As 2015 gets under way, there are clear signs that Dubai’s real estate market is stabilising. Following the crash of 2009, when prices plummeted by 50 per cent, values have been recovering.

A strong correction was seen in 2013, when residential rental prices leapt by nearly a quarter. But fears of the market overheating subsided in the second half of 2014 as prices levelled off, rising by only 7 per cent, compared with 24 per cent the year before.

“Dubai’s real estate market is finally stabilising,” says Matthew Green, head of research and consulting at the US’ CBRE, based in Dubai. “The key for the future is that the real estate cycle is becoming less volatile.”

Two halves

Research conducted by real estate analysts identifies 2014 as a year of two halves. According to a report by CBRE, the residential segment experienced a period of stabilisation during the second half of 2014, with average rental rates remaining relatively flat.

A similar positive outcome was found within the commercial real estate market, with prime and secondary office locations witnessing growth of 6 per cent and 12 per cent respectively. Yet this levelling off has come at a time of financial uncertainty, as a result of falling oil prices. While Dubai’s economy has become less energy-dependent in recent years, analysts predict that the emirate may struggle to avoid the impact of dropping oil prices.

“It could actually be good for a market if it causes wider global economic growth. With a drop in the cost of oil and transport, this could improve margins and Dubai could benefit from offering an improved business environment,” says Green. “Generally, there are two points of view on this.”

“Until $40 a barrel, the drop in price is generally covered by the current account deficit,” says Nicholas Maclean, Middle East managing director at CBRE. “Until then, companies and countries are confident the change in price can be managed. How long for, we are not sure.”

Maclean goes on to say he predicts a greater impact on the wider region and other markets, rather than Dubai. “The biggest impact for now will be on the international property market,” he says. “If sovereign funds are limited by reduced revenues from oil production, it will be important to see if GCC property investments in the rest of the region, Europe and North America are reduced.”

Deflationary effect

About 20,000 new residential units are likely to enter the Dubai market in the next 12 months and with demand for affordability likely to continue, this could leave a deflationary effect on sales and rental rates in some areas. The office sector also carries a burden into 2015: single-owner, quality office towers remain in high demand, with limited completions expected in the next year. Over the past few years, authorities in Dubai have been trying to develop and implement a variety of laws aimed at stabilising the real estate sector. The most notable measure has been the mortgage law that was brought into place to limit the amount of credit banks could offer prospective buyers.

The new regulations have caused a slight slowdown in the residential sales market. Research conducted by CBRE and the UK’s Cluttons shows transactions in both the apartment and villa segments decreased in the past 12 months despite rapid growth in recent years. Villa transactions grew, in peaks and troughs, from 210 in the first quarter of 2010 to 730 in the second quarter of 2013, before dropping back down to 250 in the third quarter of 2014.

Apartment sales peaked in the second quarter of 2010 at just below 7,000 before dropping to 1,100 in the second quarter of 2011; they rose to near the 4,000 mark in the fourth quarter of 2012 and were back at 2,100 by the third quarter of 2014.

Confidence boosters

“In 2013, our data shows the 51 per cent growth in house prices was driven by Dubai winning the Expo 2020, the economy rebounding strongly and a sharp increase in global economic confidence,” says Faisal Durrani, international research and business development manager at Cluttons Real Estate. “In fact, many of these indicators were there prior to Dubai winning the Expo.”

The memories of the 2007-08 boom and bust remain fresh for investors and developers alike and it comes as no surprise that the authorities in the UAE took measures on both a federal and emirate level.
One year on from the introduction of the mortgage cap, the market is beginning to assess the impact of the regulations. “Transactions are down quarter-on-quarter,” says Durrani. “Overall, transactions were down 30 per cent, and with villas, it has been more.”

House prices had been steadily rising since 2011. This sustained growth caused the Washington-based IMF to release a statement in 2013, concerned by what it referred to as the overheating of the market.
However, according to Cluttons, sales prices dipped by 0.3 per cent, and rents fell by a similar amount. Masood Ahmed, head of the IMF’s Middle East and Central Asia department, told a news conference on 27 October that risks seemed to have decreased, partly because the Dubai authorities had taken steps to limit speculative buying.

Lacking capital

“Considering now you have to put down 35 per cent on a property worth more than AED5m ($1.4m), people simply do not have that kind of cash,” says Durrani. “We did a calculation last year and if you are buying a property worth AED5m, you need 42 per cent in cash to proceed; to be honest, that is a lot of money for anyone.”

And while this has resulted in overall transactions significantly slowing down, Durrani, Green and other real estate analysts propose that such restrictions can only benefit the sector.

“What these limitations do is make people think twice before buying a property,” says Durrani. “It means banks are protected by the fact that the market is left with serious buyers. This stability is good for the market.”

Most transactions are now people buying their own homes rather than speculating on the market, and the regulations have made it harder for them to buy.

“A lot of end-users are those looking for family homes,” says Durrani. “These are households that would need to seek out a mortgage.” He adds that the requirement of large downpayments in Dubai is putting off many people who simply do not have the capital.

Slowdown good

In saying this, while overall transactions have decreased, Durrani says the market slowdown is good. Growth of 20 per cent a quarter in 2006-07 was simply not sustainable. “As a result, we are seeing prices come down slightly, sitting 18 per cent below the 2007 peak, and this is not a bad thing,” he says.

On the other hand, off-plan sales have continued to perform well despite overall transactions falling.

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 as a result, off-plan units seem to be better value for money.

While this might have previously caused problems for the market due to ‘blueprint flipping’, where investors buy a property off-plan and resell it at a premium, the practice has become far more difficult.
This aggressive form of investment has been dampened by developer attitudes changing. Many developers are self-regulating the ability of a buyer to resell their property.

For example, the local Emaar Properties has restricted resales on its Dubai Creek Harbour units until handover, which is expected in 2018. The firm’s strong reputation has certainly aided the rapid sales, but the sell-out scheme also highlights the maturing attitude of investors, who are taking a longer-term investment perspective.

Maturing market

A report by Cluttons also outlines that the emirate’s market is seeing nearly four out of every five transactions being refinanced once buyers have met developer restrictions, if any, on the transfer of title deeds.

This suggests the appetite to continue investing in the market remains strong, with investors keen to free up capital for a second or third purchase.

Durrani and Green both use this trend as an example of the maturity of the Dubai market. While the Expo has driven confidence, and will continue to, the market has matured into a sustainable one that will continue to grow beyond 2020, they say.

Overall, 2014 has proved to be a good year for the Dubai real estate market. A slowdown in transactions caused by capital requirements has meant banks are better protected and, in turn, growth is more workable.

Looking forward, confidence fuelled by the Expo 2020 win will mean growth will continue, albeit more slowly, as long as off-plan premium resales are limited, capital requirements stay tight and general confidence in the emirate’s economy remains.