Time to face reality: Dubai passes new regulations to ease realty 'bubble'

Published May 13th, 2014 - 06:56 GMT

A slew of regulations aimed at cooling the pace of growth in real estate prices has begun to peg back rate acceleration in Dubai residential property values, which had shot up by 51 per cent in 2013, research by property consultants Cluttons revealed on Monday.

However, driven by new job creation, rents are unlikely to cool down in the near to medium term, the study said. Following the positive outcome of Dubai’s Expo 2020 bid, there has been a return to a more moderate pace of growth in the emirate’s real estate sector as previously anticipated, Cluttons said.

Helped in part by a sharp turn around in the real estate sector — with the residential market recording its strongest growth in five years — Dubai’s economy grew at a near five per cent clip last year, the property consultant said.

“The economic growth and frenzy in the lead up to the bid announcement, led to strong demand for residential property in 2013 and helped lift average values by 51 per cent during the course of the year,” Cluttons said.

However, in the first quarter, residential values expanded just three per cent after rising by almost six per cent in the final quarter of 2013.

“The implementation of the Federal Mortgage Cap, along with measures such as the doubling of the property registration fee to four per cent, and the ban on off-plan re-sales until handover by some developers, have positively influenced the market’s behaviour. This has been reflected in the gradual slowdown in price acceleration, which we view as a normalisation of the residential market,” said Steven Morgan, chief executive of Cluttons Middle East.

According to most analysts, mortgage caps are translating into a sharp slowdown in the number of property transactions.

Although rental value growth has also slowed, average rents are not expected to fall.

Rents still currently stand at 16 per cent above this time last year, with values driven up by the rapid rebounding of the economy and increased levels of job creation.

“The increased size of deposits means that property options available to mortgaged buyers is likely to be restricted to the lower end of the property spectrum and has already had an impact on transaction volumes. We expect the transition from rented property to owner occupation to take longer as deposits are amassed, which is translating into a slowdown in the number of deals being recorded,” said Morgan.

The report reveals that the reduction in end users in the market also creates an opportunity for institutional investors to swoop on the market while prices stabilise and domestic demand ebbs to an extent.

“We have already begun to see the return of institutional activity, which will help to further diversify the city’s long term demand base, following the Dh6.9 billion investment by Chow Tai Fook Endowment Industry Investment Development in the purchase of serviced apartments, high-end residences and two five star hotels at the Dubai Pearl scheme. We anticipate there will be more headline investment deals as the year progresses,” Cluttons said.

A report by the Institute of International Finance said a surge in the UAE property values probably would not lead to an asset-price bubble because credit growth remains relatively modest.

According to Knight Frank, property prices in Dubai climbed 35 per cent in 2013, fuelling worries of another price bubble.

The International Monetary Fund has called for stronger measures to curb real-estate speculation in Dubai to prevent an unsustainable price rally.

Across the UAE, foreign cash buyers continue to buoy real estate market, and transaction volumes do not yet show signs of slowdown, Arqaam Capital has said in a report.

However, the price escalation in 2013, which is four times the annual salary hikes, means that the UAE property is slowly approaching affordability limit: a 20 per cent rise in prime prices takes 15-20 per cent of addressable population out of pocket, Arqaam said.

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