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GROWTH 'NOT DUE TO SPECULATION'

Dubai residential prices 'rising on strong demand'

Dubai, September 4, 2013

The housing prices in Dubai are rising on the back of strong demand and much-improved economic fundamentals rather than speculation, according to a study by Standard Chartered bank.

Following a sharp contraction in both prices and volume of transactions in 2009, the emirate’s housing market began to recover very gradually in 2011. Slowly but steadily, confidence has returned to the market, stated the banking giant in its research.

The second quarter of 2013 marked the fourth consecutive quarterly increase in residential prices. "In the past twelve months, residential prices have increased by 38 per cent for apartments and 24 per cent for villas, with rents increasing by 20 per cent and 17 per cent, respectively, it stated.

Standard Chartered pointed out that the housing market was influenced by broader economic trends.

"Dubai’s economy has experienced solid and sustainable rates of growth over the past three years with the key drivers beingare logistics, hospitality and retail. This looks set to continue, particularly when it comes to logistics, which contributes 14 per cent to GDP," it stated.

"We expect trade to increase in the years to come on the back of the increased spending plans of most governments in the region, including Abu Dhabi, Qatar and Saudi Arabia," said the bank in its report.

"Tourism is also expected to grow at an average of 6.5 per cent per annum between 2011 and 2021, pushing up employment growth for the sector by 4.1 per cent per year," it stated citing a Dubai Chamber of Commerce and Industry study.

"We expect 'Expo 2020' to be a meaningful contributor to the sustainability of the housing market, in the event of a positive bid result in November 2013," said the bank in its study.

Expo 2020 is a universal exposition which five cities have bid to host: Izmir (Turkey), Ayutthaya (Thailand), Yekaterinburg (Russia), São Paulo (Brazil) and Dubai (UAE). Since Ayutthaya was disqualified, Dubai’s chances of winning have increased.

In the event it does, close to 300,000 more jobs could be created with 25 million people visiting Dubai, said the report.

About 90 per cent of the job opportunities would occur from 2018 to 2021, with most of them created in the travel and tourism sector. This indicates a good chance that a high percentage of these will be converted into permanent jobs, which would benefit the expanded economy in the post-Expo period.

Standard Chartered said the demand for housing was on the rise, due to Dubai’s population growth. The city’s population is the second-largest in the country, after Abu Dhabi, largely comprising expatriates.

The population increased from two million in 2011 to 2.1 million in 2012, according to the Dubai Statistics Center. We expect it to reach 2.2 million in 2013.

Dubai is cementing its status as a safe haven in a region of political and economic turmoil, attracting people from unstable countries around the Mena region, with property-listing agencies reporting an increasing interest from buyers from countries in political turmoil.

On the aftermath of the bursting of the property bubble, Standard Chartered said the sharp increases in property prices in 2008 were driven by excessive short-term speculative activity, especially on off-plan properties.

"For these properties, buyers only had to put down 10 per cent deposits (rather than the full price), so the market became highly leveraged. Many buyers never had the intention (or the funds) to pay the future instalments as they planned to flip the property before any payments were due. This turned the housing market into an unsustainable, highly-leveraged derivatives market," said the study.

Standard Chartered said it had pointed out these problems in its study "On the Ground, ’A tale of two housing markets," published in July 2008.

"It was therefore no surprise to us that in 2009 there was a sharp correction in housing prices, accompanied by a rapid decline in property transactions. Rents bottomed out in 2009 from their 2008 peak, decreasing by an average of 44 per cent between the fourth quarter of 2009 and 2008."
 
Similarly, residential sale prices were down by 50 per cent between 2009 and 2008. In 2010, the rental decline slowed, with little to no change in villa and apartment rental prices during the year, which had fallen a substantial 32 per cent and 21 per cent between 2009 and 2010, it added.

According to Standard Chartered, 2011 marked the beginning of the housing-market recovery, with villa rent and sale prices starting to register positive-sign changes, outperforming the apartment market, which only experienced the same in 2012.

"The following year Dubai property market witnessed a positive uptrend in sale and rent prices, with sale prices improving faster than rents. For sales, villa prices outperformed apartment prices again, rising 24 per cent and 12 per cent, respectively, between the fourth quarter of 2011 and 2012 ," it stated in the study.

In 2013, the tables turned, with apartments showing a stronger performance than villas. In fact, apartments are now selling for 12 per cent more and leasing for seven per cent more than the previous quarter, whereas villas are selling for eight per cent more and leasing for six per cent more.

Standard Chartered pointed out that the strong performance of apartment leasing was pricing out some tenants from more expensive developments, benefiting more affordable areas such as International city, which topped all other areas with an increase in average rental rate of 27 per cent y/y and 11 per cent q/q.

Similarly, the top-performing area in the villa leasing market is the Springs, with an increase in the average rental rate of 35 per cent y/y and 10 per cent q/q.

The residential-sale market’s top performers are the Greens, with a 44 per cent increase in apartment sale prices y/y and 15 per cent q/q; and Jumeirah Village, with a 40 per cent increase in villa sale prices y/y and 25 per cent q/q, it stated.

According to Standard Chartered, in 2012, the real estate market’s paradigm shifted with the release of two new laws aiming at increased transparency and better regulation: the Investor Protection Law and the Code of Corporate Governance for Developers, drafted by the Dubai Land Department.

The first intended to protect real estate investors from delays in completion and handover and from unilateral changes consisting of violations of terms and conditions by developers. It allows investors to cancel their contracts in these situations and have their money refunded.

The second law requires disclosure from developers to investors regarding information about their properties, including alternatives in case of delays. This law defines the responsibilities of developers.

This commitment towards improving and strengthening corporate governance practices by protecting property rights has helped gain new investors and maintain existing ones. Stakeholders such as home-owners and tenants have regained confidence in the real estate sector, as reflected in the recovery of market prices, said the bank in its research.

Also improving fundamentals and rising prices are feeding through to improved confidence. This could drive prices further up, with prices and investment feeding off of each other.

Standard Chartered said it expects housing-market supply to grow at the same pace as demand, with new projects being launched in a more planned and controlled manner than in the past.

"Dubai’s housing market is comprised of 417,900 apartments and 62,000 villas. Residential supply has been growing at an average compound rate of around 8 per cent, with apartments increasing by 9 per cent and villas by 4 per cent. By the end of 2013, supply should increase by 19,400 apartments and 3,400 villas, assuming there are no delays in construction schedules," the bank stated.

The largest proportion of future stock from 2013 to 2015 will be delivered in the sub-markets of Dubailand (7,900 units); Business Bay (3,800 units); and Dubai Sports City (3,800 units). We expect the city to expand, with a focus on new developments outside central Dubai, in areas to the south and east, it added.

Standard Chartered said at the moment, the market seems to be driven primarily by fundamentals rather than speculation. "Although there is a risk that this could change, it is encouraging that regulators are drafting laws to curb excessive speculation in off-plan properties," it added.-TradeArabia News Service




Tags: Dubai | property | demand | residential |

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