Dubai developers reduce debt, risk
Residential and commercial real estate supply is likely to accelerate after 2017,
Several of Dubai's master developers have significantly reduced their debt compared to pre-crisis levels, giving them more flexibility to weather market cyclicality, Fitch Ratings has said.
Fitch Ratings has also revealed that the authorities in the city have also taken action to reduce risk including increasing the real estate registration tax to limit speculation, making developers deposit a portion of construction costs in escrow, and reducing the maximum loan-to-value ratio on residential property purchases.
Market transparency and regulations have improved in recent years and are more advanced than other GCC members', but still lag behind developed markets. Residential property prices decreased by 8.8 per cent during 2016 and 0.9 per cent in the first quarter of 2017, according to data from Cluttons, while average residential property rents dropped 9.9 per cent in 2016 and 4.7 per cent in the first quarter of 2017. This reflects factors including the depreciation of other major currencies against the dollar, diminished purchasing power in neighbouring Gulf countries, and redundancies in the oil and gas and finance sectors, which has also reduced demand for office space.
However, this has not resulted in blanket price declines, with limited impact on prices and yields on prime assets in prime locations. Fitch expects this fragmented performance to continue in 2017. Office rentals will also remain under pressure, although they are still below the pre-crisis peak and little new space will become available in the near term. Residential and commercial real estate supply is likely to accelerate after 2017 in preparation for Dubai Expo 2020 and the ability of the market to absorb this new supply will be a key challenge. More than 56,000 residential units are due to be completed in the next 24 months, but projects could be delayed or cancelled, reducing the pipeline.
"We expect retail property to face similar pressures to residential and office space from currency depreciation, which makes Dubai a more expensive shopping destination, and from the reduced purchasing power of visitors from neighbouring countries due to low oil prices. The potential introduction of VAT in 2018 could create a further challenge for large retailers in Dubai," analysts at Fitch said.
Fitch further noted that Dubai real estate prices and rentals are likely to remain under pressure for the rest of 2017, but performance is likely to be fragmented, with prime assets still showing some resilience while lower-tier properties outside the centre will have price and rental declines. The risk of a property shock is small due to strengthened market regulations, lower bank financing of residential transactions than during the 2008 crash, and robust non-oil sector growth resulting in more resilient residential and office segments.
Our analysis of Dubai Land Department figures shows activity accelerated in the second half of 2016 after a slow start to the year. The total value of deals in 2016 fell two per cent and the number of transactions dropped eight per cent, compared to 2015. Mortgage transaction volumes exceeded cash transactions for the first time since 2012, accounting for 50 per cent of transaction values, but this is still below the post-crisis peak of 65 per cent in 2011.