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Dubai property outlook likely to remain robust |
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9/22/2008 10:19:43 AM |
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The outlook for Dubai real estate remains robust, driven by the greater entrance of end-users into the property market, a reduction in mortgage rates and an increase in financing options, according to a new report.
The EFG-Hermes report on the Dubai real estate sector, Brave New World, said demand for real estate remains strong on the back of end-users looking to buy rather than rent, the wider use of mortgages and greater liquidity, the impetus of projects being showcased at Cityscape and other property exhibitions and the value proposition of Dubai relative to other real estate markets.
The market also gains impetus from the showcasing of projects during property exhibitions and a widening of the investor base, with stronger foreign participation and a pick-up in transactional activity.
One of the catalysts for the stronger demand has been the flood of liquidity directed towards the property market. Demand for realty now comes from a much wider base of nationalities.
Local demand has been on the rise as well, spurred in part by the lower inter-bank rates of the past few months. In keeping with its peg to the dollar, the UAE Central Bank has matched every rate cut by the United States Federal Reserve since November 2007, causing inter-bank rates to drop from 4.94 per cent to 1.9 per cent by April 2008, with mortgage rates ranging between 4.9 per cent and 7.94 per cent, boosting the growth of the market.
The EFG-Hermes Residential Price Index suggests that real estate prices have increased 14.4 per cent year-to-date. In 2007 residential real estate prices rose 18.9 per cent. The continued price appreciation this year has stemmed from continuing supply delays, deepening demand and liquidity spurred by lower interest and mortgage rates, limited relief from construction cost inflation and greater confidence in the market following recent legal improvements.
EFG-Hermes has lowered its estimates of 2008 supply to 50,000 units from the previous 64,000 owing to persistent delivery delays.
"Our new estimate for 2008 contains spillover supply from 2006 and our estimate of the overhang of units in International City that were expected to be delivered in 2008."
EFH Hermes said the pace of rent price increases has also begun to slow but the increases persist nonetheless.
While the government rent cap has helped provide some relief to tenants, landlords have still been able to charge higher rents on new contracts and there is still a mismatch between demand and supply.
The EFG-Hermes report said the recent sentiment could lead to a transfer of liquidity from real estate to the equity markets and a reduction in foreign demand could accelerate the pace and timing of a price correction. It said the supply of new units remains a key determinant.
Sana Kapadia, Associate, Equity Research, at EFG-Hermes, said a sizeable proportion of the supply over the next five years is geared towards high-end apartments while demand is skewed towards affordable housing in Dubai.
"This creates a disconnect between what end-users want to buy and what is available for purchase, and as a result we believe the high-end segment is likely to experience the full extent of a price correction," says the report.
"On the other hand, because villas make up only 15 per cent of the total supply, we expect that they will remain highly coveted and that any property price drop will not only occur at a lag to the rest of the market but will also be by a smaller magnitude."
According to EFG-Hermes estimates, rental prices have risen by 15 per cent so far this year-to-date compared to 18 per cent for the whole of 2007.
"Rent increases continue to be strong in high-end areas since the units there tend to be more luxurious and have better facilities. Also, villa rent increases persist due to the paucity of available units compared to demand," adds the report.
"In the absence of adequate and – more importantly – appropriate supply, renting in Dubai remains an expensive affair and only a significant increase in the supply of new housing will help level those rentals.
"We expect the importance of location to rise, with projects in the existing downtown core – Central Dubai – likely to hold on to their value given that the land area within this segment is geographically constrained and that the expected supply of new residential units will make up only 10 per cent of the total supply, lending it an exclusive nature.
"New and Outer New Dubai, which consist of a multitude of new projects and together account for an estimated 60 per cent of the total supply, are more likely to have an oversupply, with the effect even greater if demand turns out to be weaker than expected."
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Source: Business24-7.ae |
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