Yield-seeking buyers defer home purchases

Dubai - Prices linked to fluctuations of foreign currencies

Dubai property prices are linked to the fluctuations of three foreign currencies, says Phidar Advisory in its Q3 mid-quarter residential research note.
"Unsurprisingly, the key currencies are the Indian rupee, British pound and Pakistani rupee. Currency trends may help us to understand and forecast local property prices," says Jesse Downs, managing director of Phidar Advisory.
Historically, Indian, British and Pakistani investors have topped the list of foreign buyers of Dubai real estate. Therefore, unless there is a shift in fundamentals of these currencies or shift in the fundamentals of Dubai real estate (especially supply, demand and risk), there is unlikely to be a near-term rebound of Dubai property prices.

Sellers holding out for a rebound of prices may have to wait, possibly up to three to four years or more.
Meanwhile, there has been a very low propensity for international real estate investment into Dubai. The depreciation of the Russian rouble has kept away Russian investors from the Dubai market.
Phidar's Dubai Real Estate International Demand Index (REIDI) fell significantly in the first half of the year, driven primarily by currency fluctuations. In H1 2015, the midpoint exchange rates for all currencies included in the REIDI are down against the dollar compared to 2014, except the Chinese yuan and Hong Kong dollar.
"Demand from Chinese investors has certainly grown over the past few years. But, it is unlikely to substantially offset the lower propensity for capital flows into Dubai real estate from India, the UK and Pakistan," Downs told Khaleej Times.
Sustained low oil prices could also weigh on Dubai property prices. If oil remains low through 2016, the market could start to feel an impact through slowed economic and job growth, possibly starting in 2017, says the research note.
Though the summer of 2015 has been quiet, there is capital waiting in the wings, searching for yield. However, buyers are holding out for higher yields than sellers are willing to accept, so transactions are at a stalemate. Aside from a few distressed sales and exchange rate-motivated sales, market activity is minimal, the Phidar Advisory note adds.
In H1 2015, apartment transaction volumes were up three per cent compared to the same period in 2014, but transactions for villas were down 3.2 per cent compared to H1 2014.
Apartment lease rates decreased 0.4 per cent, while sale prices decreased 2.7 per cent, pushing yields up to 7.4 per cent. Lease rates for villas decreased 1.3 per cent and sale prices decreased 2.6 per cent, which pushed yields up to 4.8 per cent.
"The increase in yield is a positive and necessary trend in Dubai real estate," says Downs. "Especially in the context of global volatility, this is part of a healthy and necessary, market correction."
The analyst predicts that real estate supply and demand fundamentals in Dubai will remain relatively stable in H2 2015.
"However, the one factor that can cause short-term volatility is inventory. In a bull market, investors often hold properties off the rental market in order to sell quicker. However, in a bear market, property owners are more likely to add their unit to rental inventory.
"So, even if total supply remains unchanged, the rental market can vacillate. As investors recognise the low probability for short-term recovery, rental inventory likely will expand, causing rents and sale prices to decline."
- deepthi@khaleejtimes.com