UAE property prices 'showing signs of stabilization'
Dubai, May 21, 2014
The real estate prices in the UAE are showing signs of stabilization after strong growth in the past two years, particularly in Dubai and a big drop in prices is unlikely in the short term, said a report.
The future direction of prices hinges on the level and pace of new supply coming to the market, which is significant in Dubai and less so in Abu Dhabi, according to the S&P report.
Excluding unforeseen shocks, S&P's Ratings Services believes a big drop in prices is unlikely in the short term, and that's good news for the country's banks, which have large loan exposures to the real estate sector.
In addition, this sector is vital to the UAE's economy, and a correction that provokes a rise in unemployment could involve serious aftershocks for banks, like those during the last real estate crisis in the UAE.
What's different so far in this price run-up is only modest growth in the exposure of banks, compared to the spike in real estate transaction volumes. This suggests that the local banking system's contribution to financing real estate transactions is currently low, stated the S&P in its report.
"But that is likely to change this year and in 2015, in our view. We foresee an acceleration of real estate lending as developers launch new projects, and more local and expatriate customers seek to enter the mortgage market, the ratings expert said.
Tighter rules on new mortgage loans, capping loan-to-value (LTV) ratios, are likely to buffer banks. But if they aggressively expand their exposure to the real estate sector, risks will continue to build, it added.
According to S&P, there has been about a 60 per cent rise in prices over the past couple of years in Dubai. "Prices in the emirate have reached pre-crisis levels in prime areas, while prices in Abu Dhabi are still below their 2008 peak. Over the past couple of months, real estate prices have shown signs of stabilization, particularly in Dubai," said the ratings agency citing data by REIDIN.com.
"We believe supply will drive future prices trends in the UAE, and we see a significant amount coming to market in Dubai, but less so in Abu Dhabi," it added.
S&P pointed out that the real estate sector was basking in good economic growth in the UAE, which is likely to remain healthy. "We forecast GDP growth of 3.8 per cent in 2014 and 2015. The country is also stable, compared to instability in some countries in the wider Middle East region. That and low interest rates are attracting strong external demand for Dubai real estate from regional and international investors.," the report stated.
Looking ahead, Dubai has won host rights for the World Exposition in 2020, which is likely to boost the emirate's investment in infrastructure, construction, job creation, and ultimately demand for real estate.
Real estate transaction volumes increased by about 50 per cent over the past year in Dubai. Land sales reached Dh120 billion in 2013--excluding remortgages and donations--compared with Dh49.5 billion in 2010, according to Dubai's Real Estate Regulatory Agency. However, sales volume is still below its Dh188.4 billion peak of 2008, said the S&P in its report.
"We are using land sales as a proxy for total demand (land and residential real estate) because this times series is not publicly available. One figure we do have showing total demand is for land and housing real estate transactions in 2013, which reached Dh236 billion compared with Dh154 billion in 2012. Notably, they were almost evenly split between local Dh122 billion and external demand Dh114 billion, said S&P in its report.
S&P's views this significant presence of foreigner investors as potentially negative for the market's overall stability. Indeed, during the last real estate cycle, we understand that a significant portion of foreign investors exited the market entirely, accentuating the nosedive in prices.
Generally speaking, nationals arguably have a greater long-term incentive to hold their investments, while foreigners might have a greater incentive to sell and leave the country.
"We think the tendency to sell is even greater for off-plan sales where locals as well as foreigners are likely to sell if prices trend downward. Additionally, given the country's employment structure, the loss of jobs in a down cycle is significantly more pronounced among foreign workers and expatriates than among UAE nationals," he added.
According to S&P, the mortgage loans - including residential mortgages, commercial mortgages, and other loans backed by real estate - have remained almost stable in the past year. "However, we foresee an acceleration in 2014 as new local and expatriate customers seek to enter the market," it stated.
The banking system remains highly exposed to the real estate sector. Loans to the sector represented about 30 per cent of total loans and 122 per cent of total equity at year-end 2013. That's still below the peak in 2008, when total exposure to the sector was almost 150 per cent of banks' equity.
The ratings agency pointed out that several factors could cause the real estate sector in Dubai to slide back into a correction. The three most prominent factors are linked to large government-related developers, foreign investors, and US monetary policy.
A correction could also follow a sudden tightening of US monetary policy, which could reduce global liquidity in general and specifically foreign investment flows into the UAE real estate sector. However, we expect the Federal Reserve to continue to gradually taper its quantitative easing program throughout 2014 and do not foresee any major increase in US interest rates.
On the future outlook, S&P said the base-case scenario excludes a severe property price correction in the UAE within the next 12 months. "For that reason, as well as healthy economic growth and an upbeat corporate sector, we believe that the banking system in the UAE has good prospects for now," it added.-TradeArabia News Service