Dubai Adjusts to a Cooler Real Estate Market

Published in Bloomberg Businessweek, 5 October 2015

The real estate sector is accepting that lower prices may be here to stay

Almost all the main indicators are pointing in the wrong direction for Dubai’s property market these days. Over the past year the sale price of apartments has dropped by an average of 9 per cent and for villas by 5 per cent, according to Jones Lang LaSalle (JLL), a real estate agency. Prices are expected to continue their fall for the rest of this year. Rental values for villas have also been declining, albeit at a slower rate of 2 per cent, while apartment rents have shown a small rise of 1 per cent.

Many working in the real estate sector and beyond are questioning whether this represents the start of a sharp downturn or simply the usual market ebb and flow. Zainab Mohammed, CEO of property management and marketing at wasl Asset Management Group, says that Dubai’s property sector is in a much fitter state than it was prior to the property crash in 2008. “We are witnessing a correction,” he says. “However, the current situation is healthy. Dubai’s real estate market has matured and should be viewed in the overall context of the economic cycle.”

The downward pressure on real estate prices is likely to continue. Investment in Dubai property from foreign markets–particularly Russia and Europe–has slowed due to currency pressures. The slump in the price of oil is hurting demand from within the region also. The slowdown has “dented confidence and applied downward pressure on transaction levels and prices,” says Diaa Noufal, associate partner at real estate agency Knight Frank. “This has led to speculation that prices may soften further over the remainder of 2015 leading some buyers to adopt a watch and wait attitude.”

This is happening in the wake of tighter regulations introduced in late 2013, including a mortgage cap and an increase in transaction fees. These are having a bigger impact than low oil prices, according to Steven Morgan, CEO of Cluttons Middle East, a real estate agency. “What we’re seeing in the market is a general slowdown, which is natural as a result of the legislation and the supply coming on,” he says. “There is a possibility that if oil prices continue to be low there could be an impact on population growth and therefore house prices. You hear that oil companies are starting to downsize and aren’t recruiting, but we’ve yet to see that come through in the market.”

What has been seen is a fall in the volume and value of sales. The Dubai Land Department says the number of unit sales fell from 20,309 in the first half of 2014 to 16,107 in the first half of this year. The value of those sales dropped from 31.9 million dirhams ($8.7 million) to 25.3 million dirhams.

Some property firms are adjusting their strategies to take account of the slower market. Dana Salbak, research manager at JLL, says developers are being more realistic in terms of the scale and timing of their project launches, and some schemes have been delayed. “We see the residential market as subdued, with sale prices softening and rents stabilising as a result of the negative investor sentiment, but also because Dubai had become too expensive,” she says. “Both the government and developers have realised that.”

With many buyers unable to access the higher end of the market, affordable housing–a traditionally underserved area of the market–is seeing increased demand. “Developers are now catering more to middle-income earners who are increasingly putting down their roots in the region,” says Mohammed. “The character of the market has changed [to] one where property is being purchased primarily as a home and not just an investment.”

The shift is seeing some developers look for growth in new markets. Damac Properties, which specialises in high-end developments, is paying more attention to places like China, to supplement its usual markets in the rest of the GCC, India, Pakistan and the UK. “We explore and experiment with new markets all the time,” says CFO Adil Taqi.

Further help from foreign shores could come in the form of the easing of economic sanctions on Iran following its signing of a nuclear accord with world powers in July. Dubai has strong trade links with Iran and is likely to be the first port of call for Iranians looking to buy overseas. The emirate is also an ideal location for international companies looking to access the Iranian market to establish or expand operations. “I think Iran will be as important as any other country of its size and proximity,” says Taqi. “If and when it opens up in the short-term you might see some surge because of the pent-up demand, but that demand will be met very quickly.”

Further falls in the oil price and an injection of new properties onto the market could offset such a boost. JLL estimates an extra 19,000 residential units will be available next year. “There will be a strong level of supply in the market over the next 12 months, which will undoubtedly have an effect on transaction levels and possible further softening of prices,” says Noufal.

The downturn is still a long way from comparison with Dubai’s 2008 property crash. Lenders have not been spooked in the way they were then, according to Morgan from Cluttons Middle East. “In 2008 and 2009 the banks stopped lending,” he says. “That’s not happening now. There is a lot of competition, banks are liquid and they’re still keen to lend.”