By Elliott Kime
While there are still ATMs in Dubai that dispense gold bars, homes there are less gilt-edged. The largest city in the United Arab Emirates (UAE) was recently declared the world’s third most affordable for prime residential property.
According to estate agent Savills, prime property in Dubai averaged $600 per square foot in June; of the world’s major cities only Kuala Lumpur and Cape Town were cheaper.
A combination of poor economic data, property market reform and oversupply saw prices in Dubai fall to almost 30 per cent below their 2014 peak at the beginning of this year, according to online property portal Bayut.
A slide in oil prices in 2015 sent Dubai’s wider economy into a protracted slowdown. Tensions with Iran and the UAE’s regional embargo on Qatar from 2017 reduced trade and compounded the city’s problems. Further, a new 5 per cent sales tax at the beginning of 2018 harmed Dubai’s attractiveness as a tax-free centre.
However, many involved in Dubai’s property market trace its downturn back to 2013, when the government’s Land Department took action against so-called “flippers” — speculators who buy and then rapidly sell properties.
A new transfer fee increased the cost of buying, while the introduction of a mortgage cap tightened borrowing rules for expats. The effect was to dampen prices.
“For any purchaser the transfer fee was doubled to 4 per cent [of the sale price] and, with the legal mortgage cap, it combines to make a perfect storm that, along with oil price fluctuations and the dollar [to which the UAE Dirham is pegged] becoming increasingly expensive, made the market look comparatively expensive,” explains Murray Strang, head of Dubai operations at Savills.
Meanwhile, the pipeline of new homes in Dubai was growing. Official data show 20,585 apartments were completed in 2018, compared with 10,288 in 2014, while the number of completed villas rose from 4,211 in 2014 to 5,098 last year.
The resulting oversupply has produced a buyers’ market, particularly in the mainstream market where prices fell -4.1 per cent in the year to November 2018, compared with -3.3 per cent in the prime market, according to Knight Frank.
“I think you are seeing discounts, not so much on the really super-priced properties, because [owners and developers] are willing to hold out in certain cases, but on the mainstream market anything up to 10 per cent is a given,” says Taimur Khan, an associate partner Knight Frank in the UAE.
Despite the challenges, the city still attracts international buyers. According to the Dubai Land Department, 217 different nationalities invested in property in the 18 months to June 2017. During the first 11 months of 2018, Britons, Indians, Pakistanis and Jordanians together accounted for nearly one-third of total investments.
And though capital values have come under pressure, Savills ranks Dubai as the fourth-best global city for returns on residential property investments, delivering an average 4.6 per cent yield in the first half in the first half of this year.
So is there an end to the downturn in sight? “Supply is still outpacing demand,” admits Strang. “There are still a lot of cranes in Dubai, which has continued to dampen sale prices. We are still in a period where prices are coming down annually.”
In Khan’s view, when positive growth does return, prime neighbourhoods such as Palm Jumeirah and the Emirates Living development where new supply has been limited, will be the first to recover.
Khan reports optimism surrounding Dubai’s hosting of the Expo 2020 world fair, which its hoped could boost Dubai’s property market by giving people an insight into its business environment and lifestyle. Meanwhile the IMF is forecasting 2.8 per cent growth in the UAE’s gross domestic product this year.
The direction prices ultimately take depends on how much new development slows, concludes Strang. If this happens, he believes “there will be a very strong demand in the market long term, and we will see a return to form”.
Photographs: Getty Images; Dreamstime; Bloomberg