Dubai property prices set for turnaround in 2018

dubai - Additional investment for Expo 2020 will gradually start to impact the market

Residential prices in Dubai continued to drop in the first half of the year but are expected to pick up in 2018, according to a Q2 report released by Phidar Advisory.

Additional investment into Dubai in preparation for Expo 2020 will gradually start to impact the market in 2018. "Of course, the aggregate impact likely will be tempered because of the reduced role of the private sector in associated projects. The site still needs to be developed and we expect a few other high-priority leisure and entertainment projects to proceed. But, based on what we can see today, this likely will mark a gradual turnaround," said Jesse Downs, managing director of Phidar Advisory.

Attributing the current weak demand to a strong US dollar and weak oil price, Phidar Advisory dismissed the effect of an oversupply weighing down on the sector.

"Some claim this is a supply story, but supply has expanded slowly over the past 30 months," said Jesse Downs, managing director of Phidar Advisory. "The current declines reflect soft demand," she added.

Supply expansion in Dubai in 2014 and 2015 was the lowest in approximately a decade, with both years recording less than 20,000 new homes completed. In H1 of 2016, the new supply completed was only around 2,000 more units than in the same period the previous year. In an average year, 2,000 units will be absorbed in five weeks.

"The strong US dollar is one of the biggest barriers to a Dubai real estate recovery now. Unfortunately, a strong dollar is also usually associated with a low oil price, signifying a double hit to the market," Downs added.

Inflationary shock
A strong US dollar and low oil price hinder job growth and thereby residential occupier demand. Sectors linked to tourism and real estate constitute up to 60 to 70 per cent of Dubai's gross domestic product (GDP) and these sectors face an immediate inflationary shock when the USD appreciates against key currencies, due to the USD-dirham peg.

Meanwhile, low oil price reduces regional liquidity and capital available for investment.

"GCC nationals are responsible for at least a third of all real estate investment in Dubai. A sustained low oil price slows regional economic growth by reducing the liquidity and the capital available for regional financing and investment, which, in turn, slows business and job growth. So, it also reduces direct investment into real estate. This impact is not only felt in the home countries and cities, but also in Dubai, as the regional business hub and the preferred real estate investment market for regional investors outside of their home country or city," explained Downs.

In 2015, foreign nationals purchased over 80 per cent of real estate in Dubai. From that share, 82 per cent was purchased from foreign nationals outside the GCC, most of which are from countries with floating exchange rates.

In Q2, Phidar's Dubai Real Estate Investment Demand Index remained flat. Since mid-2014, currency fluctuations created inflationary shocks for foreign buyers of Dubai real estate. Three currencies have a significant impact on Dubai property prices: Indian rupee, British pound (GBP) and Pakistani rupee. All three have trended downward since 2008.

Brexit caused the GBP to lose 11 to 12 per cent. Since Brexit occurred in the last 10 days of Q2, the impact will be most noticeable in the Q3 results.

Yields
In Q2 2016, apartment lease rates declined 2.2 per cent, while sale prices declined 3.7 per cent, pushing gross yields up to 7.9 per cent. Apartments are a preferred asset for yield-seeking investors because yields are higher and void periods are lower.

Lease rates for single family homes, or villas, decreased 3.6 per cent and sale prices declined 1.1 per cent, which pushed yields down to 4.7 per cent. Although yields rose through most of 2015, they reverted back to 2014 levels in the first five months of 2016. This is because sale prices remained relatively flat, but rents fell considerably. Since the peak in mid-2014, rent decline for villas was more than twice that of apartments. This is because larger, more expensive units now have longer void periods due to affordability constraints.

"The compression of villa yields is unsustainable and should slowly reverse in the coming year," concluded Downs.

- deepthi@khaleejtimes.com