The good old, bad old days may be back for Dubai’s property market. Once again there are reports of speculators eager to purchase new properties from developers, before quickly flipping them for what they hope will be a healthy profit.

The most recent example came when the local Emaar properties started selling 188 townhouses at its Mira development on 13 April on a first-come, first-served basis. The entire stock was quickly sold out, but some of the properties were just as quickly on sale again through local real estate brokers at a premium.

After several years in the doldrums, any sign of enthusiasm for Dubai real estate will be welcomed by many in the emirate, but there are also concerns that it could quickly translate into irrational exuberance once again. The main questions for the authorities are whether the current upturn in fortunes is sustainable and how they can ensure there is no return to the boom and bust of the past.

Return to past

Alan Robertson, chief executive officer of real estate consultant Jones Lang LaSalle in the Middle East, acknowledges that “there are some worrying signs of over-exuberance in the market”. But he says the high levels of supply should dampen the potential for rampant price rises. Banks and developers are also more wary of fuelling speculative purchases, he says.

According to his firm, prices are now accelerating for residential, retail and office space. Villa and apartment sale prices are now up 17-18 per cent, compared with the same time last year, while rental prices for both are 10 per cent higher.

Average office rents remained flat in Dubai International Financial Centre in the first quarter of this year, compared with the end of 2012, but were up by 4 per cent elsewhere to AED1,690 ($460) a square metre. Although the cost of renting retail space in prime malls was flat at the start of the year, vacancy levels have declined, indicating an upturn could be coming to this part of the market too.

All this is despite a lot of new property being delivered. Jones Lang LaSalle says an additional 145,000 sq m of office space was added to the Dubai market in the first three months of 2013 and a further 1 million sq m could follow before the end of the year. Similarly, the stock of residential and retail space is rising.

The upturn is not happening across the board, however. While prime locations and luxury developments are benefiting, some lesser locations are still suffering from high vacancy rates and falling rental prices.

“For the first time since 2008, all sectors of the Dubai market are in recovery mode,” says Robertson. “But it should be a case of cautious optimism rather than back to boom times.

“The recovery is still applicable only to the best portions of each sector, with conditions remaining tough for large parts of the market, especially for decentralised, outdated or poorer quality projects.”

Other real estate firms in the emirate paint a similar, broadly positive picture. Asteco, for example, says there has been growth in residential and office rentals this year and apartment and villa sale prices are also up. However, it says that office sales have been declining because of a reluctance among some companies to make large spending commitments.

Most market observers are predicting that the growth will carry on throughout the year. “We’ve been through 12 months-plus of improving conditions in Dubai and we’re going to see a continuation of that in 2013,” says Matthew Green, head of UAE research at the US real estate consultancy, CB Richard Ellis.

Property deals

There are some concrete numbers that add weight to the positive predictions. Overall, there were 41,767 property transactions in Dubai in 2012, worth some AED154bn ($41.9bn). That represented a rise of 8 per cent in terms of the number of deals compared with the year before, according to Sultan Butti bin Mejren, director-general of the Land Department, an arm of the Dubai government.

The vast majority of deals were for residential and commercial sales and mortgages, with 31,145 transactions across these areas worth a combined AED38bn. Plot sales were fewer in number, but worth far more on average, with 8,618 deals totalling AED111bn.

International buyers accounted for a significant proportion of the property sales. Land Department figures show that 998 investors from the rest of the GCC spent AED4.8bn on Dubai property last year. A further 2,109 investors from other parts of the Arab world spent AED4.9bn and some 13,573 investors from outside the region spent AED36bn. The largest international source of investments was India, which accounted for AED8.7bn of the total, followed by UK buyers who spent AED5.1bn and Pakistani investors with AED3.9bn.

Such enthusiasm among international buyers indicates that Dubai can still profit from its perceived safe haven status. There are several other related reasons that help to explain the return of confidence to the market.

Tourism continues to be a strong area of the Dubai economy, with visitor numbers continuing to rise. Dubai Airports handled 57.7 million passengers last year, up 13 per cent on 2011. Trade is also expanding. Ports operator DP World says its UAE ports handled 13.3 million 20-foot equivalent units (TEUs) last year, a rise of 1.9 per cent, while freight volumes at Dubai’s airports rose 3.9 per cent to 2.3 million tonnes.

Profits rebound

The renewed confidence in the market is also helping to fuel the profits of the emirate’s largest property developers. Nakheel made a profit of AED2bn last year, up 57 per cent on 2011, and posted a 91 per cent increase in revenues to AED7.8bn. In 2012, the company awarded construction contracts worth more than AED1.4bn, at Dragon Mart phase two, Jumeirah Park and Discovery Gardens, among other sites.

This year, Nakheel says it plans to hand over 3,000 units to customers and it expects to invest AED6.5bn in new projects over the coming three years, including the expansion of Ibn Battuta Mall and the construction of Nakheel Mall on Palm Jumeirah.

Rival developer Emaar Properties also reported strong profit growth of 18 per cent last year to AED2.1bn. Revenues for the year were AED8.2bn, just ahead of the AED8.1bn recorded in 2011. Its plans include a 1 million square foot expansion to The Dubai Mall and an extension to its Arabian Ranches residential development.

As the financial performance of these companies indicate, the residential and retail segments in Dubai are buoyant. That explains the motivation behind some other large developments that are being planned, including Mohammad bin Rashid City being jointly developed by Emaar Properties and Dubai Holding, and the $1.6bn Bluewaters mixed-use island project planned by Meraas Holding.

The challenge for the emirate is to ensure that the recovery now clearly under way does not end up mimicking the boom and bust that Dubai went through before. The authorities do at least seem to be aware of the danger and have been discussing some potential actions to keep demand in check.

“After witnessing the collapse of the Dubai property market in 2008-09, it is clear that the UAE government is reluctant to relive the bubble-to-burst property effect again,” says Richard Paul, associate director of real estate consultants Cluttons Dubai.

The most significant proposed measure is the introduction of lending limits by the Central Bank of the UAE. No date has yet been announced for this to be brought in, but when it does happen it is expected that a national will be able to borrow no more than 80 per cent of the value of their first property, and 65 per cent of a second property. The equivalent limits for expatriates are expected to be 75 per cent and 60 per cent.

Although the limits will be nation-wide, most observers say the main target is Dubai, where the market is much further along in terms of recovery than Abu Dhabi.

“The mortgage law is more aimed at Dubai,” says one real estate executive. “The impact on Abu Dhabi will be minimal. But if we do get any kind of period of recovery there, then you would expect that they would want to be limiting the negative impact of speculation in the market.”

Mortgage impact

However, there is some doubt about whether the mortgage cap will have much impact even in Dubai, given the preponderance of cash buyers, particularly at the luxury end of the market. Where it is likely to have an effect is in the mid market, perhaps pushing people into rental properties.

“If you go down the route of constraining end-users, all that does is force people into the rental market, which will force prices there up even further. You always need to encourage end-users in any market,” says Green.

Ultimately, the central bank may decide not to pursue the idea of a mortgage cap, but the authorities have few other potential levers they could pull, according to Robertson.

“We do not see that there is a lot the authorities can do except perhaps introduce a transfer tax or stamp duty, but we suspect it is unlikely that they would do that,” he says.

Instead, the real pressure could fall on developers to discourage the rapid flipping of properties, perhaps by introducing higher deposits than the current 5-10 per cent of a property’s value that is now typical, or even introducing a mechanism to claw back any profits made from an onward sale before a unit is fully paid for.

How realistic or practical such options are is another question entirely, but if prices continue to rise on their current trajectory and speculators become more active, some solutions will need to be found.