UAE’s housing market crash

After six years of unprecedented price increases, the UAE housing market has now crashed.

Residential property prices in Dubai, measured by the proprietary property price index of Morgan Stanley, dropped 25% in Q4 2008 from the previous quarter.

The proprietary property price index tracks house price changes from property listings in Dubai. It gives an indication of current asking prices in the secondary market.

High-end apartments and villas were the worst-hit, with prices falling 35% in Q4 2008 from their peak in Q2 2008, according to Morgan Stanley.

Apartment prices in Downtown Burj Dubai fell 28% q-o-q to AED2,700 (US$736) per sq. ft. in Q4 2008, according to Global Investment House. In Dubai Marina, house prices have declined by 18% to AED1,800 (US$490) per sq. ft. over the same period. In the Palm Jumeirah, the value of villas and apartments has dropped by as much as 60% in just a few months.

Low-end properties seem to be more resilient. Houses located in Dubailand, Dubai Sports City and Jumeirah Village have seen positive price trends since January 2008, according to Colliers International.

A wait-and-see approach among homebuyers has caused a large decrease in demand for properties, which has prompted several developers to delay or cancel construction projects. Meanwhile, expatriates going back home, because work is drying up in the emirates. Interest rates increased and LTV ratio reductions have been imposed by banks and other mortgage providers, exacerbating the situation.

Excessive speculation by foreign buyers

Following the passage of the long-awaited foreign property ownership law in March 2006, a deluge of foreign money has come in, creating a market for Dubai’s unparalleled ambition in creating a skyscraper city, and numerous reclaimed land projects. Property prices have skyrocketed since then.

Europeans, including Russians, account for 20% of the buyers of all property categories. GCC, Arab nationals and UAE nationals make up 28%, Asians 40%, and Iranians 12%, according to figures from Global Realty Partners.

"Excessive short-term speculative activity has been further triggered due to loose monetary policies that have resulted in excessive liquidity in the market with investors seeking to purely leverage from their invested property, especially when it comes to off-plan housing properties," said Marios Maratheftis of Standard Chartered Bank.

At the end of 2008, foreign investors suddenly disappeared, as the global financial crisis bit in the emirates. The end of the previous rapid turnaround on speculative buying has caused transaction volumes to plummet.

The overall foreign ownership index of property kept prices by Colliers International dropped 8% in Q4 2008 from the previous quarter. Apartment prices fell by 11.2% q-o-q in Q4 2008 while villa prices dropped 3.5%. On the other hand, prices for townhouses rose slightly by 0.5% over the same period.

Why the large difference between this and Morgan Stanley’s figures? Perhaps because Colliers’ index measures house price changes in only certain foreign ownership areas, which have been mortgaged through the six leading banks . Since the global credit crunch caused banks to be cautious and to lend only to high-class and good-standing borrowers (who usually purchase mid to high-priced properties), possibly these properties have suffered less.

In fact, in the view of Colliers, the slight price decline witnessed in Q4 2008 was dwarfed by strong price growth in the first three quarters, resulting in a 59% (41% in real terms) property price increase in 2008.

The average price of residential properties all over the emirates was AED1,770 (US$482) per sq. ft. in December 2008.

Construction projects halted

Almost half of all the construction projects in the UAE, worth around AED1.1 trillion (US$582 billion), have been either put on hold or cancelled in response to falling demand and deteriorating market conditions.

Of the 59 projects severely affected, 8 have been cancelled and the rest put on hold, according to an HSBC report. The table lists some of the megaprojects being delayed or cancelled:

PROJECT LOCATION DEVELOPER VALUE (US$)
STATUS
Jumeirah Gardens City Satwa district, Dubai Meraas Development 95 billion
On hold
Mohamed Bin Rashed Gardens Between Al Khail Road
and Emirates Road, Dubai
Dubai Properties 55 billion
On hold
Nakheel Harbour & Tower Between Phase 2 of Ibn
Battuta shopping mall and
the 75-km Arabian Canal, Dubai
Nakheel 38 billion
On hold
Mudon Development Dubailand Dubai Properties 21 billion
On hold
Culture Village Along Dubai Creek,
next to Garhoud Bridge
Dubai Properties 13.6 billion
On hold
Palm Deira Deirah coastal area, Dubai Nakheel 12.5 billion
On hold
Al Salam City City of Umm Al Quwain Tameer Holding 8.3 billion
On hold
Al Burj Tower (The Tall Tower) Near Jumeirah Lake
Towers and Dubai Marina
Nakheel 8.2 billion
On hold
Universal City Dubailand Dubailand 2.2 billion
On hold
Emerald Gateway Along Coast Road, between Abu Dhabi downtown and Abu Dhabi International Airport Abu Dhabi Municipality 1.9 billion
On hold
Aqua Dunya Dubailand Dubailand 1.8 billion
On hold
Dolphin City Island near Abu Dhabi Emirates German Group 1.7 billion
On hold
Nad El Sheba Race course 5-km southeast of Dubai Meydan LLC 1.3 billion
Cancelled
Al Falah Outskirts of Abu Dhabi Aldar Properties 0.72 billion
On hold
Falcon City
of Wonders
Dubailand ETA Star 0.68 billion
Cancelled
Dubai
Exhibition City
Within the Jebel Ali Airport City n/a 0.45 billion
Cancelled

New benchmark rate introduced

Mortgage interest rates in Dubai have, in the past, followed key US Fed rates, because of the peg to the US dollar. The dirham (AED) is pegged to the US dollar at AED3.67 = US$1. In 2008, when the Fed successively cut key rates, the UAE’s central bank was forced to track US monetary policy, causing inflation to hit a record high of 12.9%.

The Central Bank of the UAE set its first benchmark interest rate (overnight repurchase rate) at 4.75% in September 2007. The new repo rate gives the country slightly more flexibility in responding to changes in the US Fed funds rate.

In January 2009, UAE´s benchmark rate was reduced to 1%, from 1.5% in December 2008, to mitigate the impact of the global meltdown.

Mortgage lending stops

The UAE’s mortgage market has expanded rapidly in recent years. Total real estate mortgage loans grew from 4.1% of GDP in 2001, to 15.2% of GDP in 2008. In September 2008, total outstanding mortgage loans rose by a spectacular 97% to AED115.7 (US$31.5) billion from December 2007.

Then the global credit crunch hit. Banks and other mortgage lenders imposed tighter lending criteria; they increased interest rates, and reduced LTV ratios.

Amlak and Tamweel, the UAE’s two largest home finance companies, have stopped offering new loans. The two mortgage lenders accounted for more than 50% of all mortgages in the country.

Government to the rescue!

In September 2008, the UAE government made AED120 (US$32.7) billion available to shore up bank liquidity. In February 2009, Abu Dhabi announced an additional AED16 (US$4.36) billion cash injection into the emirate’s five banks.

"The first and most important agenda priority for the UAE is to fix the liquidity problem so that the banks can start lending again," notes a Standard Chartered Bank report. Government measures were insufficient, it added, saying at least AED100 (US$27) billion more is needed to kick-start lending.

The government is also widely expected to help the real estate market. “Now there’s a role for the government to stimulate the (real estate) sector as it did with the banking sector. It must stimulate the construction economy,” said Fatima Obaid Al-Jaber, CEO of Al Jaber Group.

Rent caps and the new rental index

In 2006, the peak of the property boom, the government introduced a rent cap of 15%, to control rent increases. Then in 2007, the rent cap was tighted to 7%. In 2008, the rent cap was again reduced to 5% in an effort to curb inflationary pressures.

In January 2009, Dubai’s Real Estate Regulating Agency (RERA) unveiled a new rental index to replace rent caps. Following this a new rental law was released, establishing the rental index as a benchmark for rent increases.

NEW RENTAL LAW

CURRENT RENTAL RATES
RENT INCREASE
FOR 2009
Equal to or 25% below the rental index
nil
26% to 35% below the rental index
5%
36% to 45% below the rental index
10%
46% to 55% below the rental index
15%
More than 55% below the rental index
20%

In the Greens, the rental index places the annual rent of 2BR apartments between AED168,000 (US$45,777) and AED180,000 (US$49,046), and 3-BR apartments at a range of AED200,000 (US$54,496) to AED260,000 (US$70,845). In the Arabian Ranches, rents for 4-BR villas vary between AED320,000 (US$87,193) and AED350,000 (US$95,368).

In Jumeira Lake Towers, 3-BR apartments cost between AED240,000 (US$65,395) to AED350,000 (US$95,368). In Marina, 3-BR apartments vary from AED220,000 (US$59,946) to AED300,000 (US$81,744). In Mankool, 3-BR flats rent for AED150,000 (US$40,872) to AED200,000 (US$54,496) annually.

Rents and yields falling

Even the rental market is cooling. Homeowners unable to sell properties are renting units out, causing the supply of rental houses to rise sharply.

Rents for residential properties dropped 25% in 2008 from the previous year, according to some estimates. Dubai’s most prestigious locations, like Downtown Burj Dubai and Palm Jumeirah, were the worst hit, with rents plunging as much as 33%.

Rental yields in Dubai registered a big decrease from around 8% to 5% in 2008 from a year earlier, according to research conducted by the Global Property Guide. Bigger apartments tend to generate lower yields, at 4.50% for 180-sq. m. apartments. On the average, Dubai apartments have yields of around 5.52%.

Further rent declines of around 15% to 25%, are projected in 2009, as many firms are downsizing.

The turmoil has just started

Residential property prices are universally expected to continue falling in 2009, as expatriates leave the country.

"In our view expat-led population outflows in Dubai and flattish trends in Abu Dhabi will pressure house prices in the foreseeable future," said UBS bank in a research note.

“Apartment prices will fall by an average of 20%, with individual declines ranging between 10% and 50%,” according to Landmark Advisory. “Villa prices are likely to remain relatively stable with an average drop up to 10%, with lower quality units bearing the brunt of the decline.”

Of all the cities in the GCC region, Dubai will be worst hit. "Dubai is still very much at the outset of a real estate crash, and the full trickle-down effects of this into the real economy have yet to be fully appreciated," says EFG-Hermes, the Arab world´s largest investment bank.