UAE prays for housing market recovery in 2011

The UAE’s housing market is still taking a beating, over a year after the bubble burst. The residential property price index dropped 6% q-o-q to Q3 2010 from the previous quarter, and was down 6% on a year earlier, according to Colliers International Middle East.

Sentiment has been hit by soil erosion, caused by delayed construction at “The World” project. Without maintenance, the islands made up of reclaimed land are slowly being eaten by the sea.

Revolts and protests movements in the Middle East in Tunisia, Egypt, Syria and Yemen are also not calming nerves.

Nevertheless the UAE’s Economics Minister Sultan Al Mansouri expects “positive movements” by the end of the year.

“It won’t be a graph like before (sic), but we will see growth which is gradual and more realistic,” Al Mansouri said in an interview published in Arabian Business.  The end of the house price crash will come by the end of 2011 or early 2012, he forecasts.

Perhaps.  But during Q3 2010:

• House prices fell 6.3% during the quarter to AED10,236 per sq. m. (USD2,786 per sq. m.) (6% down on the year)
• Apartment prices were down 7% during the quarter to AED11,281per sq. m. (USD3,071 per sq. m.) (9% down on the year)
• Villa price prices fell 4.7% during the quarter to AED 9,332 (USD2,540) per sq. m. in Q3 2010 (1% down on the year)
• Townhouses fell 9% during the quarter to AED7,793 (USD2,121) per sq. m. (11% down on the year)

Total real estate transaction values in Dubai plunged 65% in 2010, according to Jones Lang La Salle.  And while demand fell, oversupply kept on rising. In Q3 2010, less than 600 transactions were completed, significantly down from 1,200 during the same period in 2009.

• The completion of 36,000 housing units in Dubai in 2010 squeezed prices down.
• The anticipated completion of 25,500 units in 2011 is expected worsen the glut, according to La Salle.

LaSalle expect house prices to decline by 10% in 2011, and around 5% in 2012, contrary to the government’s hopes.  House prices have already fallen by around 60% from their Q4 2008 peak.

Excessive speculation by foreign buyers

Following the passage of the long-awaited foreign property ownership law in March 2006, a deluge of foreign money came 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.

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.

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.

"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.

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:

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.

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%.

Prices and rents in Dubai have both declined very significantly since our last survey in September 2009 – and even then, they had fallen significantly from 2008, according to research conducted by the Global Property Guide. Prices for apartments typically range from around US$3,700 to US$4,200, except on the very largest apartments, which are somewhat less highly priced. This compares with a range of US$6,650 to US$7,300 at the peak of the boom.

Overall, gross rental yields in Dubai are moderate at around 5.6% to 6.5%.

Yields for smaller-sized apartments have moved up, but not those for larger-sized apartments