Vol:51 Jan/09

2009 - Make or Break for Dubai property market?

As the global financial crisis shows no signs of abating, 2009 is turning out to be a critical year for Dubai's economy, and its property market. The global economic slowdown has weakened demand for commodities in international markets, leading to a subsequent fall in energy prices, from a peak of $147 a barrel in July 2008 to below $40 in mid-December. The worldwide price crash has had its reverberations in the UAE and Dubai, the Middle East's most important business hub. Construction delays, uncertain stock markets and banks downgraded by ratings agencies are signs that the region has not escaped the impact of the meltdown and Dubai's Budget 2009, for the first time in its history, shows a deficit of AED 4.2 billion. A study by Economist Intelligence Unit (EIU) projects a real GDP growth of only 2.8 per cent for the UAE compared with about 6 per cent in 2008.

Declining growth spells ambiguity for Dubai's business and property sectors as it may weaken demand for space resulting in a surplus of available properties. But it certainly does not signify an end to the emirate's development plans. The overall economic pall has prompted the government to enact some tough measures in a bid to stimulate growth. The 2009 Dubai Budget and the newly released rental index are indications that some realistic changes are in store for the Dubai's once booming property sector. 

More than 45% or AED 17.05 billion of Budget 2009 has been earmarked for infrastructure and transport projects, mostly those by RTA, Dubai Ports Authority, Dubai Municipality and airports. The government is heightening spending on its infrastructure investments which will generate employment in years to come. However, a drop in oil prices in 2009 could mean further delays, but backed by a substantial pool of internal funds, the growth and funding of key projects in the UAE is less likely to be affected than in other parts of the world. 

Does continual development bode well for Dubai's property industry? Yes, it does. But due to the ongoing liquidity crunch, businesses in the emirate have been affected leading to lay-offs which could affect the region's population growth. According to a new report by the Swiss bank, UBS, up to 8 per cent of Dubai's population could move out in 2009. And this could be a major stumbling block for the local real estate market, leading to a further softening of prices and rents.

Some 32,000 residential units are scheduled for delivery this year in Dubai. This, supported by adequate checks and controls by the Real Estate Regulatory Authority (RERA) could very well herald the permanent transition of the local realty sector into an end-user market.

Gross Rental Yields - A Comparison

Country Buying Price (USD/sqm) Gross Rental Yield Rental Income Tax Capital Gains Tax China $2,697 4.36% 5.00% 4.66% India $11,413 4.02% 8.11% 16.95% UAE $71,480.00 5.50% 0.00% 0.00% UK 19,094.00 € 4.12% 0.00% 31.24% USA $14,898.00 4.37% 30.00% 12.50%

(Source: Global Property Guide)

RERA's Rental Index that was rolled out in the second week of January 2009 reveals rental rates across Dubai; rather than an regulator, it is a useful reference tool by means of which investors can levy rents based on official statistics. In the light of softening rents, there are indications that rates could fall below what has been cited in the index. Hence, the index is to be updated every 6 months. Close on the heels of the rental guide, RERA is also expected to publish a Property Index to regulate the prices of residential and commercial properties.

Thus, 2009 promises to be a year of making for the Dubai property industry as RERA and government strive to elevate the sector to international standards and attract long-term investments. A modest growth is also expected this year as developmental activity in the emirate progresses in tandem with Strategic Plan 2015. This assumes significance, especially in the light of a World Bank report which predicts a speedy economic recovery in 2010, beyond 2009, depending on how quickly oil prices rebound to $50-60 a barrel.  As the effects of the recession start to wear off, a revival is well within reach by late 2009 when development plans gain momentum, which in turn will ignite demand for space.

 

Dubai property rent hike ceiling fixed at 20% Integral clause in the new decree issued by His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Prime Minister of the UAE and Ruler of Dubai to freeze rents in Dubai stipulates 20 per cent as ceiling for landlords while increasing rents. Using a series of "mini rent caps" via a rent slab, the index prevents rents from rising too high. For example, if the rent is 36 per cent to 45 per cent below the average market rate for properties with similar specifications in similar areas, the rent can only be increased by a maximum of 10 per cent, according to the decree. However, it is worth noting that the index was compiled using figures from the second half of 2008, and since then, rents have dropped much further. The index states that the average rent for a two-bed apartment in Mirdif falls somewhere between AED 120,000 to AED 130,000. But currently, tenants in two-bed apartments in Mirdif are paying around AED 90,000.