The real estate market is in essence an ongoing bet on supply, demand and confidence and the interplay between those elements. For developers and buyers, the trick is to get the timing right so they make the most of the good times but avoid the worst of the downturns. For regulators, it is to prevent the swings in the market getting out of hand.
It is something that many in Dubai got spectacularly wrong in the past decade. The effects of the recent crash are not completely in the past — there is still a lot of debt to pay back — but the market is once again picking up. Old projects are being dusted down and new schemes planned. The question is whether Dubai will blindly stumble into the same problems as before, or whether it has learnt enough from its recent history to avoid another damaging bust.
To date the signs are that the authorities, chastened by their past failures, are more determined to keep things in check this time. Towards the end of last year, the Dubai Land Department doubled the real estate transaction fee from 2 percent to 4 percent and the Central Bank of the UAE imposed caps on how much mortgage lenders can offer borrowers.
For buyers, it has meant a substantial rise in upfront costs. According to property consultant Cluttons, someone buying a AED5.5 million ($1.5 million) villa in Dubai had to provide an initial AED1.1 million, but that figure has now more than doubled to AED2.3 million. Of the two measures, the higher transaction fee is probably the more significant for the market as a whole, given that up to 75 percent of property deals are in cash and so remain unaffected by the mortgage cap.
The changes seem to be having an effect. Property prices rose as much as 50 percent in 2013, but the pace is slowing this year. Real estate consultancy Jones Lang LaSalle (JLL) says residential prices rose 10 percent in the first quarter and a further 6 percent in the second quarter. That slowdown is no bad thing, says Craig Plumb, head of research for the Middle East and North Africa at JLL.
“The residential market in Dubai has recovered very strongly in the past few years,” he says. “There are some signs of overheating in the residential market and that is leading to a lot of speculation about whether the market is growing too quickly. Certainly it is our view that the increase in residential prices over the past year has definitely been at an unsustainable rate.”
The slowdown may not just be because of the government clampdown, however. Plumb says the issue of affordability has also been important.
“Two things have resulted in a market slowdown: one is the government regulations, the other is the fact that prices were just becoming too expensive,” he says. “You can’t really say how much is due to the government and how much is due to natural market dynamics.”
Helping with that changing dynamic is the fact that the initial buzz surrounding Dubai’s Expo 2020 win has eased somewhat. When the hosting rights were awarded to Dubai in November, many sellers tried to exploit the situation by ramping up prices, but there was resistance from buyers.
“The effect Expo 2020 had at the end of last year was to create in some vendors false expectations of what their property was worth,” says Victoria Garrett, head of UAE residential at property firm Knight Frank. “This lead to buyers’ and sellers’ expectations not being aligned and a lot of unrealistic asking prices. This has started to correct itself.”
Despite all this, prices may still be growing too fast for comfort. In July, the IMF warned that further action would be necessary if real estate prices continued to rise rapidly. Others in the market agree.
“The government is clearly making inroads in its overall objective to stabilise the market and reduce speculative investment,” says Ziad El Chaar, managing director of local developer Damac Properties. “While these measures have seen more end-users entering the market, there are further steps the government could take to ensure the market doesn’t overheat in the future.”
What these extra measures might be remains to be seen, but the government could increase transfer fees again, or introduce a sliding scale so that fees are higher if a property is re-sold very quickly. There could also be more restrictions on off-plan sales, which is a particular area of concern. According to credit ratings agency Moody’s Investors Service, recently launched projects are being traded at premiums of between 5 and 30 percent. It says developers are increasingly marketing projects with lax payment plans.
Developers insist they take the issue seriously and some have imposed their own restrictions on the re-sale of off-plan properties.
“Emaar has also introduced several regulations to promote market stability and to minimise the adverse impact of heavy speculative practices,” says a spokesperson for the company, which ranks as one of the region’s biggest property developers. “Real estate agents can no longer resell off-plan properties of Emaar until the unit is completed and handed over. Similarly, Emaar has restricted all investors from transferring or re-selling their units until 40 percent of the total value of the unit is paid.”
The Washington DC-based Institute of International Finance says it does not believe Dubai’s real estate market is in bubble territory. It points out that despite the rise in prices the increases in credit growth — a key feature of asset bubbles — remains relatively modest. And it adds that the price-to-income ratios for both Dubai and Abu Dhabi are still below their 2008 peak and remain much lower than in many other global cities, such as London, Moscow, Istanbul, Beirut and Madrid."Although there has been an increase in residential valuations since 2012, we feel concerns that Dubai’s real estate market is entering a bubble territory are off the mark,” says Mustafa Pooya, chief commercial officer at Select Properties.
Other financial industry figures also say that, for now at least, concerns about a bubble are misplaced.
“Although there has been a significant surge in real estate prices in Dubai and Abu Dhabi, the prices so far do not point to another real estate bubble,” says Kris Babicci, chief executive officer of Dubai-based Commercial Bank International. “The government has already put in a number of safeguards to more closely control the real estate market and deter speculators. The property markets in both Dubai and Abu Dhabi are benefiting from new job creation, favourable government policies, and increased liquidity. Moreover, the UAE’s status as a safe-haven continues to attract investor interest.”
Indeed, Dubai’s safe-haven status could enhance the market in the near future. With regional stability deteriorating, thanks to conflict in Libya, Syria, Iraq and elsewhere, Dubai’s appeal to regional investors is only likely to increase. The risks are not simply a matter of prices climbing too high, but also of too much being built. One area of the market where that is arguably already the case is the commercial office sector. “The office market is oversupplied,” says JLL’s Plumb. “The vacancy rate is around 25 percent, which by international standards is very high. The recovery [in the commercial real estate market] is very piecemeal. There probably won’t be a general recovery soon.”
Other observers tell a similar tale. Demand may be strong for well-designed, high-spec buildings, but overall the market is flat. According to property consultancy Asteco, there was no significant growth in office sales in the second quarter of this year and leasing activity was also slow — with no growth at all in some key areas of Dubai such as the Dubai International Financial Centre, Sheikh Zayed Road and Tecom.
The final months of this year are likely to see further, different tests of market sentiment towards the real estate sector, with a number of companies expected to list locally.
The largest is Emaar Malls Group, the shopping centre subsidiary of Emaar, which could be floated on the Dubai Financial Market (DFM) this month. When it happens it will increase the market’s capitalisation by 10 percent, according to Kuwaiti financial services firm Markaz. On a rather smaller scale, Damac is also considering listing locally. Having made its debut on the London Stock Exchange last year with a listing of global depository receipts (GDRs), it is now encouraging these investors to swap their GDRs for shares traded in Dubai.
The terms on offer appear generous. When Damac initially sold its GDRs, each was equivalent to three ordinary shares in the company, but it is now offering just over 23 ordinary shares in exchange for each GDR. The company declined to comment on the reasons for such a huge jump in the conversion price.
A third developer, Meraas Holding, has also been linked with a possible IPO.
If these listings prove successful others may follow. However, the attitude of investors to the real estate sector may have been dented by the events at local construction giant Arabtec this summer.
In May, rumours began circulating about a rift between the company’s high-profile chief executive Hasan Abdullah Ismaik and one of its largest shareholders, the Abu Dhabi government-owned Aabar Investment. Aabar subsequently reduced its stake in the firm and Ismail also resigned. The Arabtec share price lost 61 percent of its value in June alone, wiping out almost $3.9 billion of value in the process, according to Markaz. The following month the shares recovered by 63 percent, on the back of a cost-cutting exercise and positive second quarter results.
Whether there has been any long-term damage to investor sentiment remains to be seen. Damac’s El Chaar insists that “Arabtec is a unique situation that has no real bearing on the broader industry”, but others say it has had a wider impact.
“The ongoing issues involving Arabtec have impacted confidence, with people reacting to the drop in the stock market and as a result speculating whether there was going to be a correction in property prices,” says Knight Frank’s Garrett. In any event, the problems at Arabtec do not appear to have dented the preparations for the annual Cityscape real estate exhibition, which opens on 21 September. Organisers of the event say there will be 25 percent more exhibitors this year compared to last.
Market sentiment is being boosted by the ability of some property firms to deal with their debts and post rising profit results. On 25 June, Nakheel said it would complete the early repayment of its entire AED7.9 billion in debt by August. Some of the debts did not fall due until 2018, but getting them off its back now allows the company to finally put the tough years behind it.
In the first half of the year, the company made a net profit of AED1.85 billion, a 54 percent rise compared to the same period last year. It’s full-year profits for last year of AED2.57 billion were about 27 percent higher than the year before.
Many other companies still have significant debt owing and, for some, their liabilities may increase rather than reduce in the coming years. Some $8 billion in infrastructure investments are due to be made in advance of Expo 2020 and London-based research firm Capital Economics says a lot of that is due to be financed via bank loans. Few in Dubai will quibble about the price though. The Expo is the sort of grand event that defines the emirate, and should cement its burgeoning reputation as a global hub for tourism, trade and logistics.
Down the road in Abu Dhabi, the property market is rather less buoyant, although still growing at a healthy rate. Overall residential prices in the city have increased 20-25 percent over the past year and the authorities have taken steps to boost demand rather than suppress it. Late last year, the city’s rental cap was removed, allowing property owners to lift prices above the previously sanctioned 5 percent. In addition, all local government employees must now live in Abu Dhabi, which is boosting demand further.
Such moves are having an impact, but growth is rather fragmented. Asteco describes the second quarter as “a period of consolidation with lower levels of transactional activity and more conservative, yet arguably more sustainable, levels of rental and capital appreciation”.
It says sales prices increased by 4 percent from the previous quarter, while rental prices rose by up to 7 percent. Similarly, office rental rates for better quality properties were up 3 to 4 percent during the quarter.
These trends are expected to continue in the near-term, according to property analysts. “The residential leasing market is improving and has seen stronger rental growth in certain sections of the market,” says Matt Dadd, real estate director for Abu Dhabi at Knight Frank. “Rents are expected to continue to rise in Abu Dhabi for new projects and existing schemes that have all the modern-day amenities. Older secondary buildings and locations will not witness price growth.”
As in Dubai, profits at some key companies are also rising. Aldar Properties, which merged with Sorouh Real Estate in June 2013, saw its profits increase in the second quarter to AED506 million, up 12 percent from the previous quarter. In April, the company launched three residential developments with a combined development value of AED5 billion.
In Doha, there is a similar trend evident, with villa rental rates rising by 9 to 22 percent over the past year, depending on the area, according to Asteco. It says affordability is becoming an issue, with demand rising for smaller properties as residents look to control their spending.
The commercial market in the Qatari capital, meanwhile, appears fairly flat. Office rents have not risen by more than 2 percent in the most sought-after areas during the past 12 months, while some high-profile locations such as West Bay have actually seen prices decline.
Although these other cities may not be as active as Dubai, they can still learn from the trends impacting their more vibrant neighbour. As Plumb points out, what happens in Dubai tends to be repeated in other markets.
“Dubai is the bellwether in the region,” he says. “It’s the first market to go through the cycle, so what happens there tends to happen in other markets a bit later. The crash and the recovery happened in Dubai before it occurred in Abu Dhabi, so there is a strong line of reason to say what is happening in Dubai now will happen in Abu Dhabi in about 18 months’ time.”
That once again raises the question of whether Dubai is heading for another bust. It is easy to be drawn into the self-justifying narratives that generally surround a growing market, but given the price trajectory it seems all but inevitable the emirate’s authorities will have to introduce even tougher regulations if the market is to be kept on a sustainable footing. Whether they will be willing and able to do everything that is required is unclear.
In any event, it is not just local residents and developers who will be watching. Authorities in other cities around the region will also be keeping an eye on whether their counterparts in Dubai are able to prevent another property crash, if only so that they don’t get drawn into another downward spiral too.