As we enter the traditionally quiet Ramadan and summer months, many residential agents in the Dubai market are wondering where the next deal will come from. Data from the Dubai Land Department reveal there was a 50 per cent decline in sales activity over the first five months compared to the same period in 2015 as more buyers adopt a ‘wait and see’ attitude.
Before examining the reasons for the decline in activity, let’s explore what the data actually tells us. Over the first five months of 2014 there were 11,900 sales transactions of apartments and villas registered with the Land Department, with a combined value of around Dh19 billion. Sales over the same period this year fell to around 5,800 (with a total value of just over Dh10 billion).
This represents a fall of around 54 per cent in the number of sales and 4 per cent in the value of total transactions.
JLL has identified four major reasons for this decline. Two of these can be classified as market factors and two due to regulatory changes.
The most important change in terms of market factors is a major shift in buyer sentiment as prices have stabilised. From June 2012 to June 2014, the average price in Dubai increased by almost 60 per cent. Over the past nine months, this rapid growth has calmed, with average prices actually declining marginally (-2 per cent).
JLL expects prices to decline further over the rest of the year and this has caused many investors to adopt a wait-and-see approach, thereby reducing the level of sales in the marketplace.
The second market related factor is the significant strengthening of the dollar against many overseas currencies that occurred over the past year. With expatriates accounting for over 75 per cent of all residential sales in 2014, the stronger dollar has effectively increased the sale price of Dubai real estate for many overseas investors.
While this decline has been most dramatic for Russian buyers, those from other substantial source markets such as India, Pakistan and the UK have also seen an increase in the effective price of buying real estate in Dubai. While some investors from these countries may be attracted to this sector as an effective hedge against a further strengthening in the dollar, the net impact of currency movements has probably been a negative for the level of overseas transactions in the Dubai residential market.
Recognising that a dangerous asset price bubble was developing in the Dubai residential market in 2012 and 2013, the government introduced a number of measures to calm sentiment. The most important of these were an increase in the transfer fee (sales tax) on residential property from 2 per cent to 4, while the maximum loan to value (LTV) ratio of residential mortgages was capped at between 65-75 per cent, thereby increasing the down payment required by borrowers.
The first of these measures was aimed at reducing investor demand, while the latter targets end-users, an increasingly important category of the market over the past few years.
The combination of these market factors and regulatory restrictions has effectively taken the heat out of the Dubai residential market with little or no talk of a property bubble in recent months. This welcome stabilisation of market conditions has in turn reduced activity to a more sustainable level.
Interest in recent off-plan launches indicates there is still demand for the right product at the right price on the right payment terms, but the depth of this demand is certainly below that experienced in 2012 and 2013.
While there have been ongoing launches of upmarket products in areas such as Downtown and Dubai Marina, an increasing number have been targeted at the middle-income sector with competitively priced products in areas such as Sports City and along the Al Quadra Road.
The volume of sales activity is a leading indicator of price levels and we would expect prices to decline further over the traditionally quiet summer months (JLL is expecting an average decline of around 10 per cent in 2015).
The key question will be the extent to which activity levels increase again in the final quarter as this will provide a good indicator of the direction of prices in 2016.
The writer is the Head of Research at JLL MENA.
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