Property prices and residential rents in Dubai to fall 5% in 2007

Dubai: Property prices and residential rents in Dubai will ease five per cent in 2007 after hitting a peak early that year as supply of new units will outpace demand, Standard Chartered Bank said yesterday.
Steve Brice, regional head of research for the bank for the Middle East, told reporters the fall in rents in Dubai will be offset by a rise in Abu Dhabi where liberalisation and investment is fuelling a boom.
"Concerns about a property bubble in Dubai are amongst the top three risk seen facing the emirate. The good news is that supply is set to grow rapidly in 2007," Brice said in a report that unveiled a new property index for Dubai.
Quoting data from the Prime Group, the bank said some 52,000 new residential units will hit the Dubai market in 2007 after considering delivery delays. Another 63,000 will be released in 2008.

"Given a reasonable assumption of a seven per cent population growth for the emirate, it suggests this will lead to an excess supply of around 6,000 units in 2007 and 33,000 units in 2008. This is likely to mean that we will see property prices and rents falling in the coming 24 months."
Brice said he expected property prices and hence rents, to fall five per cent in Dubai in 2007.
Property prices in Dubai have nearly doubled in the last three years owing to rapid population growth, increased investor and speculators interest and demand for second homes from people living in trouble spots in the reigon.
"We have argued before that residential property prices are likely to come down 20-30 per cent in the next two to three years. The good news is that this is not expected to have a dramatic impact on the UAE economy with the correction expected to be gradual."
In Abu Dhabi, property prices are expected to continue rising until 2009 as government plans to invest $175 billion in the economy until 2012 and rising oil prices will drive demand.
Standard Chartered's new residential property index, which uses offer prices of developers, has shown an 18.8 per cent rise in 2006 until the end of October.
The overall property index, in fact, fell in five of the last eight months but jumped 5.7 per cent in July and 12.9 per cent in October.
Brice attributed the first rise to the announcement allowing foreigners to buy property and the second to the realisation that estimates for the release of new property to the market are unlikely to be fulfilled.
The data showed apartment prices have risen 10.1 per cent in 2006 until October and villa prices by 30.1 per cent.
Standard Chartered also scaled up its forecast for UAE's nominal GDP growth owing to higher oil price expectations and the surge in government investment in Abu Dhabi.
It said it expected UAE's GDP at current prices to rise 30.7 per cent in 2006 to $172.8 billion and by 13.7 per cent in 2007 to $196.5 billion. GDP will rise a further 7.58 per cent in 2008 to $211.4 billion.
It expected Saudi Arabia's nominal GDP to rise 10.76 per cent in 2007 to $401.4 billion and by 11.16 per cent in 2008 to $446.2 billion.
"We now believe these two countries will see an even more marked acceleration in their invesment levels। In the case of the UAE, the investment will be driven by Abu Dhabi, which recently announced investment plans of over twice its current GDP over the next six years," the Standard Chartered report said.

I wouldn’t put a penny of my money into Dubai, says Stuart Law of investment property firm “It’s a city based on consumerism. I’m not sure that guarantees its role as a long-term holiday home location. I wouldn’t buy there.” Several property developers and agents in the region have now begun echoing Law’s opinion. Dubai’s sustainability as a resort isn’t the only worry though, as there is also concern that the supply of property in Dubai has begun to outstrip demand.
Dubai property: buying could be easier than selling
“Thirty years ago there was nothing in Dubai but a creek, a sheikh’s palace and a dodgy reputation as the smuggling capital of the Arabian Gulf,” says The Economist. Since then it has been billing itself as the tourism and business hub of the Gulf region and people have flocked there with their money. Property prices have soared in tandem with the frenzy, but it now seems that it has reached a peak. Since 2003 alone more than 12,000 homes have been built, says Graham Norwood in The Independent, meaning “that anyone wishing to sell a home has competition from new properties”.
According to a spokesperson for Standard Chartered Bank, also in The Independent, “development of the Palms, Dubai Marina, Business Bay and Arabian Ranches, to name just a few [schemes], is going to boost supply in the coming five years in dramatic fashion. To us, this suggests that a decline in property prices is just a matter of time.”
Kevin Fleury, a mortgage broker specialising in overseas loans at Conti Financial Services, agrees. He tells The Times that when investing in property abroad, an exit strategy is needed. With Dubai, though, there isn’t one. “There is a severe danger that there will be an oversupply because so much is being built. This will suppress rents and capital growth, and I think many people will find it difficult to sell.”
Even when it comes to selling a home, the vendor will face additional problems। Dubai may well have just granted the right to own freehold properties to expatriates, but “there is no conveyancing system for property purchases”, says Gill Kerby in The Sunday Times. “The developers and agents offer to undertake all contract exchanges on your behalf (not a good idea).”

Dubai property: is the infrastructure all it's cracked up to be?
And an oversupply of houses isn’t the only problem facing investors. The Dubai tourism board may well issue sprightly images of superhighways traversing the emirate city’s centre, but as the construction of one of it’s latest property developments demonstrates, infrastructural issues do not seem to have been factored in. “Palm Jumeirah is a peninsula, with one way in and out,” says William Kistler, European President of the Urban Land Institute. He tells that “the question of how the road provision is going to connect into the transit infrastructure is something that we have got a not very satisfactory answer to”।

Palm Jumeirah came to prominence back in 2002, when David Beckham and several other members of the England football team bought properties on the palm-shaped island on their way to the 2002 World Cup in Japan. The subsequent hype helped it to sell out, but its developers have remained tight lipped on allegations that the players received large discounts to buy there. 25% of the properties went to British buyers.
The only road from the resort (down the palm’s trunk) leads directly to Dubai’s main highway, the Sheikh Zayed Road, where traffic “moves as slowly as water down a blocked drain”, says Kistler. People were wondering whether the infrastructure was sustainable even before they built the Palm Jumeirah. Although two new road projects are planned for the area, so too are 100 residential towers, accommodating up to 40,000 people.
The reason for the extra towers seems to be that Nakheel, the property development company owned by the Dubai government, grossly underestimated the number of properties that would be built on the palm-shaped idyll, says The Daily Telegraph। The result makes scary reading. According to a former construction worker for the company, the current plan has 150,000 people living there, “but there are no medical facilities and no evacuation plan in place”.

Dubai property: a bubble waiting to burst?
There is also another reason to be cautious when it comes to Dubai property - the boom in prices is a bubble waiting to burst, fed principally by speculative purchases.
Sure, Dubai enjoys year-round sunshine and indoor skiing, but what promoters of the tiny emirate “don’t emphasise is that Dubai will be the world’s biggest construction site and traffic jam until at least 2010”, says Kerby.
Late in 2004, Middle East Business media reported that 85% of off-plan flats and 50% of off-plan villas were bought by speculators, most of whom sell before completion. This means that most homes are secured by “10% deposits and then traded like shares”, says Graham Norwood in The Observer. In other words, the majority of those buying have no intention of living there.
Some Dubai builders already recognise the “fragility of this speculative frenzy”, says Norwood, but may be too late in looking for larger deposits। “A global economic downturn or a local housing crash, or both, could turn this investment-led boom into a major slump.”

Basit Javed