This time last year many observers predicted that a recovery in Dubai’s property market would be in full swing by the time we entered the closing stretch of 2017. With less than four months to go before the end of the year, it’s fair to say we are now in the home straight. So has the widely anticipated rebound materialised?
“A clear direction on recovery is yet to emerge, with only a few locations consistently marking an upward movement on prices, primarily in the mid-market segment in established locations,” says David Godchaux, CEO of real estate firm Core Savills.
“We are cautiously optimistic on mid-market sales prices for the next three years, with some districts that have seen a price recovery of 5-10% over a span of 12-18 months since January 2016. As we had predicted, the prime market performance is still lagging behind with further marginal room for price softening, although we are close to stabilisation.”
Some communities in the lower market segment have witnessed the beginning of stabilisation over the past six months, Godchaux says - although he attributes this more to a mechanical rebound, than the beginning of a healthy recovery.
Rental depreciation since early 2016 is yet to have a significant negative influence on the sales market, however it does slow the recovery of sale prices. Core Savills concludes that rentals would need to soften by another 25%-40% to have a significant negative impact on buyer demand from both investors and end-users.
“We are not yet there,” Godchaux says. “We had predicted further rental drops throughout the summer months, but expect rents to start stabilising in core locations by next year, while predicting potential room for softening in the secondary locations.”
Are we building too much?
With new projects announced on a weekly basis, anyone keeping an eye on the Dubai property market might conclude there is an ongoing surge in supply in the residential market. If true this spells good news for the construction sector. But is it really the case? And, if so, is it likely to last or is there a danger of oversupply as some commentators have predicted, potentially leading to another downturn?
Well, not quite. There are two important elements to remember when discussing this question, Godchaux says. Firstly, actual delivery numbers have typically been very far from the announced numbers, consistently over the past few years. Secondly, there is no single residential market in Dubai. On the contrary, there are different market segments which are reacting to different demand drivers and seeing very different supply figures, he says.
Over 6,600 units were delivered in first half of 2017 while 11,200 units are expected in the second half of the year, making a total of 17,800 units expected to be delivered this year. However this figure is only around half the 36,000 units that were announced by developers for the full year.
“This large discrepancy between the announced and delivered stock has been a historical trend in Dubai,” Godchaux says. “This has in fact helped developers to address oversupply concerns by aligning demand and delivering products at realistic prices, aiding absorption - albeit in the mid and prime segments. We expect deliveries to slow down in Q3 and pick up pace again during and after Cityscape in September.”
The vast majority of units anticipated to be delivered by 2020 will be below the AED 1.2mn ($326.7mn) price point, Godchaux says. While he expects some of these units to be well absorbed, he is concerned about a large share of this stock being acquired primarily by investors looking at achieving high yields and short-term profits on the back of difficult mortgage access for the lower income bracket end-users – who are forced to stay in the rental market, and hence contribute to yields that are ‘artificially high’.
“This is paradoxical because this large pool of end-users should be the primary target demand for these more affordable units, and would constitute a much healthier and more stable long-term ownership,” he says.
Another factor that has driven some to comment on oversupply affecting sale prices is the detrimental effect on secondary sales for a few apartment districts. However this is less an oversupply issue and more the fact that the off plan property market is cannibalising market share from the resale segment.
“Existing owners trying to sell their ready-properties, contend with highly competitive and attractive payment plans offered by master developers (for instance in Downtown Dubai and few properties in Dubai Marina). On the bright side, it demonstrates the market’s high appetite for quality new stock, provided that it is well priced.”
Nevertheless, two other effects could soon become detrimental, Godchaux says. Firstly, attractive entry prices (sometimes below resale values) are decreasing the district average, leading some commentators to misinterpret this statistical bias as a market trend of price drop. Secondly, existing owners have sometimes found themselves having to reduce the asking price in order to compete with cheaper off-plan stock. This effect does actually create a trend of decreasing prices, across the district, in a price war scenario and a no-win situation for developers too in the midterm.
Where will the demand coming from?
Clearly there’s no lack of investor appetite for off plan real estate in Dubai right now. But who is going to live in these properties? Is the current tepid level of economic growth really going to attract enough people to live in Dubai and therefore substantially increase the pool of potential occupiers?
The short answer is yes, says Godchaux, because most of the stock is coming in the lower price segment, which appeals to the largest pool of existing (or new as the economy continues to expand) pool of occupiers. Although this also potentially represents a higher systemic risk, as lower income demand is structurally more volatile and likely to over react to external shocks.
“I think the question is not only about the total size of the occupiers’ pool, but also the structure of it, or the proportion of investors versus owner-occupiers,” he says. “A balance is essential for this more volatile lower-end of the market to be healthy in the long term. And we may potentially be creating the premise for significant problems in a few years, if end users are being kept away from the market and forced to rent.”
The situation has improved since 2016, with more attractive payment plans allowing a portion of occupiers to switch to ownership. But for many renters, switching to ownership still remains a out of reach – and this is illustrated by the paradoxically low level of yield compression in the past 12 months in more affordable districts (coupled with unique rental level resilience in these locations). Although yields have contracted, they are still northwards of 7.5% for most apartment neighborhoods, and up to 9% -10% for some lower-end districts, illustrating that these units are still primarily today investors’ products. Solutions could potentially come from adjusting mortgage regulations to mitigate these effects or creative paths to ownership, like rent-to-own programs, Godchaux says.
The Expo 2020 effect
In anticipation of the event, outer areas of Dubai are seeing the most number of supply deliveries, although only a few buildings in Jumeirah Village, Dubailand and Al Furjan gained traction from price conscious buyers. With the city expanding south/southeastwards toward the Expo 2020 site and the extension of the Dubai Metro, we will continue to see more developments emerge, Godchaux says. However, these may require more time to be established and to reach higher levels of absorption.
Core Savills anticipates a gradual split of the investors market into two main strands. On the one hand there will be longer term investors, looking at core locations such as Dubai Marina, Downtown Dubai, the Palm and Emirates Living, on the back of yields that are still relatively high but likely to continue compressing. On the other side, a growing pool of investors appears to be emerging, one that is looking at less expensive outer areas offering higher short-term returns, particularly in the lower mid-market and affordable segments.