Property Speculation Reduced in Dubai's Residential Market

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According to research by Cluttons, Dubai's real estate regulatory changes including the UAE-wide Federal Mortgage Cap and Dubai's doubling of Property Registration Fees last year, which was aimed at curbing speculative activity, have together gradually and successfully contained a market that was in danger of overheating with the level of transactional activity now dramatically reduced.
 
Cluttons' Spring 2015 Dubai Residential Market Outlook report, highlights the upward creep of project completions, coupled with the slow motion impact of new real estate regulations and the general dent to sentiment as a result of the slowing rate of house price growth, in a sentiment-driven market has weighed heavily on the emirates residential market, with the 2015 outlook remaining somewhat mute, with villas expected to bear the brunt of price declines. The first quarter of the year saw overall home values edge downward by a further -0.8%, leaving average prices -0.5% down on this time last year and 19.4% below the Q3 2008 historic peak.
 
Steve Morgan, Chief Executive at Cluttons Middle East commented: "The Federal Mortgage Caps have been in place for over a year now and the impact on the villa market has been particularly pronounced. The anniversary of the game changing Federal Law has passed relatively unnoticed, however this has had a positive, but powerful influence on the level of transactions. During 2014, just under 1,300 villas changed hands, down 52% on 2013. The number of transactions during Q1 2015 was down 36% on the same quarter last year."
 
Cluttons' report highlights, that the total amount of upfront equity required for the purchase of an AED 5.5 million villa has gone up from 20% to 42% with the introduction of the mortgage caps, which means that households aspiring to purchase have to make a substantial increase in provisions to make the transition from rented accommodation.
 
"The sustained growth in rents over the past 18 months has exacerbated the challenges of amassing a deposit, while the cost of living has continued to rise. There may be some respite on the horizon as the dirham continues to strengthen, driving down inflation," Morgan added.
 
Cluttons' international research and business development manager, Faisal Durrani explained, "Reflecting on the performance of the market over the past 18 months, it's clear we have rushed through Dubai's second property cycle and are now in a place where the market as a whole is rapidly searching for a new floor. The regulations have been instrumental in reigning in the market and the slow motion impact has been gradually amplified over the past 12 months. The result has been a much more subdued market, with the risk of another rapid correction being carefully managed away, leaving the market about a fifth below the last peak in 2008 and much more stable than in 2008/09. There of course remain pockets of outperformance, where prices are holding steady such as on the Palm Jumeirah or Dubai Marina, for instance."
 
With villa vendors on the back foot and properties showing signs of "sticking", a substantive price decline by a handful of distressed sellers has been recorded by Cluttons, but these remain rare. Elsewhere, without downward adjustments, vendors are only able to drum up limited interest. A new 'sweet spot' appears to be emerging around the AED 3-3.25 million mark, where transactions are still taking place.
 
Benefits of affordable housing
 
According to Cluttons', the proposal by Dubai Municipality to introduce mandatory affordable housing quotas for all new residential developments in Dubai is long overdue and is expected to bring a wide range of benefits to the emirate, while driving further maturity in the market.
 
Morgan commented: "The issue of affordability has been one that has been quietly bubbling away in the background for some time. With the introduction of the Federal Mortgage caps and the doubling of property registration fees, we saw genuine end users in the market forced into a holding pattern as they attempted to make the transition from rented accommodation to owner occupation. The surging rents, driven by the exceptionally strong underlying demand, which was linked to the robust economic growth, meant that household finances were coming under tremendous pressure on several fronts."
 
A new proposal by Dubai Municipality is aimed at those on monthly incomes of between AED 4,000 and AED 12,000, says Cluttons. With these households being placed in a better position to control their rental outgoings, the speed at which deposits can be amassed will no doubt rise, therefore aiding property ownership aspirations.
 
"The introduction of this asset class in Dubai is likely to bring a surge in institutional investor interest, especially if the affordable quotas are reasonably high. The creation of this new residential investment class should then pave the way for partnerships between local developers and large multinational finds, effectively catapulting the emirates real estate market to the next stage of its evolution," said Morgan.
 
According to the report, despite this sluggish outlook, demand is expected to remain very stable in the medium to long term, particularly as the government continues to drive economic diversification, which will fuel job creation levels.
 
Currency fluctuation threat
 
Durrani commented: "On a more macro level, the strong dollar (and therefore dirham) environment is a double edged sword, which must not be under estimated. While lower inflation from falling import costs will benefit the domestic market, sterling, Indian/Pakistani rupee and Euro continue to lose ground to the dollar, making a Dubai based investment significantly more expensive than this time last year; which is particularly important given that a large proportion of residential investment originates from Indian, Pakistani and UK nationals.
 
However with the IMF still warning of a low period of global growth and the Greek financial woes yet to play out, things may change rapidly on this front in the second half of the year, so this remains a downside risk high on our watch list".
 
Rental market softens further
 
Away from the sales market, residential rents have also continued to slowly soften. During Q4 2014, rents dipped by -1.9%, leaving the total rental value growth last year at a marginal 0.4%.
 
"With the RERA Rent Index system yet to evolve into a complex rental matrix that factors variables such as views, size of units, age of the building, etc., it will continue to lag reality, leaving tenants somewhat constrained by a rental index that does not fully reflect market conditions", said Durrani.
 
Cluttons' report highlights that with supply levels continuing to edge up, landlords are growing wary of the threat of longer void periods due to the fear of an increased level of choice for tenants. This may trigger a period of "off-grid" deals, where landlords and tenants agree to rents that are not in sync with RERA's recommendations.
 
Durrani however pointed out: "We're expecting just over 12,600 units to come to market by the end of next year and a further 15,800 completions are scheduled between 2017 and 2018. At this stage, the risk of an oversupply appears to be minimal, given the expected growth in population of just under 400,000 over this period. The expected economic growth and rate of job creation should mean that supply and demand remain fairly well matched, at least in the short term, barring any surprise external economic shocks."
 
Morgan concluded: "It is worth noting that 4,000 of the units expected in 2017/18 will be in the form of affordable homes on the former Dubai Waterfront site, as announced by Nakheel. What the additional supply does mean however is that the supply-demand equilibrium is likely to be maintained as the population grows in tandem with the rising number of completions, suggesting that any strong turn around in rental value growth is unlikely, given the current projections".
 
With the sources of current and pipeline tenant demand remaining robust and underpinned by the growth in the new jobs, linked to both economic growth and diversification, and the reverse migration from Sharjah, Cluttons expects the current stabilisation in rents to persist.