The Dubai real estate market is a complex market. Why is that the case?
Prices in Dubai reached a peak in 2008. Then the bubble burst as the world economy had its chain jerked and that correction hit Dubai hard. There was a massive down turn in prices and many people suffered. It is estimated that prices in Dubai dropped as much as 50% from 2008 to 2010. Some projects were put on hold; others have never been resurrected. Investors suffered particularly if they had borrowed on the assumption that once the building was completed, they could rent the property for what was now looking like an unrealistic figure. Even worse, there was a tremendous lag before many of these properties were built.
That was six years ago. Now, many projects have either reached completion or are nearly complete and the real estate landscape is changing but not becoming clearer. Two articles in Arabian Business Online, May 2014, blur the picture. One article states that Select Property, a real estate company, has reached record levels in the first quarter (Q1), and another states that residential property prices have slowed.
It seems that massive sales in the Dubai Marina by Select Property have boosted their sales. Other real estate companies have reported nearly 200% increases in Q 1 sales as well. If you are involved in selling, that is great. But is it sustainable or are we looking at another bubble? I have tended to believe that if something looks to be too good to be true, then it probably is in fact too good to be true.
Actually, last year may have been unusual in Dubai as sales rose for two main reasons. Firstly, following the announcement that Dubai had won its bid for Expo 2020, there was increased interest in property as speculators considered the developments that would need to take place in Dubai over the next six years and the numbers of people that this development would bring to the area, all needing housing.
Secondly, some people may have wanted to buy property before the mortgage caps came into practice. These caps mean that the amount of money that can be borrowed when buying a property is limited to from 60% – 80% depending on the nationality of the purchasers and whether or not it is a second home (Carvalho, 2013). Emiratis can borrow more than foreigners.
In many ways, the Dubai real estate market, coming as it did out of nowhere, grew up with little regulation, and even when regulations began to be put in place, there were often ways around them. So the implementation of governmental rules and regulations could put some purchasers off getting involved. But will it be enough to control speculators?
According to Gulf Business On-line, the “value of real estate transactions in Dubai jumped 53 percent last year, to more than 236 billion dirhams ($64.3 billion). Selling prices for residential property rose by about a third in the first three months of 2014 compared with a year before, prompting the IMF to warn of a possible bubble” which is clearly something to be wary of.
The IMF has voiced concern several times lately about the way the housing market appears to be heating up again leading to fears of another bubble. The measures to reduce borrowing through caps on mortgages were welcomed by the International Monetary Fund (IMF) as a means of keeping borrowing at a moderate level. But, it is worth keeping in mind that as Dubai moves towards Expo 2020, the situation could change more rapidly than is ideal.
Also, it is not yet clear whether or not the caps will have the desired impact in a country where many properties are bought by speculators looking for quick profits when they ‘flip’ them before they are even built. These speculators are not hampered by mortgages as they have the funds on hand, but they are a big part of driving prices worryingly high.
Another issue is that a lot people buy property in Dubai in order to rent, so what is happening to the rental market is part of the picture. Rents rose last year but are not continuing to rise this year.
What are people paying to rent properties? According to Hilotin (2014), prices for two-bedroom places in the ‘posh’ areas indicate the “The Palm is priciest (Dh185k), followed by Downtown (Dh178k), [and] The Greens (Dh150K). At these prices, and these are per annum, a few months of no rental income could be a strain on the finances.
If you are thinking of buying a property to rent, you need to ask whether or not you can afford the property if it does not rent for weeks or months at a time. There are plenty of buildings around Dubai with long banners hanging from them advertising apartments to let. A drive through Arabian Ranches reveals lovely villas unoccupied, and they sometimes stay unoccupied for months.
What kind of prices are properties on the market for? On the Better Homes website, a long established agency, you can find 5-bedroom apartments with ocean views in the Marina for AED 25,000,000. And of course there is space to park your six cars. A more modest, but extremely elegant 2-bedroom apartment is available for AED 4,200,000. These are brand new. It is likely that the build quality is better than it was pre-2008 when at times the demand was so great that builders were struggling to get materials, fittings and workers.
In the Arabian Ranches, a large development of color coordinated villas, a large villa with a pool could also reach AED 25,000,000 but a 2-bedroom villa with a garden and no pool could be AED 2,500,000. The Arabian Ranches is an attractive area with groomed public walkways, playgrounds, public pools and green spaces. It is well established and has a shopping center and restaurants.
But not all housing developments have been as well thought out. Some have sprung up beside massive power pylons, some have access problems and some are now looking rather decrepit. Do look closely before buying whether it is to live in or to rent.