Dubai property market diverges as prices slump while rents hold

[DUBAI] As Dubai real estate heads towards what may be its worst year since the financial crisis, Standard & Poor's says investors should be prepared for the pain to continue in 2016.

The ratings company, which in February said home prices would probably slump as much as 20 per cent this year, is pointing to more than just the drop in oil prices for continued pressure on the market: Russians are staying away because of the ruble crisis, while European buyers are balking at the increased expense of Dubai property because of the euro's fall against the dollar, which is linked to the local currency.

"There's no reason to take a more positive view," Franck Delage, director of corporate ratings for Europe, the Middle East and Africa at S&P, said in a phone interview late yesterday. "May be there will be a soft landing but at this point in time we don't see a positive trend." Dubai's property market is one of the most volatile in the world, swinging between troughs and peaks. While home prices have dropped by about 15 per cent since the second-quarter of last year, they soared about 70 per cent between mid-2011 and mid-2014, according to figures by real estate consultancy Phidar Advisory. Both Phidar and Jones Lang LaSalle Inc are anticipating further declines in 2016, even as rents hold up and yields are increasing.

"The downward trajectory could continue through 2017 and the average apartment price could decline another 20 per cent and still be nowhere near the price floor established in the last cycle," Jesse Downs, Managing Director at Phidar, said in a telephone interview.

Apartment prices have dropped 14.4 per cent since their peak in the second quarter of 2014, while single family homes declined 13.8 per cent, according to data by Phidar. The firm estimates apartment values soared 76.5 per cent between the fourth quarter of 2011 and the second quarter of 2014. JLL puts the surge at about 60 per cent.

Still, while some homeowners are seeing equity evaporate, rents are holding steady and developers are posting higher profits. Rents have dropped 1 per cent from a year ago, JLL said in a third-quarter report. That could start to tempt some buyers back into the market, some analysts say.

"With prices falling, the rental yields are going up and at some point the market will become more attractive, bringing back investors," Craig Plumb, head of Middle East research at JLL said. Rental yields for apartments are about 7.8 per cent, while single-family homes can garner around 5.2 per cent, he said. That's an improvement from January last year, when apartment yields were at 7.2 per cent and villas at 4.7 per cent.

Dubai's largest developer by market value, Emaar Properties PJSC, said third-quarter profit surged 31 per cent, while Damac Properties said quarterly net income climbed 45 per cent. Both companies sell properties to buyers before construction starts.

About 6,000 homes are set for completion in the final quarter of this year, while another 23,000 and 22,000 are scheduled to hit the market in 2016 and 2017 respectively, according to JLL. However, in the third-quarter only 1,700 homes were completed as several projects set for handover were delayed, JLL said.

Developers may start reducing or delaying some new housing projects to "better balance demand and supply," S&P's Delage said.

HSBC Holdings Plc, in a September note to investors, argued that the United Arab Emirates real estate market would be unlikely to suffer a crisis because many of the main buyers in Dubai - Indians, Saudi, Britons and Pakistanis - had not seen a material weakening of their currencies and transaction numbers were higher than some reports had suggested.

The euro has declined about 11 per cent against the dollar this year and may weaken further if the Federal Reserve decides to raise rates next month.

"Two myths need to be debunked - transactions are down just 20 per cent compared to some reports of more than 50 per cent, and most currencies have not fallen significantly, especially the currencies that matter most," HSBC analyst Patrick Gaffney said.

The drop in prices will also eventually improve affordability and that can encourage new buyers who were previously priced out of the market, S&P's Delage said.

"Even with a 20 per cent decline, values would be significantly higher than 2011 trough prices," Phidar's Downs said. "In nominal terms, prices would be similar to the average apartment price at the end of 2012 and early 2013."

BLOOMBERG