Price index cuts tipped to revive investments in Dubai property sector

Price index cuts tipped to revive investments in Dubai property sector

The laws and regulations put in place by the Government of Dubai recently are beginning to transform the local property sector in a way that was deemed almost impossible 6-8 months ago. Market credibility, which had taken a heavy beating in the aftermath of the global credit crisis when developers were unable to meet deadlines due to cash shortages, has been restored to a great extent. In February 2009, the government launched the US$20 billion dollar ‘Dubai Bond' program as part of its long-term financing strategy for property developers. Issued in two phases, the first tranch of the bond worth US$ 10 billion was subscribed fully by the UAE Central Bank. The bond has given Dubai sufficient liquidity to fund its upcoming financial obligations and continue its development program. This was followed by the issuance of Law No. 9 that makes Dubai Land Department the sole monitory authority for purchaser-developer transactions in the emirate.

 No more speculation

Earlier, property developers in Dubai were fully reliant on off-plan sales to finance their ongoing and future projects. During the heydays of the ‘Dubai property boom', the demand for off-plan properties was fostered primarily by speculators who hoped to exploit the spiraling investor interest. But, as the full impact of the global credit crunch began to be felt by the emirate, finances dried up and the off-plan property market virtually disappeared, leading to construction delays and project cancellations. The problems were aggravated by higher interest rates and loan-to-value rate reductions.

However, with the issuance of the Dubai Bond and the subsequent injection of liquidity into the market, construction work on major projects is back on track. In the current scenario, only developers with good financial fundamentals could carry their projects towards completion. This is bound to have a healthy impact on the overall outlook for the market in the coming years, as good financial base and sound legal framework are imperative for long-term accountability. 

Price Cuts, More Investment Opportunities

In its latest survey of house price fluctuations worldwide, Global Property Guide notes a 35 per cent drop in rates in UAE during Q1 2009 as compared to the same period last year (see World-wide House Price Change) and 42 per cent decline over a quarter earlier.

Currently, pricing for Dubai properties is uneven and there are few takers for off-plan units. The sector is now dominated by buyers who are dictating the pricing patterns. Dwindling market demand, an oversupply of units coupled with ‘distress sales' by owners in a bid to raise much-needed liquidity for loan/ mortgage repayments are affecting sale prices adversely. At some communities, distress sellers are even disposing off properties for pre-2006 rates. Foreign/ regional investor interest is presently geared towards ready-to-move-in apartments/ villas or projects that are at least 50 - 60 per cent complete. Prices are now determined by project location, accessibility, quality of construction and the amenities on offer.

However, market analyses by Gowealthy Research and Management Team reveal that demand continues to hold strong in mid-level segments like International City, where prices have fallen by 25 - 30 per cent (Refer to price charts). Vacancy levels at these communities average between 10 - 15 per cent.

With a prices corrected to reasonable levels, Dubai has suddenly become a hotbed of affordable properties guaranteeing high returns in the long-term. According to our estimates, prices could continue to drop till Q3 of 2009 and thereafter register a slight rise in Q4 when consumer confidence would perk up as a result of higher oil prices. Of course, this would ultimately depend on global market recovery.