First-quarter reports from property analysts have confirmed that growth in Dubai’s residential real estate market has slowed substantially.

According to the US’ CBRE, the value of residential sales transactions was down 20 per cent year-on-year in the first quarter of 2015, while transaction volumes dropped by 4 per cent. The residential rental sector, meanwhile, was largely stable for the third consecutive quarter.

“The Dubai real estate market saw phenomenal growth until late 2014 and this is a period of stabilisation, not a big decline,” says Safina Ahmad, head of CBRE’s residential agency in Dubai. “It’s a sign of a maturing market not to see double-digit gains every year, and Dubai still offers attractive yields in a global context.”

Stablising market

Examining the figures on a quarterly basis, CRBE says the value of residential sales transactions rose 40 per cent between the fourth quarter of 2014 and the first quarter of 2015, from AED4.6bn ($1.3bn) to AED6.4bn. But the number of transactions also climbed, from 2,573 to 3,896, meaning the average value of a residential property sale fell by 2 per cent. As in the residential sector, commercial and retail rents have stabilised, although demand remains strong.

Several factors are at play behind the cooling market. Lower oil prices mean less capital is entering the market, and the strong dollar is discouraging European investors. While higher retail spending and property investment from Saudi Arabia, India, China and Iran is expected to compensate for this fall in inflows, this may take several years to materialise.

A flood of new stock being delivered across all segments is also weighing on prices. CBRE says 16,000 new residential units entered the market in 2014. According to the US’ JLL, the first three months of 2015 saw the delivery of about 730 residential units across Dubai, and an additional 22,000 units are expected to enter the market by the end of the year.

Key fact

Residential real estate prices are forecast to drop by 10 per cent in Dubai in 2015

Source: JLL

Some 420,000 square metres of new office space was delivered in late 2014, bringing total stock at the end of March to 8.1 million sq m, according to CBRE. JLL, meanwhile, predicts 194,000 new retail units will be delivered in 2015, followed by 373,000 units in 2016.

“With the number of units being developed in all sectors, if they were all completed on time, there would be an oversupply,” says Craig Plumb, Middle East and North Africa head of research at JLL. “But we expect the delivery of some projects to be delayed.”

Regulatory changes

In addition, regulatory changes, including higher transaction fees and mortgage caps, introduced to cool the market when it was overheating, are now having an impact. “It’s partly because prices have become too expensive,” says Plumb. “Investors aren’t coming to the market as prices are not expected to grow, while owner-occupiers can’t afford the higher deposits following changes in mortgage regulations.”

The market slowdown is not uniform across the emirate, with prime residential areas and those with good infrastructure continuing to enjoy strong demand and hold their value.

The disparity is wider in the commercial real estate market. Secondary and tertiary office space rents are expected to decline while demand for prime office space remains robust.

“There is a high vacancy rate for office space at the moment, but for high-quality property in the best locations, trading is going very fast and we are running out of stock,” says Nicholas Maclean, managing director of CBRE in Dubai.

No crash

Analysts are not predicting a repeat of the 2008-09 property crash, as they say the market is adjusting after a period of unsustainable growth. However, the new supply entering the market, combined with faltering confidence, means further declines are projected. JLL is forecasting a 10 per cent drop in residential property prices in 2015. Sale prices generally move ahead of rents, so decreases in that segment are expected to follow.

“It’s not a crash but a natural, positive part of the market after prices rose too quickly,” says Plumb. In 2013/14, residential rental prices leapt by 30 per cent, after having fallen by more than 50 per cent since 2008.

Taking a longer-term view, analysts are predicting a new paradigm of sustainable yet profitable growth rates of less than 6 per cent a year, more in line with those seen in Europe or North America. These reports may indicate the rampant price inflation of the past two years has ended. But there is the possibility of investors panicking in response to the slowdown, disposing of assets and driving rates down faster. This would, in time, lead to volatility.

For 2015, Dubai is a buyers’ market. They are in a position to take longer to make decisions and negotiate as transaction rates fall, while sellers are expected to be more flexible on prices to meet their prospective clients’ expectations.