Dubai property: How should investors react to the recent price falls?

After three years of sustained growth, Dubai property prices took a tumble in the first quarter of this year — and a few ‘property flippers’ got their fingers burnt. How should long-term investors react? We take a hard look at the factors that continue to drive the property market in this extraordinary city. (LEAD)

By the first quarter of 2015, most commentators were reporting falls on the Dubai property market. During the first six weeks of the year, the average closing price of an apartment was down 3.7 per cent, and that of a villa 3 per cent. Property consultancies JLL and Knight Frank, both of whom keep a close eye on Dubai, expect prices to fall 10 per cent over the year. Moody’s is predicting losses of 15 per cent.

This retrenchment is equally visible at scale. In 2014, investors pumped Dh218bn(US$55bn) into the emirate’s real estate market. That’s a huge sum by any standards — but an 8 per cent decrease against the 2013 figure.

With some Dubai property investors getting nervous, it’s time to look at the big picture.

Dubai since 1960

Over the past half-century, Dubai has been one of the outstanding success stories of the Middle East.

The 70s oil boom tripled the city’s population, and made a vital contribution to the development of its infrastructure. However, the true origins of Dubai’s prosperity can be traced to the opening of its international airport in 1965 and the construction of the container facility at Port Rashid a few years later.

Over the last couple of decades, trade has far outweighed petroleum in Dubai’s economy. Oil revenues now account for less than 5% of the city’s rapidly-expanding GDP. Dubai’s ranking as one of the world’s five fastest-growing economies rests squarely on its success in trade and in the provision of financial services.

It is this global success which drives international demand for Dubai property. And, in the years of unrest since 2011, Dubai’s status as a business haven within the Middle East has served to increase the rate of capital inflows to the city.

Dubai corrects

Of course, no property market ever expands smoothly. Whenever Dubai prices fall, property investors think back to the events of 2008. But are January’s figures harbingers of an upcoming crash, or just a blip?

Rating agency Moody’s takes the latter view. “The slowdown in Dubai’s real estate market is positive in the long run,” says their report. “It… alleviat[es] our concerns about the housing market potentially overheating.” This position is common among the more heavyweight commentators, but it begs a further question. Given the underlying strength of Dubai’s economy, why is the market correcting now?

Long-term Dubai watchers point to the interaction of three distinct factors:
* The performance of the US dollar — since the UAE pegs its currency to that of the US, the strong dollar has undermined the affordability of real estate throughout the region.
* The depreciation of the rouble — the rouble’s 50% year-on-year fall has impacted the previously buoyant demand for investment and second homes among Russians.
* The action of the Dubai government — in 2013, higher property transfer fees were imposed as a means of cooling the market.

The same watchers point to signs of underlying resilience in the Dubai market. In particular, Dubai-based property advisory Phidar has reported a marginal increase in January’s transaction volumes by comparison with the same month in 2014 — with a stellar 8 per cent growth in apartment sales over the perod. This tends to confirm the view that reduced prices in this sector may simply reflect an increased availability of housing stock. (Prices in prestige developments like Emaar Properties’ flagship Downtown project are likely to remain more resilient, since the developers are able to control supply.)

Looking ahead

So, what will follow the correction? Since Dubai’s property market is underpinned by its international performance, we can look to the country’s economic growth for clues.

The fundamentals look good. Dubai’s GDP grew by 4.5 per cent last year. The rapid expansion of Jebel Ali port and Dubai World Central have served to consolidate its status as one of the world’s great trading centres, besides attracting professionals to the city in ever-increasing numbers.

Meanwhile, the city’s leisure economy continues to make unprecedented strides. In 2013, Dubai became the world’s seventh most popular destination, and the success of its tourist industry is set to continue with Expo 2020. Besides attracting more than 25 million visitors, Expo will generate Dh25bn(US$6.5bn) investment in infrastructure-related projects and create 277,000 new jobs — generating a further huge population influx to the city.

In short, blips notwithstanding, Dubai property investors have much to look forward to.