Crunch-time ideal for property purchases in Dubai

Crunch-time ideal for property purchases in Dubai

Across the world volatile economic conditions are altering investing patterns, forcing property investors to make long-term instead of short-term commitments. The ongoing global liquidity crisis has crippled international stock markets and indices, making real estate an extremely viable investment choice. In Dubai, property has always been in demand, given the scale of development activity and the resultant growth of population, leading to an astounding spurt in prices in the last 2-3 years. But, as prices soften due to the crunch, new purchase options are emerging for investors in Dubai.

Dubai has always beckoned local and international investors because it is a major trade hub linking the markets of Asia, Europe and Africa. Besides, the emirate, a base for manifold industries and the world's largest man-made port at Jebel Ali, affords plenty of opportunities for investment diversification which is imperative for better returns and risk management. As a result of high investor demand, office occupancy costs in Dubai are continuing to beat sluggish economic conditions created by the credit crunch, as they rise faster than global inflation. According to a survey by CB Richard Ellis in 2008, Dubai office rents are the tenth most expensive in the world. The average price per square foot for offices in 2008 in Dubai was US$128.45, as against Mumbai at US$210.97. An office for 30 people, based on 100 square feet per person, now costs US$309,600 per year in Dubai, up from about US$294,960 per year in 2007.

But the liquidity crisis that commenced in Q4 of 2008 and the resultant ‘distress sales' have ushered in a price slide, making this an opportune time to buy properties in Dubai. The tightening of credit rules by local banks has further contributed to the price correction, by effectively ending borrowings for speculative gains. Emirates NBD, the largest bank in the UAE, has hiked the minimum salary limit for expatriates seeking a mortgage by more than 200 per cent and doubled the threshold for locals. Currently, the bank is only considering expatriate customers for a home loan if they earn a minimum of AED 25,000 (US$6811) a month, up from a previous limit of AED 8,000 (US$2180). Emiratis must now earn AED 20,000 (US$5450) a month, up from AED 10,000 (US$2725). A market that is temporarily bereft of buyer competition is good news for investors. Properties in certain areas of Dubai are selling for 30 to 40 per cent less than the 2008-end rates. In some cases, they are being sold for their NAVs, which mean 2007 starting rates, even 2006-end prices.

According to market studies, some 32,000 residential units will be delivered in Dubai in 2009, which when taken into consideration with the expectant 7% fall in population, will lead to an availability surplus in the market. Thus, if one were to comment on the present condition of the Dubai real estate sector, the problem for the buyer is not a lack of choice, but rather the difficulty of predicting whether prices may fall even further.  But it is interesting to note that the ongoing correction applies mostly to higher-end properties like villas and townhouses. Demand for smaller units like 1 and 2 bedroom apartments in communities like International City and Discovery Gardens is still holding strong and consequently their prices have not dropped notably.

At present, the only moving properties in Dubai are those that are negotiating distressed prices. But, the spurt in the number of available properties is set to be short-lived. As developers begin to "re-assess" their projects, the upcoming supply of property would be restrained leading to a "significant growth in value in the future." That, together with high rental yields and an increasingly transparent legal system makes "Dubai perfect for long-term property investments." According to the Egyptian Investment Bank, EFG-Hermes, Dubai's external debt amounts to US$60.6 billion.  But, preliminary reports by the IMF expect the UAE's total government debt to come down to 9.4 per cent of the GDP by the end of 2008, compared to 10.6 per cent in 2007. It is clear that the Dubai property sector, one of the world's most promising, is going through a period of consolidation. Yet, as the bailout packages become effective later this year, hiking oil prices, a market recovery and corresponding rise in property values could be expected in 2010.  In short, it would be advisable to take advantage of softening market prices in 2009 and wait patiently for long-term gains.