Property prices set to fall in ’09

DUBAI —Residential property prices in Dubai will begin to fall only in 2009 with supply constraints —due to a slower pace of project handovers being witnessed this year — delaying the predicted price drop by one year, EFG-Hermes said yesterday.

By Issac John (Deputy Business Editor)

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Published: Wed 26 Sep 2007, 9:00 AM

Last updated: Sat 4 Apr 2015, 11:44 PM

The fall in prices, almost one year later than initially expected, will start following a peak in property prices in the second half of 2008, said a revised forecast by EFG-Hermes.

At the end of last year, the forecast predicted rents and property prices would begin falling in 2008.

The latest report by the bank said the residential property market continues to mature “but with supply set to outstrip demand in the next 12 months, a decline in prices is now not expected until 2009.”

“The market has witnessed a far slower pace of completed project handovers so far in 2007, with only 11,000 units or 20 per cent of the expected 57,000 units coming on stream, meaning that supply continues to lag behind demand,” said Sana Kapadia, Research Analyst at EFG-Hermes.

This supply lag has led to revised housing unit supply forecasts for the next three to four years, with estimates of 25,000 housing units for the whole of 2007, 64,000 in 2008, and 68,000 in 2009. On the other hand, demand for property continues to rise with population growth. Based on the assumption that the population of Dubai will rise to almost 1.9 million by 2010, up from 1.4 million currently, demand now calls for 45,000 to 50,000 new units per annum, the report pointed out.

“Supply in the residential property market is and will continue to be constrained in 2007. We predict that the peak year for supply will now be 2009 — meaning that the market is unlikely to see a price decline before this occurs,” the analyst explained.

“We expect a rise in average prices of 10-15 per cent in 2007 and a rise of 5-10 per cent in 2008. Following a peak in 2H2008 as more supply hits the market, prices will start to decline again in 2009, with a cumulative decline of 15-20 per cent by 2011.”

The extent of the price correction that EFG-Hermes forecasts in 2009 will depend primarily on the pace at which new units are delivered and the price elasticity of demand.

“In terms of rental prices EFG-Hermes expects the decline in the pace of rental rate growth observed in the first eight months of this year to be sustained into early 2008,” said Kapadia.

The report noted that over the past nine months, the residential property market in Dubai has continued to mature, with strong signs of change felt in a lower rate of price appreciation, improvements in the legal framework, an increasing level of activity in the secondary property market, and a reduction in the number of new project launches.

The report said demand for housing continues to rise as the population grows.

“We maintain our assumption that the population of Dubai will rise to almost 1.9 million by 2010, up from 1.4 million today, implying a CAGR of 7.9 per cent. We have revised our demand forecasts, which now call for demand of 45,000 to 50,000 units per annum.”

Maintaining that a price correction will encourage stronger demand, the investment bank said there will be excess supply in 2008. “We see this being absorbed by the pent-up demand of earlier years (2005-2007). We believe that the extent of the price correction that we are forecasting in 2009 will depend primarily on the pace at which new units are delivered, and the price elasticity of demand. We believe that demand is price elastic, and that once prices begin to come down from their highs, this will increase demand.”

Last year, EFG-Hermes predicted that prices would start falling in 2008 with supply outstripping demand with some 139,000 units due to be handed over in Dubai in 2008 against an annul demand of 40,000-50,000 residential units.

However, a recent study by the Middle East Economic Digest (Meed) found demand for property would continue to outstrip supply until at least 2010 Dubai’s property boom is set to continue until the end of the decade.

Meed said by 2010 an estimated 175,000 new residential units would be available, but demand is still set to outstrip it, with an estimated 181,000 units required by that year. The two key factors behind the sustained demand are the continued population growth and falling occupancy rates.

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