A burst bubble? Dubai property set to drop in 2015 as currency adds to woes

Published March 2nd, 2015 - 09:22 GMT

Liam Jeffrey was surprised when a couple selling an apartment on Dubai’s Palm Jumeirah artificial island asked the property broker to cut the price by 10 percent just three weeks after they put it on the market.

“They found a property they wanted to buy in London and when they send the money back to the U.K., they make up that difference on the exchange rate alone,” said the 26-year-old broker at Smith & Ken. “They’re not losing anything and that wasn’t the case few months ago.”

Declining currencies in European countries whose citizens are among the leading buyers of Dubai homes are combining with falling oil prices and a tax on foreign property held by Indians to push down home prices in the emirate. A year ago, Dubai regulators took steps to cool a market where home values had been climbing at the fastest pace in the world.

Investor sentiment “can change rapidly,” said Gregg Lemos-Stein, managing director of corporate ratings at Standard & Poor’s. “Buyers will hold off on any kind of activity and wait for prices to fall. That can exacerbate the decline.”

S&P predicts a price drop of 10 percent to 20 percent this year, according to Franck Delage, associate director of corporate ratings for Europe, the Middle East and Africa. Chicago-based broker Jones Lang LaSalle Inc. says selling prices will decline 10 percent and rents slump as 25,000 new homes are added to the market in 2015.

There was little sign that steps to slow the market would lead to declines after home values surged 56 percent in the two years through 2013. The United Arab Emirates’ central bank limited mortgage lending and required larger down payments, and the Land Department doubled transaction taxes early last year as policymakers tried to avoid a repeat of a property bubble in 2008 that caused values to slump by about 65 percent.

“They did the right thing and it had the desired effect because 2013 was pretty ridiculous in terms of price growth,” said Richard Paul, director of UAE residential valuations at Cluttons in Dubai. “Landlords need to lower prices and buyers need to save for deposits. That can easily take 18 months to three years and we may see a subdued market.”

Emaar Properties PJSC, the city’s largest developer, reported an 18 percent drop in revenue from property sales last year compared with 2013.

Falling oil prices are adding to pressure on home values as investors wait to see what effect the decline will have on the market, S&P’s Delage said. Brent crude, the benchmark product that has averaged $101 a barrel since the end of 2009, plunged to about $61.08 as of Wednesday.

Residents of oil-exporting Gulf countries such as Saudi Arabia and Kuwait bought 9.2 billion dirhams worth of properties last year, an 11 percent increase from 2013, data from the Dubai Land Department shows. UAE citizens spent 22.8 billion dirhams.

India’s implementation of a tax on overseas investments may be another drag on the market, Colliers International said in a Dec. 21 report. Indians purchasing real estate abroad with proceeds from domestic property sales are subject to a 20 percent capital-gains tax if they hold the asset for more than three years, according to budget documents published in July.

Indians, the biggest foreign buyers of Dubai homes, spent about 18 billion dirhams ($4.9 billion) in both 2013 and 2014. British buyers are a distant second with purchases totaling 9.3 billion dirhams last year and 10.4 billion in 2013.

At the same time, Dubai’s dollar-pegged dirham is making its property more expensive for investors from the Indian subcontinent, the U.K., Russia and the eurozone.

In the past six months, the British pound lost about 8 percent against the dollar, the euro declined 15 percent and the Russian ruble slumped 42 percent.

“Currency issues are much harder to deal with than other factors,” said Craig Plumb, head of Middle East research at Jones Lang. “There isn’t much the government can do to fix that problem short of removing the currency peg or imposing restrictions on capital.”

Most analysts don’t expect Dubai’s home-price slump to resemble the 2008 collapse. Dubai’s property market is more regulated than it was five years ago with restrictions on speculative development and how advance payments can be spent.

“We are not factoring in the same situation as 2008,” S&P’s Delage said. “There has been some discipline to the market and industry and there are offsetting factors.”

Not everyone agrees that prices will fall this year. Lenet Asatourian, a broker at ERE Homes, said asking prices already dipped as much as 15 percent in 2014, making properties more attractive to buyers.

“This year, we are getting more inquiries than we did in the past six months and we have an equal number of buyers and sellers,” she said.

“Buyers who held off last year as prices surged are now coming back. To me, that signals a maturing market,” she added.

Hussain Sajwani, chairman of Damac Properties Dubai Co. PJSC, agrees, saying buyers from China and Africa increased. Values will probably stabilize after three straight years of gains and rents will grow by less than 10 percent, he said.

Demand will still come from residents looking to own rather than rent and from investors chasing rental yields that beat London, Cluttons’ Paul said. Gross rental yield in Dubai averages 5.5 percent to 6 percent compared with as much as 3.5 percent in central London, he said.

Jeffrey of Smith & Ken said today’s market is a change from dealing with stubborn sellers who overestimated the value of their properties. The Palm Jumeirah home he’s trying to sell hasn’t found a buyer since the owners asked him to cut the price.

“Investors are worried that prices will fall and are simply holding off on purchases until they see which way the wind blows,” he said.


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