Dubai Property: Another Bubble?

Expat Briefing Editorial Team, 27 February, 2015

Dubai's property market was a high profile casualty of the financial crisis.

After seven years of rapid real estate price inflation, the bubble burst in 2009 when property prices crashed by around 60 percent.

It didn't take long for the green shoots of recovery to appear, however, and by mid-2012, prices began to rise again as foreign buyers piled into the popular expat city once more. To stretch the botanical analogy further, by 2014, the market was positively blooming once again after home values surges by 56 percent in the two years to the end of 2013. Blooming and booming.

So is the possibility of a much-feared bubble beginning to rear its ugly head once again?

There have certainly been warnings.

In July 2013, the International Monetary Fund (IMF) wrote in report on the state of the United Arab Emirates economy that the strengthening real estate cycle, particularly in the Dubai residential market, "could attract increased speculative demand, creating the risk of unsustainable price dynamics and an eventual, potentially disruptive correction." In IMF-speak, that means a bubble.

Not that the authorities in the UAE and Dubai have been blind to what's been happening in the real estate market. Mortgage rules for both local and foreign buyers, including loan-to-value ratios, were recently tightened, and in 2013 Dubai doubled the tax on real estate transactions in an attempt to curb speculation. Under the latter measure, the transaction fee on residential and commercial properties was lifted from 2 percent to 4 percent as of October 6, 2013.

While the IMF welcomed these attempts to cool Dubai's property market, the Fund hinted that additional measures would probably be needed, including additional fees for reselling properties within a relatively short time to discourage speculative demand. It said these actions could be complemented by further tightening of lending criteria.

But, figures released by the Dubai Land Department in January 2015 suggest that the government's touch on the brakes might just be working

According to the DLD, the total value of real estate transactions in 2014 topped AED109bn (USD30bn) from just under 42,000 transactions. Over half (AED64bn) of this investment came from outside the Gulf and Middle East region, with Indian (AED18.1bn), British (AED9.3bn) and Pakistani (AED7.6bn) buyers leading the way.

However, total investment in Dubai's real estate sector in 2014 was substantially lower than in 2013. That year, there were almost 63,652 land and housing unit sales which generated AUD236bn worth of transactions. The total number of transactions recorded in 2013 was 53 percent higher than in 2012.

Clearly, given Dubai's recent history, 2013's "irrational exuberance" looked unsustainable. But perhaps the market is now settling down into a more stable pattern.

This seems to be the conclusion drawn by estate agents and property experts.

Although prices continued to rise in 2014, global property consultancy Knight Frank says that the cooling measures applied by the government have had some effect.

In the latter half of the year, there was a reduction in residential transaction activity. This was noticeably pronounced at the more luxury end of the market, with transaction volumes for prime residences 14 percent lower in the third quarter compared with the same period in 2013. This applied downward pressure on prices, which fell by 0.2 percent quarter-on-quarter – the first decline in almost three years.

On the other hand, prices for more affordable properties continued rising, as James Lewis, Partner at Knight Frank Real Estate observed.

"We've seen a reduction in non-GCC demand for prime housing stock – that is properties priced at AED 10 million and above. That's not to say that foreign nationals are not still purchasing properties in Dubai, just that many of them are opting for apartments and villas which are priced in the mid-range bracket, where prices saw an annual increase of around 12.5% in Q3".

Given Dubai's historic dependence on the hydrocarbon sector, the slump in global oil prices since the middle of last year is thought by some to be weighing on the real estate sector, as investors wait on the sidelines to find out if this will affect the economy.

Indeed, Alan Robertson, CEO of JLL MENA , said the oil price has been a "major dampening factor" on Dubai's real estate market over recent months.

"Dubai's real estate sector witnessed stable rents and prices during Q4 2014, and [2015] has started with increased uncertainty facing the UAE real estate sector", Robertson said last month.

To a large extent, fears about the oil price's impact on Dubai are unfounded as the economy is now highly diversified thanks to government investment in transport infrastructure and incentives designed to attract new industries to Dubai. In fact, Dubai is by far the most diversified place in this largely oil-dependent region, and revenue from hydrocarbons accounts for just 2 percent of its economy.

Nevertheless, while Dubai's economy is relative strong at present, Robertson anticipates that the residential property market will continue to cool, something he says won't necessarily be a bad thing.

"There is no doubt that the bubble has deflated rather than rapidly burst and the leading question now being asked is 'what is next'. JLL's view is that the Dubai residential market will see some welcome stability in 2015, with average residential prices ranging from flat to declining by up to 10 percent over the year".

"In some ways this cooling of sentiment is a positive, in that it has effectively reduced the pressure on asset prices that was emerging in 2013 and the first half of 2014," JLL states in outlining the key trends expected to influence Dubai's real estate market in 2015. "The talk of an asset price bubble that dominated discussion of the Dubai residential market up to mid-2014 has now been replaced by a more sombre sentiment."

In his assessment of what's in store for 2015, Lewis concurs.

"We expect to see softening in both prime residential rents and prices", he said, "of 5-10 percent and up to 5 percent, respectively".

"I think 2015 will be a cautious year", he added. "The introduction of macro-prudential measures over the past 12-18 months illustrates the effort made by authorities to avoid another real estate bubble".

So, in summary, the government appears to have learned the harsh lessons of the financial crisis, and acted much more robustly this time to prevent property prices surging like a runaway train. Therefore, the danger of another catastrophic correction in Dubai's real estate market seems to have dissipated over the last few months, and we might be able to stop talking about the b-word, at least for the foreseeable future. Nevertheless, the lure of this low-tax territory with its year-round sun remains strong for expats and foreign investors, and this is likely to continue fuelling demand for property in the "City of Gold".

If you are considering moving to the United Arab Emirates or are soon to depart, you can find helpful information and advice in the Expat Briefing dedicated United Arab Emirates section

Additional information of interest to expats and foreign investors in Dubai can be found on our partner websites and, including the Lowtax Dubai Knowledge Base and the Tax-News jurisdiction page for Dubai.

Tags: speculation | interest | Tax | Middle East | inflation | investment | Dubai | India | Pakistan | United Arab Emirates | International Monetary Fund (IMF) | fees | tax |


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