In 2016 Dubai`s property market has seen a correction of rental prices in all sectors and segments, a tendency which seems to persist throughout 2017, primarily caused by increased new property delivery during a time of subdued demand on the back of macro-economic factors. In this article I will be going into some more detail highlighting the market dynamics at play and what to expect in the mid-term from an investor`s point of view.
Affordable Property – Good Cause, Bad Timing
As I have explained in a previous article, it has been a while that the government has recognized the availability of affordable property as a key driver of the economic development of Dubai. The negligence of this sector in the past due to developer`s profitability considerations therefore had become an issue jeopardizing the emirate`s long-term growth.
Coherently, the government has taken steps to incentivize property developers to shift development activity towards the lower end housing segments. With historically low interest rates, a strong external value of the USD-pegged Dirham and low oil prices, many developers seized the opportunity and took advantage of these favourable circumstances, conceiving and building properties catering to those sub-luxury segments that had practically been unserved before.
As the beforementioned factors were often coupled with smaller built-up areas as well as inferior locations, the result were tremendously cheaper offerings, predominantly available for off-plan purchase.
As the years 2015 and 2016 saw an economic climate influenced by dampened consumer income and expectations, these offers – greatly enhanced by attractive payment plans – were faring well with investors and end-users alike and came to completion for the first time in substantial numbers by the end of 2016.
Off-Plan Properties Delay Onset of New Cycle
As a survey by Core Savills reveals, the first quarter of 2017 saw a number of 3.100 finalized units, many of which account for the mid- to low-quality segments. Core Savills expects some more 15.000 units to handover until the end of 2017, a figure already greatly reduced compared to previous projections. The injection of substantial new supply of affordable property during times of comparatively low demand brings about pressure on rental prices throughout the segments as higher-income families are also looking to save on rents during times of reduced if not absent pay rises and prolonged economic uncertainty.
Whereas initial predictions suggested that the remainder of 2017 would see another 36.000 units be delivered, historical evidence and the developer`s commercial logic facing the present market weakness hint at the lion`s share of these units be held back for handovers in 2018 and beyond.
As is the case with all asset classes, product due for a future delivery also competes to a limited extent with the spot market. According to this logic, the reduced prices for off-plan properties have also limited the achievable prices for ready property, thereby prolonging the present sideways movement of Dubai`s property market as a whole.
In light of the above one could take the negative view that the abundance of new product is for now delaying the onset of the recovery, in contrast to which I take the long-term view, clearly seeing this emergence of an enhanced and more diversified (especially towards the lower end) product base as a crucial prerequisite for a more mature and deeper market.
Roundup
A likely persistance of subdued rental price dynamics throughout a term of 12-18 months will act as a catalyst for Dubai`s resident- and economy growth. As we have witnessed in the past, spikes in supply will not only lead to more overseas expats arrivals, but also provoke (net-) movements of residents of neighbouring emirates to Dubai. An already slightly increased hiring activity and upward-pointing business confidence are to be further strengthened at a later stage by a substantial increase in fiscal spending pre 2020.
Several factors enabling cheap new product (low interest rates, low land prices, low construction costs) are presently subsiding, thereby pointing towards higher prices in the mid-term for off-plan properties (all else being equal).
Geographical growth of the emirate makes centrality become increasingly relevant. This in turn should drive prices of properties in excellent and good locations on an above-average rate at the onset of the new cycle.
The yield compression and increase in transaction volumes witnessed simultaneously clearly indicate that there is increased hunger for properties at the present price levels, with investors allegedly taking advantage of good opportunities prior to the next upward movement gaining steam.
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The author advises institutional investors about property transactions and handles property portfolios in Dubai since the year 2007. Should you have comments or inquiries, please contact the author on author@property-blog-dubai.com.
