Cluttons puts the Dubai real estate market into context and highlights what’s likely to transpire in 2018
Values across Dubai’s residential investment areas continued to moderate during Q2 2017, dipping by an average of 1.5%. This leaves the annual rate of change at -5.8% and marks the 12th consecutive quarter of price declines, during which time prices have moderated by 14%. The latest change means that average house prices stand at $350 psf, nearly 30% below the Q3 2008 market peak.
Apartments continue to fare better than villas, with prices decreasing by an average of 1% during Q2, compared to a 2.2% drop in villa values. Interestingly, however, since the last market peak in Q3 2008, there are only two villa submarkets where prices have recovered to within touching distance of their previous highs. Jumeirah Village and villas at Motor City are 2.6% and 3.6% down on their Q3 2008 market high respectively.
Meanwhile, villas on the Palm Jumeirah remain about a third cheaper than during the 2008 price boom. Apartments, on the other hand, remain well below the 2008 peak, averaging 20-71% lower. The Burj Khalifa has had the smallest price recovery over the last nine years, with prices down 70.6% to $613 psf, compared to nearly $2,368 in Q3 2008.
Despite the seemingly slow climb in values compared to 2008 levels, the market has demonstrated characteristics of maturity, even though it is just 15 years since Dubai opened up its property market to international (non-GCC) investors. This is reflected in the fact that price drops have averaged 1% per quarter over the last 12 quarters.
Clearly improved regulation around off-plan resales, the introduction of federal mortgage caps, the doubling of property registration fees, more stringent controls around developer financing and the protection of investors’ funds through the mandatory requirement of escrow accounts have all contributed to the market’s stabilising growth profile in recent years.
The ongoing soft correction in the market appears to be nearing an end, with many locations starting to show signs of bottoming out, as we have previously reported. In fact, during the first six months of 2017, just seven of the 32 sub-markets we track in the emirate registered price falls, with all other locations seeing no change in value. The weakest performing market was Motor City ($245), where villa values receded by 8.2% over the same period, leaving them 12.6% lower than a year ago.
Rounding off the top five weakest performing markets during H1 2017 were Jumeirah Islands (-6.3%), Hattan Villas at Arabian Ranches (-5.6%), the Burj Khalifa (-5.6%) and villas on the Palm Jumeirah (-4%). Aside from Motor City, where values average $245 psf, and Jumeirah Islands ($327 psf), prices in the remaining weakest sub-markets average $435-653 psf, putting them well above the average for the city as a whole.
Affordability Issues Still Unresolved
Affordability remains a challenge for Dubai’s residential market. With household incomes strained by rising living costs, underpinned by inflation levels of over 2% and the looming new VAT regime, as in Abu Dhabi the dream of home ownership continues to drift further away for many. Average incomes remain at around $55,000 per annum for expat households across the UAE, based on the Ministry of Economy’s last income survey. With an average mortgage multiplier of three to four times annual income, most households would be hard pressed to purchase a family home for $163,350 to $218,000 anywhere in the emirate.
The number of affordable housing districts in the city remains primarily limited to well-known areas such as International City and Discovery Gardens, which together house some 120,000 residents spread across circa 48,000 units. The limited supply in the affordable segment of the market, coupled with steady but robust demand, has helped hold values relatively steady over the last 12 to 18 months.
Dwindling New Home Launches, While Supply Pipeline Remains Strong
Elsewhere, while the housing supply pipeline remains robust, the vast majority of stock being brought to the market does not fall under the affordable bracket. This threatens to undermine Dubai’s ability to continue attracting workers of all skill and earnings levels, while also putting the city on a potential path to experiencing the affordability emergencies faced in well established, mature global cities such as London and New York.
As it stands, some 12,500 units should be handed over this year, rising to over 21,400 in 2018 and a further 26,000 units in 2019.
Meanwhile, the subdued residential market conditions have curbed developers’ appetite for bringing forward new schemes, with just over 1,600 units announced so far this year according to our estimates, against a little over 34,000 last year.
The danger of such a sharp slowdown in new unit launches could potentially drive a price spike in the medium to long term, given the population and jobs growth predictions in the lead-up to Expo 2020 and beyond.
In fact, Standard Chartered expects 300,000 new jobs to materialise between 2018 and 2021, directly as a result of Expo 2020. By the end of 2017, some $3bn worth of construction and infrastructure contracts will have been awarded in the city. This will help drive up demand for residential and commercial property in the next six to nine months, suggesting that the bottom of the current market cycle may finally be on the horizon.
Meanwhile, Dubai Municipality predicts that the emirate’s population will nearly double from 2.8 million today to five million by 2030, effectively suggesting the need for a doubling in the city’s housing stock in order to accommodate the expected growth.
The fact that over 58,000 units are scheduled to enter the market between 2019 and 2020 may offset any population surge linked to Expo 2020; however, as with most project-linked jobs, the vast majority will be in the lower to middle income bracket. There is little evidence to suggest this demographic is being catered for in any meaningful way, meaning house price spikes in more affordable communities are almost inevitable in the medium to long term.
2018 Likely to be a Year of Stability and Marginal Growth
The support provided to house prices as a result of the dynamics outlined above continues to influence our forecasts for the market, with stability likely to bed in more widely across the city’s residential investment areas before the year is out.
However, it is still our view that values will end the year 4-5% down on 2016, on average. 2018 is likely to see values showing their first positive – albeit weak – growth in over three years, as the Expo effect starts to influence demand levels and overall sentiment.