Dubai’s housing market – avoiding another bubble

New regulations are helping to plot the right course for sustainable growth

Dubai's Real Estate is a kaleidoscope of change
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The Dubai property market has experienced a rollercoaster ride in the last six years. After growth skyrocketed in 2006, Dubai became the envy of the world as the likes of David Beckham and Hollywood stars invested heavily in high-end luxury projects with prices comparable to New York and London. The housing market reached its peak in 2008 and then crashed by roughly half in 2009 as the international community watched in disbelief. The market’s crash came hand in hand with the global financial crisis, but in comparison to other cities’ real estate markets, Dubai was more severely affected — many commentators argued that it would never recover.

The market is now experiencing a resurgence — the gradual recovery started in 2011 and has continued unwaveringly. Property prices are rising strongly and the overall economic outlook of the UAE is fairly robust. According to Jones Lang LaSalle (JLL), international property consultants, residential property prices increased by an estimated 24 percent for villas and 38 percent for apartments in 2013. Rents have also increased by roughly 20 percent for apartments and 17 percent for villas.

Some commentators fear that the market is experiencing a new bubble that will inevitably burst and that the rapid recovery is the product of extreme speculation and over optimism in market fundamentals. On the contrary, it is the view of this author that the market’s recovery has been driven by non-speculative factors. The pillars of the recovery are (i) the implementation of pro-investor regulations; (ii) sociopolitical developments in the Middle East and economic growth in the UAE; and (iii) the Expo 2020.

Factors of market collapse

The significant increases in property prices in the Dubai market back in 2008 were the result of highly speculative activities that caused it to become extremely leveraged. The term “property flipping” became synonymous with buyers who only put down a minimum deposit with no real intention to pay for the property when payments became due for the remaining amounts. Arguably, the lack of regulation was the main contributor to the collapse of the real estate market. The extent of the collapse became apparent in 2009 as rents decreased by 44 percent from the 2008 peak, and as sales prices fell by roughly 50 percent, indicated by JJL and the Dubai Land Department (DLD), the emirate’s real estate registry.

In spite of the above, the steady recovery of the market began in 2011 and continued in 2012 as sales prices and rents increased around 24 percent and 12 percent respectively, according to JJL. In 2013 the extent of the recovery became more prominent as prices of villas and apartments and rents continued to increase progressively. This is clearly a very significant development for Dubai, especially as critics were reluctant to accept the market’s recovery.

Improved Regulations

Arguably, the lack of regulation and transparency was one of the main reasons behind the 2008 burst, as the lack of legislative controls failed to protect investors and there was limited recourse to developers. The DLD has acted swiftly and legislative measures were introduced as follows: the Investor Protection Law is designed to protect real estate investors from violations of terms and conditions by developers and delays in completion — investors can terminate the contract and have their money refunded. This provides greater certainty and forces developers to maintain their obligations.

The Code of Corporate Governance for Developers requires disclosure from developers to investors regarding information about their properties, including alternatives in case of delays. This law defines the responsibilities of developers and has ensured that investors are sufficiently protected. The effect of this is that it provides greater transparency, making investors more inclined to invest.

New laws are expected to be drafted in the next two years in order to maintain property values and regulate Dubai’s real estate market. Since 2008, the regulators have understood the requirement to reduce property flipping, the desirability of greater investor protection and the importance of developers’ governance. In addition, the Central Bank of the UAE has capped mortgage loan-to-value ratios to regulate the market and limit highly speculative behavior. The caps, as published by the Central Bank of the UAE, stipulate loan limits of 75% for expatriates and 80% for Emiratis.

In relation to the rental market, there have been a lot of concerns with regard to rental increases. Going forward, permissible rent increases for both residential and commercial properties in Dubai will be set according to the current market rental price for that property. This is in accordance with a new Dubai Rental Index which can be obtained from the Real Estate Regulatory Agency (RERA). This is reassuring as it sets parameters for landlords and caps on rentals. The relevant provisions are contained in Decree No. 43 of December 8, 2013. It lays out the rental value increases that a landlord can demand when renewing both residential and commercial leases, including those leases in private development zones and free zones. The provisions of the decree have been summarized concisely by Gateley, a leading UK law firm. To give a few examples, (i) rentals cannot be increased if the original tenancy rental value is currently less than 10 percent lower than the average standard rent payable in that area; (ii) rent may be increased by 5 percent of the original tenancy rental value if the current rental value is between 11 and 20 percent below the standard rate; (iii) it may be increased by 10 percent of the original tenancy rental value if the current rental value is between 21 percent and 30 percent below the standard rate; (iv) it may be increased by 15 percent of the original tenancy rental value if the current rental value is between 31 and 40 percent below the standard rate, and finally (v) it may be increased by 20 percent of the original tenancy rental value if the current rental value is more than 40 percent below the standard rate.

Demographics and the Expo

The Arab Spring and Dubai’s economic growth have contributed to Dubai’s population growth, as it is considered a safe and affluent location. The population increased to 2.1 million in 2012 from 2 million in 2011, and is expected to rise even more as evidenced by the Dubai Statistics Centre. The instability in the Middle East has benefited Dubai and it is unlikely to be subdued any time soon. This has given a boost to the real estate market as foreigners have invested significantly in properties. Dubai’s win of Expo 2020 has also been a very positive factor for Dubai’s growth. It is likely to create 300,000 jobs as well as increase housing demand. It is also estimated that Dubai will be visited by 25 million tourists as a result of the Expo and that the job market will flourish. The effects of the Expo can already be seen as property prices increase even further.

Dubai appears to have learned its lesson from 2008. The current resurgence seems to be the product of solid pillars matched by stable market requirements. Specifically, the legislative changes implemented so far have provided greater transparency as well as opportunities for investors. The new rental legislation will hopefully provide greater certainty and the present landscape appears to be very different from the 2008 bubble cycle. It is important that the Dubai government and central bank continue their active roles in ensuring that high-level speculation is avoided. In addition, over supply of projects need to be carefully monitored. Overall, the future of the Dubai’s property market appears bright, provided these fundamentals are maintained.
*The views expressed are those of the author in her own personal capacity.

Nicole Purin

Nicole Purin is a legal and finance expert based in the United Arab Emirates.

One Comment;

  1. Christimathews said:

    This is a good initiative and push by the Dubai Government and the proper planning of housing helps to maintain the city properly.