Dubai real estate is hot, and not just because of its desert climate. The city’s property sector has seen tremendous growth since 2002, when the Dubai government first announced that foreigners would be legally permitted to acquire freehold residential titles for designated areas. When that promise came to fruition in 2006, an enormous wave of buying ensued.
The high rate of appreciation in Dubai property values has raised concerns that a bubble has been created. From 2003 to 2007, new villa prices increased at an average of 226 percent over four years, and apartment prices increased by an average of 100 percent over four years, according to Colliers statistics quoted in GlobalPropertyGuide.com.
Rent pricing has also skyrocketed, with yearly increases ranging from 25 to 40 percent leading up to 2006, according to Arab investment firm EFG-Hermes’ statistics, as quoted in GlobalPropertyGuide.com. The government has since imposed caps on rental price increases, which have been progressively lowered: from 15 percent in 2006 to 7 percent in 2007, and most recently to 5 percent in 2008 for tenants who have occupied their apartments for two years.
The surge in prices has been the probable result of Dubai’s rapidly growing population, which has created huge demand for residential properties. Dubai’s population was estimated at 1.2 million people in 2005—almost twice the number recorded in 1993, according to GlobalPropertyGuide.com. Only 7 percent of the city’s inhabitants are local “Emiratis.”
Dubai's population has doubled and is expected to double again in the next decade
The population is expected to double again during the next decade, according to an article in The Business
Dubai’s real estate market has been compared to that of Singapore in 2000, which saw property selling prices increase a cumulative 37 percent over two years, according to a December 2006 report by EFG-Hermes quoted in GlobalPropertyGuide.com. After a short period of stability, Singapore’s prices dropped sharply by as much as 30 percent of their peaks.
Many industry players—not the least of which is the Dubai government—are nervous that the city’s real estate market might similarly crash. EFG-Hermes predicted that a downturn is inevitable and that Dubai property prices will fall by at least 25 to 30 percent in 2008 and 2009.
Earlier this month, an article in The Financial Times named Dubai as one of several international real estate markets that are overheating.
Naysayers point to the huge amount of residential property development taking place in Dubai as the main reason behind an eventual downturn. The report by EFG-Hermes estimated that more than 100,000 new apartments would hit the market in 2008 alone and that the total supply of housing in Dubai will double by 2010. Earlier this year, the Real Estate Regulatory Authority (RERA) in Dubai reported that about 500 developers are active in the market, according to an article published this month in Emirates Business 24/7.
Without adequate demand to fill the abundance of properties, prices are expected to fall hard and fast.
But progress for new developments has been much slower than anticipated thanks to increased regulations on developer activity, a labor shortage and a rise in construction costs.
Only a fraction of the supply promised by developers should actually come on stream this year.
The Trump Organization
is among the developers breaking ground in Dubai. The Organization has entered into a joint venture with the local-based company Nakheel for the construction of the 48-story Palm Trump International Hotel and Tower.
Although Dubai’s market performance for this year still largely remains to be seen, some experts remain optimistic and believe the real estate market will stabilize. Some have argued that the Dubai real estate market was previously undervalued.
“The valuation leaps from 2002 have indeed been tremendous. But this was an artificially depressed, closed real estate market before then, and it took some big discounts to get the market rolling to begin with,” Peter Cooper wrote in an Emirates Business 24/7 article published earlier this month. “Those prices were the anomaly, not the prices in the local market today.”
Many variables, including the rate of population growth and market regulation by the Dubai government, will contribute to the real estate market’s eventual performance.
In the midst of so many unknowns, there remains one certainty about the Dubai real estate sector: supply and demand will need to reach a sustainable balance, or else the infant property market is in for some serious growing pains.