Dubai’s real estate market shows signs of overheating

HOT PROPERTY: Dubai real estate has become popular with foreign investors looking for both capital gain and income from rents.

JEDDAH: Dubai’s real estate market, fueled by expansionary monetary conditions and high oil prices is showing signs of overheating. This is also raising the risk of a possible sharp market correction because a significant imbalance may develop over the next two years as scheduled new supplies come on to the market.
Samba Financial Group said in its Economic Monitor report for September that while bank exposure to the property sector currently appears manageable, and the dynamics of Gulf real estate markets are quite different from those which have caused such pain to US banks, it will be important to closely monitor real estate markets, particularly as banks are aiming to aggressively expand mortgage financing in the region.

“We expect Dubai’s property sector will show signs of cyclical weakness in 2009-10. Such projections suffer more than usual from a lack of data and imperfect information about future demand and supply. The soaring property prices over the last five years have attracted increasing supply which will eventually exceed demand,” Howard Handy, general manager & chief economist of Samba Financial Group, said.

According to the Dubai Lands Department, the total value of land sales in the first seven months of 2008 has already exceeded that for the whole of 2007, although the implied value of a unit of land area has risen just 3 percent year to date, compared with a 60 percent rise in 2007.

The report said strong domestic population growth, a positive outlook for the booming economy which will continue to attract foreign workers, and growing per capita income, provide a solid impetus for sustained demand for Dubai’s real estate. However, there is increasing concern about the impact of speculative activity, particularly in off-plan properties.
These are offered with attractive payment structures, allowing buyers to put just 5-10 percent down as a deposit. With real interest rates from banks currently negative, an increasing number of investors are leveraging up in order to take short-term positions; selling on their properties before installments are due.

Such activities could prove destabilizing, and push prices to unsustainable levels.
Home to flamboyant developments such as palm-shaped islands, tax-free Dubai kicked off a Gulf property boom in 2002 when it invited foreign investors to buy properties.

Dubai’s nascent mortgage business has burgeoned since then, with home loans in the UAE jumping 55 percent in the year to March, according to central bank data.
Dubai property prices have surged 79 percent since the beginning of 2007, Morgan Stanley said last month, adding it expected a 10 percent decline in prices by 2010.

The ruler of Dubai recently issued a new mortgage law as part of moves to regulate the Gulf business hub’s booming real estate sector. The law stipulates that mortgage contracts be registered with the land department, specifying the size of the loan, the repayment period and the value of the property to which the loan is linked. The law requires that mortgages taken out on properties in Dubai be sold by registered financial institutions, and insured.

However, UAE central bank data show that real estate mortgages grew by 90 percent in 2007 and a further 10.3 percent in Q1 2008 to around $18 billion, accounting for 8.4 percent of total bank credit. Lending to the construction sector rose 26 percent and another 9.4 percent in Q1 2008, accounting for a further 10.3 percent of total credit.
Combined construction and mortgage lending stood at 18 percent of total bank deposits in Q1 2008. Meanwhile data from the Dubai Land Department show a 48 percent increase in the value of mortgages issued in the first 7 months of 2008.

Dubai real estate has become popular with foreign investors looking for both capital gain and income from rents. However, investor confidence may erode in light of reports that, having secured money up front by selling off-plan, some developers are now becoming reluctant to actually build the properties, preferring to compensate investors holding ownership rights.