The Ups & Downs Of The Dubai Property Market
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It has been a turbulent time for the Dubai property market over the last few years. When I arrived in Dubai in late 2012, the market was booming. Buyers were putting down deposits without even setting their eyes on units. Prices were increasing on an almost daily basis. It was an investor’s dream. “Flipping” was rife, with units changing hands (at least in principle) 3 or 4 times in as many months. I had not seen anything like it.
So what has changed since 2012? What has happened to the market? Has the bubble well and truly burst? Are we witnessing another crash as seen in 2008? What does the future hold for the Dubai property market?
It is well-documented that housing prices fell drastically in Dubai following the economic crisis in 2008-2010; with prices said to have dropped by over 50%. By 2012 however, Dubai did see a strong resurgence. International investment played a key role in driving this forward, with Indians, Pakistanis and Brits investing heavily in many areas. There was also a significant increase in spending from Arab countries such as Jordan, Egypt, Syria, Lebanon etc – the so-called “Arab Spring” was in full effect. Dubai was considered a safe haven for investment away from uncertain economies and government instability back home.
Sales transactions, and indeed prices, increased significantly throughout 2013; almost doubling in some areas. Average rental prices also flew up at disproportionate rates, in many cases rising higher than wages. Many tenants/buyers were being priced out of areas such as Dubai Marina and Downtown Dubai, and were moving to more affordable suburban areas, such as Jumeirah Village, Dubai Sports City, IMPZ etc. Prices and sizes were and still are better there, with tenants and investors getting more for their money in these “secondary” locations. Improvement in infrastructure and amenities in these areas also played an important role it must be said.
Unfortunately, however, what goes up will of course inevitably go down. The market was in real danger of “overheating” [source: CBRE], with growing fears of a recurrence of the earlier issues witnessed in 2008. The experts appeared to be right. Things were untenable.
In an attempt to slow the market down and prevent another crash, the government stepped in and introduced some important measures which are still having a significant impact on the market today.
On the rental side of things, an index calculator was introduced, governing the increase in rents meaning landlords could no longer simply hike up prices to whatever they deemed appropriate.
Also stronger regulations were placed on landlords for evicting tenants. A 12 month notice period (to be served by official means – registered post or Notary Public) must be given and only for a few accepted reasons – the main ones being that either the owner (or direct family member) wishes to use the property for their own personal use or the owner wishes to sell the property. A rental committee has since been established to reside over any disputes and penalties are imposed on any owners who are found to be in breach. All of this helped to slow things down by preventing landlords from evicting tenants or increasing rental prices disproportionally.
For sales, property registration/transfer fees doubled overnight; increasing from 2% to 4% in November 2013. A mortgage cap of 75% was introduced; meaning buyers could only borrow up to 75% and would therefore need to pay 25% + 4% transfer fees in addition to 2% agency commissions to their brokers. This had a significant impact on villa sales particularly.
Also greater restrictions were placed on Power of Attorneys. A Power of Attorney for selling must now be specific to the particular property and Power of Attorneys themselves are no longer permitted to receive sale funds on behalf of clients – payment must be by manager’s cheque as per the name(s) registered on the Title Deed.
For off-plan sales, transfer fees when using a Power of Attorney are now 8%, a measure introduced to prevent owners from “flipping” or “selling on Power of Attorney”. In other words, to prevent owners from giving POA to a buyer (to sell the property) without registering the unit and paying their 4% registrations to the Dubai Land Department.
In my view, these measures have been successful in doing what was intended and indeed needed. They have slowed the market down to a sustainable level as well as safeguarding the interests of property owners, investors and tenants.
2014 Onwards – The “Correction Period”
The market hit its peak in early-mid 2014 and things have slowed considerably since. We are currently seeing an ongoing “correction period”. There has been a significant decrease in property transactions since mid-end of 2014, as well as a considerable drop in sales prices, with estimations being at around the 20-25% mark.
Other important factors are also playing a major role. The drop in oil prices has meant that much of the earlier investment from oil-rich countries such as UAE, Iran, Saudi Arabia and Russia has depleted. Further EU sanctions and recession in Russia has meant much of their investment in Dubai has all but disappeared. Many GCC nationals are now investing in the UK property market, particularly in London, in hope of a more sustainable investment and increased capital appreciation and return on investment. Add to this, the fall in the rate of the GBP against the USD (to which the AED is pegged), making investment in Dubai a much more expensive proposition for would-be UK buyers.
As if the above wasn’t enough, and perhaps somewhat ironically given the circumstances, construction in Dubai is ongoing at an ever-increasing rate. It is difficult not to notice a building site in Dubai or at least see a crane blocking the view of the Marina or Downtown skylines. New developments are expected to reach between 20,000-25,000 this year. One can only imagine the number by the time of the Expo 2020!
At the very basic level of supply and demand, this will only slow things further and push prices down even more. There is more supply than demand. It is as simple as that. There are and will be more units available providing greater options to buyers, who it must be said, are becoming smarter with their investments.
What’s Next For The Dubai Property Market?
Well, in my view, the market will continue to correct itself over the coming year or so and we may see some further drop in sale prices – although I do not expect to see such a drastic fall as in 2008. It is certainly a buyer’s market now and this is likely to continue well into 2016. Rental prices have fared slightly better but we are seeing a drop there too, with current estimates being around the 3% mark in the 2nd quarter of 2015. There are some reports of rental increases in certain areas so all hope is not lost.
The good news is that high rental yields are still available with many locations offering up to and over 10% return on investment. An example of this is Damac’s Lakeside project in IMPZ, where a studio apartment can be bought for around AED 350-380k and rented at around AED 35-38k per annum. Not a bad proposition perhaps? Other areas such as Discovery Gardens, Jumeirah Village, Dubai Sports City and International City are also proving to be popular options as good investments given their excellent returns on investment.
Off-plan investment has and will also continue to be an attractive option for many buyers, due to the staged payments and competitive payment plans on offer. Some Developers at least appear to have learnt from their mistakes and now build in phases. The Dubai Land Department has also put measures in place to safeguard interests, insisting that all Developers have a registered Escrow account established before they can sell off-plan units. This provides a much more secure environment for investment in off-plan property.
A Committee for Cancelled Projects has also been established at Real Estate Regulatory Agency (RERA), which specialises in the liquidation of real estate projects and aims to settle rights and release refunds to clients on projects that have been cancelled. Work has already begun on this with a list of cancelled projects being released in January this year. There does appear to be some hope of recovery for those unfortunate investors however this is likely to be a rather difficult and long-drawn process.
What about the re-sale market? There are still buyers out there but only when the properties are listed at the correct (realistic) selling prices. It is the job of a good real estate broker to guide his/her client and educate them on this. Prices are not the same as a year or so ago so owners should bear this in mind when listing their properties for rent or sale. The current favourable exchange rates for European owners may help to soften this blow in some way however.
We are looking at a correction period that will be of benefit long-term in providing a positive and sustainable future for the Dubai property market, away from the mistakes we have seen previously. In all honesty, the market was well overdue a correction. The rapid increase in prices from 2012-2014 was unsustainable and it was looking more and more like getting into the realms of 2008.
The market will hopefully then stabilise once more, the prices will level off, rather than continuing to fall and we may just see another wave of investment leading up to the anticipated Expo 2020.
The Dubai property market certainly does work in peaks and troughs but perhaps this is why we are all still reading and talking about it…
[NB the author of the above article is an LLB Bachelor of Laws graduate from the UK and is the Managing Partner of Your POA – Dubai (www.yourpoadubai.com). Your POA specialise in representing national and international clients as Power of Attorney in Dubai for a wide range of property related matters; from Property Handovers from Developers and Title Deed Registrations to Sales and Purchases. If you need a Power of Attorney or have questions on any property related matters in Dubai, please email [email protected] or call Philip on +971 52 832 7420]