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Can the Dubai property market avoid another meltdown? - ASHARQ AL-AWSAT English Archive 2005 -2017
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An image taken from Burj Khalifa, the world's tallest skyscraper, on May 21, 2013 shows part of Dubai's Marina. (AFP Photo/Marwan Naamani)

An image taken from Burj Khalifa, the world’s tallest skyscraper, on May 21, 2013 shows part of Dubai’s Marina. (AFP Photo/Marwan Naamani)

Dubai, Asharq Al-Awsat—Is the Dubai property market setting itself up for another fall?

Analysts differ, but if the numbers are any indication, the second-largest Gulf emirate has come a long way from the property market meltdown that saw housing prices crash by as much as 60% in 2009.

In March of this year, property sale and rent prices in Dubai rose for the 16th consecutive month, according to a report by Deutsche Bank. The report also highlighted that overall prices were up 1.5% from February to March, with the majority of areas in the emirate witnessing an increase. The Gulf emirate has also announced a number of new megaprojects in recent months, including the ambitious Mohammed Bin Rashid City, a planned mixed-use development. Described as a ‘city within a city,’ it will include the world’s biggest shopping mall, over 100 hotels, a Universal Studios theme park, and a public park set to be larger than London’s Hyde Park.

Likewise, developer Deyaar recently announced that it sold over USD 46.3 million (AED 170 million) worth of property at a three-day event in Dubai—an achievement it said “reaffirms signs of strong recovery trends” in the UAE’s property market.

Furthermore, Emaar Properties, the once financially troubled real estate developer and builder of the world’s tallest tower, the Burj Khalifa, recently hinted that it might develop an even taller skyscraper.

This apparent recovery has led to Forbes ranking the Dubai housing market as the second hottest in the world, second only Hong Kong.

So, has the Dubai property market weathered the proverbial storm?

Not exactly. Masood Ahmed, the head of the International Monetary Fund’s (IMF) Middle East department, recently warned that Dubai needed to regulate the pace of its real estate market rebound in order to prevent another boom–bust scenario.

“It is important, looking at the stock of real estate that is going to come into the market, to be careful to ensure that the measures are in place to moderate the pace of growth to avoid any risk of another boom–bust cycle,” Ahmed told reporters in Dubai.

He added: “There are also some big projects being proposed in Dubai, and we think these need to be done in a way that minimizes any financial risk for the government-related entities, particularly any financial liability for the sovereign.”

Many analysts believe that the 2008 crash was caused by Dubai real estate developers using “off-plan sales,” where developers market pre-construction developments to property investors in order to secure better financing terms from their lenders. But in 2008, projects that were purchased before completion were scaled back, an in consequence investors could not get their money back.

That resulted in investors suing developers, including Damac Properties, the largest privately owned property development company in the Middle East and one of the hardest-hit developers during the 2008 property market crash. Ironically, Damac announced in April the launching of a 28 million-square-foot luxury villa and condo project on the outskirts of Dubai, using the same off-plan sales financing model.

But since 2008, a number of regulations have been put in place in Dubai that limit how much of investors’ money developers can use as they reach certain construction milestones. Another law is in the works, which aims to give investors partial refunds when projects fail to meet their deadlines.

Asharq Al-Awsat spoke with the IMF’s mission chief for the UAE, Harald Finger, about what measures can Dubai take to prevent a repeat of the 2008 scenario.

“It will be important to manage the risk of another potential boom–bust cycle. The Dubai real estate market is in a phase of uneven recovery,” Finger said.

He went on to say that aluations have risen quickly over the last year in some market segments, but are still well below their 2007/08 peaks. Should the pace of price increases continue unabated, there is a risk that renewed exuberance could lead to another boom–bust cycle.

A number of policies could be considered to mitigate this risk. Continued fiscal consolidation will be an important ingredient. In addition, the authorities could ensure that execution of the newly announced megaprojects be gradual and structured in a way that strictly limits new risk-taking by the still highly indebted government-related entities. In the banking system, the planned regulations on concentration limits to GREs and emirate governments and on loan-to-value ratios for mortgages will help.

But because the residential real estate market is largely a cash market, other measures could also be considered, particularly if prices continue to surge. These could include targeted increases in real estate fees, which would help limit speculation in the market and also generate revenue in support of fiscal consolidation.

According to the Middle East and North Africa CEO of the commercial property consulting firm Jones Lang LaSalle, Alan Robertson, many of the conditions that led to the unsustainable growth in real estate prices in 2006/07 have returned, which include strong demand from cash-rich overseas buyers, attractive credit terms (in the form extended payment plans for off-plan projects) and discussion about instant profits for those lucky enough to secure units in selected projects that can then be quickly on sold.

In a statement to Asharq Al-Awsat, Robertson highlighted three reasons why his firm believes that the exuberance of the previous cycle can be prevented, allowing the market to shift up a gear without becoming overheated.

First, there remain limitations on the availability of finance. While the UAE central bank has delayed the implementation of the proposed caps on the LTV ratio for residential mortgages until later in the year, there remain constraints on the level of funding available from local banks to finance or purchase real estate in Dubai.

Second, there are high levels of new supply entering some sectors of the market. While not all the 45,000 residential units scheduled for completion in 2013/14 will actually be delivered in this timeframe, there remain significant levels of new supply which will provide investors with choice of completed units and dampen the pressure for price increases for off-plan units.

Third, there are improvements to the legal and regulatory framework, which provide more protection to investors. While the new investor protection law has not yet been formally approved, there are tighter controls on the level of down payments that developers can claim from purchasers prior to commencing construction. Some developers are even inserting clauses into their sale and leasing agreements that require minimum holding periods or further periodic payments, to discourage the rapid on-sale or flipping of units.

According to Robertson, however, it is not all is gloom and doom: “We have definitely seen a return in confidence to the Dubai residential market. The challenge to all those interested in the long-term sustainability of the market is to ensure that this confidence does not lead to undue exuberance. If the market has learned anything from the past decade, it is surely that an extended period of sustained growth is far more beneficial than a short period of unsustainable growth followed by an inevitable crash.”