Speculation or fundamentals? What the Dubai real estate surge really means
“Following a sharp contraction in both prices and volume of transactions in 2009, Dubai’s housing market began to recover very gradually in 2011,” said a recent report from Standard Chartered. “Slowly but steadily, confidence has returned to the market. Q2-2013 marks the fourth consecutive quarterly increase in residential prices. In the past twelve months, residential prices have increased by 38 per cent for apartments and 24 per cent for villas, with rents increasing by 20 per cent and 17 per cent, respectively.
“We look at the drivers of the recent price action, and assess whether the recent price increases are the result of excessive speculative behaviour which could give rise to another bubble. Our conclusion is that, at the moment, the market seems to be driven primarily by fundamentals rather than speculation. Although there is a risk that this could change, it is encouraging that regulators are drafting laws to curb excessive speculation in off-plan properties.
“We examine the rise in rents and selling prices of villas and apartments in different areas this year; uncover how demographics and political uncertainty in the region have been driving the robust performance of the housing market; and present our analysis of off-plan sales prospects, mortgage statistics and regulations, which support our conclusion that the current housing-market rally is in line with economic fundamentals.
“The sharp increases in property prices in 2008 were driven by excessive short-term speculative activity, especially on off-plan properties. For these properties, buyers only had to put down 10 per cent deposits (rather than the full price), so the market became highly leveraged. Many buyers never had the intention (or the funds) to pay the future instalments as they planned to flip the property before any payments were due. This turned the housing market into an unsustainable, highly-leveraged derivatives market. We pointed out these problems in our On the Ground, ’A tale of two housing markets’, published in July 2008. It was therefore no surprise to us that in 2009 there was a sharp correction in housing prices, accompanied by a rapid decline in property transactions.
“Rents bottomed out in 2009 from their 2008 peak, decreasing by an average of 44 per cent between Q4-2009 and Q4-2008. Similarly, residential sale prices were down by 50 per cent between 2009 and 2008. In 2010 the rental decline slowed, with little to no change in villa and apartment rental prices during the year, which had fallen a substantial 32 per cent and 21 per cent between 2009 and 2010.
“2011 marked the beginning of the housing-market recovery, with villa rent and sale prices starting to register positive-sign changes, outperforming the apartment market, which only experienced the same in 2012.
“2012 witnessed a positive uptrend in sale and rent prices, with sale prices improving faster than rents. For sales, villa prices outperformed apartment prices again, rising 24 per cent and 12 per cent, respectively, between Q4-2011 and Q4-2012. Rents increased at a slower rate, with villa rents up by six per cent and apartment rents up by seven per cent between Q4-2011 and Q4-2012.
“In 2013, the tables turned, with apartments showing a stronger performance than villas. In fact, apartments are now selling for 12 per cent more and leasing for 7 per cent more than in Q1-2013, whereas villas are selling for 8 per cent more and leasing for 6 per cent more.
“The strong performance of apartment leasing is pricing out some tenants from more expensive developments, benefiting more affordable areas such as International city, which topped all other areas with an increase in average rental rate of 27 per cent y/y and 11 per cent q/q. Similarly, the top-performing area in the villa leasing market is the Springs, with an increase in the average rental rate of 35 per cent y/y and 10 per cent q/q.
“The residential-sale market’s top performers are the Greens, with a 44 per cent increase in apartment sale prices y/y and 15 per cent q/q; and Jumeirah Village, with a 40 per cent increase in villa sale prices y/y and 25 per cent q/q.
“The housing market is influenced by broader economic trends. Dubai’s economy has experienced solid and sustainable rates of growth over the past three years. The key drivers are logistics, hospitality and retail. This looks set to continue, particularly when it comes to logistics, which contributes 14 per cent to GDP (Dubai Chamber of Commerce and Industry). We expect trade to increase in the years to come on the back of the increased spending plans of most governments in the region, including Abu Dhabi, Qatar and Saudi Arabia. Tourism is also expected to grow at an average of 6.5 per cent per annum between 2011 and 2021, pushing up employment growth for the sector by 4.1 per cent/year, according to a Dubai Chamber of Commerce and Industry study.
“Demand for housing is rising, due to Dubai’s population growth. The city’s population is the second-largest in the country, after the capital Abu Dhabi, and is largely comprised of expatriates. The population increased from 2.0 million in 2011 to 2.1 million in 2012, according to the Dubai Statistics Center. We expect it to reach 2.2 million in 2013.
“Dubai is cementing its status as a safe haven in a region of political and economic turmoil, attracting people from unstable countries around the Middle East/North Africa region, with property-listing agencies reporting an increasing interest from buyers from countries in political turmoil.
“Additionally, school registrations reflect the influx of families as renters and end-users in the housing market. In fact, schools absorbed 10.35 per cent non-Emirati students during the 2012-13 school year, according to the Dubai Statistics Center.
“Improving fundamentals and rising prices are feeding through to improved confidence. This could drive prices further up, with prices and investment feeding off of each other.
“According to the Business Confidence Survey (Q1-2013), led by the Department of Economic Development (DED), 55 per cent of businesses are expecting higher sale revenues in Q2-2013 and 30 per cent are expecting stable sales thanks to rising activity and volume. In terms of capacity expansion, 55 per cent of companies reported a willingness to invest during the next year, and 40 per cent were willing to invest in technology upgrades for the same period. This optimism in Q2 expectations appears to have resulted from a real economic recovery, since 91 per cent of these businesses reported either improvement or stability in business conditions in Q1. More importantly, the survey stated that 98 per cent of businesses planned to either increase (23 per cent) or maintain (75 per cent) their employment count for Q2-2013.
“In 2012, the real estate market’s paradigm shifted with the release of two new laws aiming at increased transparency and better regulation: the Investor Protection Law and the Code of Corporate Governance for Developers, drafted by the Dubai Land Department. The first intended to protect real estate investors from delays in completion and handover and from unilateral changes consisting of violations of terms and conditions by developers. It allows investors to cancel their contracts in these situations and have their money refunded. The second law requires disclosure from developers to investors regarding information about their properties, including alternatives in case of delays. This law defines the responsibilities of developers.
“This commitment towards improving and strengthening corporate governance practices by protecting property rights has helped gain new investors and maintain existing ones. Stakeholders such as home-owners and tenants have regained confidence in the real estate sector, as reflected in the recovery of market prices.
“We expect Expo 2020 to be a meaningful contributor to the sustainability of the housing market, in the event of a positive bid result in November 2013.
“Expo 2020 is a universal exposition which five cities have bid to host: Izmir (Turkey), Ayutthaya (Thailand), Yekaterinburg (Russia), São Paulo (Brazil) and Dubai (UAE). Since Ayutthaya (Thailand) was disqualified, Dubai’s chances of winning have increased. In the event it does, close to 300,000 more jobs could be created with 25 million people visiting Dubai. 90 per cent of the job opportunities would occur from 2018 to 2021, with most of the jobs created in the travel and tourism sector. This indicates a good chance that a high percentage of these will be converted into permanent jobs, which would benefit the expanded economy in the post-Expo period.
“We expect housing-market supply to grow at the same pace as demand, with new projects being launched in a more planned and controlled manner than in the past. At the time of writing, Dubai’s housing market is comprised of 417,900 apartments and 62,000 villas. Residential supply has been growing at an average compound rate of around 8 per cent, with apartments increasing by 9 per cent and villas by 4 per cent (Source: CBRE). By the end of 2013, supply should increase by 19,400 apartments and 3,400 villas, assuming there are no delays in construction schedules. The largest proportion of future stock from 2013 to 2015 will be delivered in the sub-markets of Dubailand (7,900 units); Business Bay (3,800 units); and Dubai Sports City (3,800 units). We expect the city to expand, with a focus on new developments outside central Dubai, in areas to the south and east.
“The key difference between the real estate market in 2008 and in 2013 is off-plan sales. Flipping of off-plan properties was the main reason behind the previous boom-and-bust cycle. Authorities are deploying efforts to ensure that off-plan sales are controlled. In fact, the Real Estate Regulatory Agency (RERA) reaffirmed that it aims to limit the dependency of developers on investors’ off-plan sales proceeds by ensuring developers make a 100 per cent land payment and put down a 20 per cent construction guarantee as collateral.
“Additionally, developers are entitled to attach conditions to sales contracts in order to help prevent speculation and flipping. Some developers define a period of six months to a year before a property can be resold.
“In the next two years, seven new laws are expected to be drafted in a bid to regulate Dubai’s property market and maintain property values. Introducing controls to limit the fast re-sale of property, the laws will focus on setting thresholds for premiums and percentage of completion of projects before they can be sold.
“The land department is also setting the scene for legislation for the Tayseer programme and the Tanmia initiative. The first was launched during the crisis when banks were reluctant to offer credit to developers. Property companies must be registered with the department and have at least 60 per cent of a project complete to benefit from the programme. The second aims to restructure stalled projects so that construction work can resume.
“This does not mean that off-plan sales have disappeared from the market entirely. 2013 uncovered several off-plan releases from major developers such as Emaar, Damac and Nakheel. It is important to note that mortgages play a small role in Dubai’s housing market, as both the mortgage and real estate markets are new. The market is dominated by cash buyers. During the first half of 2013, more than 80 per cent of the apartments purchased in Dubai were bought with cash (Source: Dubai Land department). Real estate mortgage loans soared during the 2008 bubble, increasing by more than a 100 per cent between 2007 and 2008. The recent uptrend has not seen a similar parallel increase in real estate mortgages, which have remained flat to negative since 2010.
“The Central Bank of the UAE announced last December that it intended to cap mortgage loan-to-value ratios. This regulation aims to regulate the market to avoid another boom-and-bust cycle. A final decision is expected later this year; the ratios of any proposed caps are not yet known. The initial caps, circulated in December, announced loan limits of 50 per cent for expatriates and 70 per cent for Emiratis for first-home purchase. Following an outcry from banks, the limits were increased to 75 per cent for expatriates and 80 per cent for Emiratis. For subsequent homes, the ratios would be 60 per cent for expatriates and 65 per cent for Emiratis.
“Since mortgage sales are lower than 20 per cent, we believe that regulating off-plan sales will be far more important than mortgage caps when it comes to avoiding another boom-and-bust cycle.
“The recovery of Dubai’s housing market started in 2011. It has set the scene for a slow, strong and persistent rise in housing prices, pulled by real demand for housing from end users and a steady supply of new developments to match it. The market seems to be driven by fundamentals rather than excess speculation, in contrast to what the market went through in 2008. The outlook of the market will therefore depend on how these fundamentals evolve over time. Right now, we conclude that there are no serious indications of a speculative bubble in the housing market.”
By Isla MacFarlane
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