow dramatic energy price fluctuations.

These sentiments were translated into the Dubai Financial Market, which suffered badly in December 2014, losing 33 per cent from its 2014 peak on 5 May.

“Oil price sentiment had an impact on the local economy and particularly the stock market – and when that happens generally people feel less well off and invest less in real estate,” says Plumb.

Downs says that while in the short term the impact of oil prices will be based on sentiment, moving forward the situation will have to be monitored closely as “there still is a relationship between oil price and economic growth that affects capital flows”. Dubai may not itself be a hydrocarbon economy, but many businesses involved in the sector around the Middle East base themselves in the emirate.

Uncertainty ahead

While analysts are reluctant to forecast a gloomy future for Dubai’s real estate sector, it is difficult not to project a troubling 2015.

The reality is that property prices are expected to decrease by at least 10 per cent and supply is unlikely to reach equilibrium in the next three years.

In addition to this, with regulations showing no signs of being eased, investors will continue to be forced to seek the lower end of the market. As the developments currently under way are out of step with this demand, an oversupply of luxury units will carry on flooding the city.

The outlook for hydrocarbons prices remains uncertain with many oil majors already cutting jobs and capital spending, while a currency linked with the strengthening dollar continues to make the city a much more expensive place to live, work and invest in.

Analysts are calling the slowdown in the market a period of stabilisation and a necessary stage in the growing maturity of Dubai’s real estate sector.

“We have been saying for some time now, prices were growing too fast. When prices grow at something like 56 per cent, that’s too fast and it was never going to be sustainable,” says Plumb. “The market is currently at the top of its cycle; following two years of very strong growth, we had six months of stability.”

As the market now moves into a negative slide, 2015 is set to be a good year for tenants and those with the cash to buy.