Dubai property market booms again

27 January 2014

Government takes steps to prevent another crash in the emirate

When sales and rental prices plunged by more than half in Dubai’s property crash of 2008-09, few would have predicted the recovery of the market would be as swift or robust as has occurred in the past 12 months.

Fuelled by low interest rates, weak stock markets globally and a desire among many investors to flee unrest in other parts of the Middle East, the emirate’s property sector soared faster than any other market in the world in 2013. That trend looks set to continue in the years ahead following the boost to confidence in the sustainability of Dubai’s economic rebound given by the Expo win.

According to US real estate consultancy Jones Lang LaSalle, residential property prices ended the year 22 per cent higher on average. The rental market also strengthened, albeit at a slower rate. Rents ended the year about 17 per cent higher.

The consultant says the recovery in Dubai’s property market has been broad-based, spanning prime, secondary and affordable locations. It expects further growth in rents and sales prices in 2014, but at a more measured rate. The final quarter of 2013 saw a slowdown in real estate transactions as the market awaited the outcome of the Expo bid, with the main buyers Gulf Arabs interested in land purchases.

Rental caps introduced by the government in response to the boom of 2003-08 have acted as a brake on the home lease market, although the number of tenant-landlord disputes is rising as landlords try to break contract terms and push prices higher.

New developments

As demand for property purchases has risen, developers have delivered an increasing number of residential projects. In the first nine months of 2013, more than 9,000 residential units entered the Dubai market, about 50 per cent more than the number handed over during the same period in 2012, according to Jones Lang LaSalle.

Local developers have also stepped up efforts to restart stalled schemes and launch new projects. Among the bigger schemes to be announced in 2013 was a tie-up between Meydan Group and India’s Sobha Group to build 1,500 villas as part of the multibillion-dollar Mohammed bin Rashid City project.

Meydan is working with another local developer, Meraas Holding, to build real estate schemes on either side of the relaunched Dubai Water Canal project, which stalled in 2009.

Emaar Properties, meanwhile, has launched new projects in Downtown Dubai and near the Expo site, and Nakheel has rolled out new schemes on the Palm Jumeirah.

The sharp rise in prices and the wave of megaprojects being launched has brought back memories of the previous boom, sparking fears of another property bubble in the emirate. The US-based Roubini Global Economics has warned that Dubai’s successful bid to host the World Expo in 2020, combined with the UAE’s recent upgrade by market index provider MSCI to emerging market from frontier market status, could further draw more money into the property sector.

The research group said the influx of investment could lead to a “boom-and-bust” cycle in the coming years. “With the UAE’s dollar peg, there is a potential for bubbles to develop in Dubai, possibly reinforced by Expo-euphoria, with the authorities relying on macroprudential measures to cool frothy asset markets that the central bank may not have authority to reinforce,” the group said.

Looking to avert another crash, the government has enacted several measures to shore up the market, including doubling the property registration fee charged for real estate transactions to 4 per cent, from 2 per cent, to discourage speculators.

Mortgage caps

The UAE central bank has also issued new limits on home mortgages in a bid to keep prices in check. For expatriates, the new rules will limit home loans to 75 per cent of a property’s value for a first investment of less than AED5m ($1.4m). For homes worth more than AED5m, first-time-buyer expatriates will only be able to borrow up to 65 per cent of the property’s value.

For UAE nationals, loans will be restricted to 80 per cent of a property’s value for homes worth less than AED5m, while the cap will be 70 per cent for more expensive properties. For second and subsequent property purchases, regardless of cost, expatriates will only be able to borrow 60 per cent of a property’s value and UAE nationals up to 65 per cent. For off-plan property, loans will be limited to 50 per cent of the value of the property for both expatriates and UAE nationals.

The central bank has also moved to limit the risk for banks by capping the amount they can lend to the governments of the UAE’s seven emirates and their related entities. Under the rules, no individual bank can lend more than 25 per cent of its capital to a single state-linked non-commercial entity, or lend more than 100 per cent of its capital to all such entities plus the governments of the emirates combined. An identical curb has been imposed on lending to commercial state-linked entities.

Looking ahead, UK-based Knight Frank predicts property prices in Dubai will rise by 10-15 per cent this year, which again would be the fastest rate of growth in the world. The consultant expects the market to heat up in the first quarter of 2014, after a brief lull at the end of 2013 due to the new rules and buyers taking a “wait-and-see” approach prior to the Expo 2020 announcement.

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