Palm Jumeirah Island
Is Dubai heading for a property melt down? Recent reports by Morgan Stanley and the WSJ suggest so but we think otherwise.
According to the WSJ, property flipping has not only become a sport of sorts for investors, but a very profitable one at that.
When the Emirate allowed foreign property ownership for the first time in 2002, real estate transactions were estimated to be around AED38.7 billion Dirhams. Last year, this figure rose to AED462 billion Dirhams which relates to US$125.8 billion roughly.
The RERA (Dubai’s Real Estate Regulatory Authority) is looking to crack down on the practice of property flipping in the emirate.
Morgan Stanley predicted that prices will start to fall in the second half of 2009, with a possible drop of 10% by 2010. Just as a comparison, last year there were 245,000 condos in Dubai, according to property consultant Colliers International. By 2010 the emirate is expected to have a supply of 429,000.
But RERA isn’t the only one desperate to curb the “quick for profit sales practices” in Dubai. Developers themselves have started to implement new measures. Investors of Nakheel’s Trump International Hotel & Tower have to wait a year before they can sell their units on the secondary market.
Homes on Palm Jumeirah Island
Should this Worry Investors?
Our opinion is in the negative; firstly Dubai’s phenomenal real estate growth has been a victim of much criticism for several years now with industry pundits predicting a slump as far back as 2005.
Secondly, there is also far less supply than promised by overenthusiastic developers partly due to limited labour and materials. Take major developers, Dubai Properties who are to deliver only 5000 freehold units in 2008. Then in Abu Dhabi, the first delivery of units only takes off in late 2009 and would create additional demand in Dubai.
Thirdly, oil prices drive the performance of Dubai’s property market. When oil prices fell below $10 in 1999, there was a corresponding fall in Dubai real estate. However with recent highs in oil prices hitting the $140 mark and the current unstable political climate in Georgia, high oil prices are now a reality we are all having to live with, in the short to medium term.
Then, the current eight percent mortgage rates in Dubai that are yet to adjust to the recent cuts in US interest rates. Given that the Dirham is pegged to the Dollar, interest rates in Dubai should follow a downward trend thereby making is significantly cheaper to buy property than rent.
In comparison to other global cities, with similar salary levels, Dubai & Abu Dhabi house prices are still cheap in absolute terms according to a HSBC survey of house prices in comparison to per capita GDP. This is a historic anomaly that will be eliminated by price rises.
Remember that six years ago when freehold property ownership was introduced in Dubai it was a market in its infancy without any formal legislation and regulatory infrastructure. Dubai now has mature property laws, state of the art land registry and a pro-active regulatory agency (RERA) embarking on a campaign to clean up the sector.