UAE Property Hits, Misses

The United Arab Emirates (UAE) spent the last year on a property market rollercoaster as it reacted to financial crises the U.S. and Europe, but by the end of 2012 its two of its largest cities, the capital of Abu Dhabi and Dubai, were starting to show signs of divergent movement. Residential prices in Dubai jumped by nearly 19% by the end of the year while the same sector in Abu Dhabi dropped by 6.5% in the same period. Property transactions were also up in Dubai by 21% in the first half of 212 over the same period last year and foreign property transactions were even higher. Even so, the UAE is still considered in recovery due to its record boom and subsequent bust following the global financial crisis. For more on this continue reading the following article from Global Property Guide. 

After three years of house price falls, Dubai’s housing market is now recovering fast, while its neighboring Abu Dhabi, UAE’s capital, is still struggling.

In Dubai, widely viewed as a regional financial and transport and logistics hub, the all-residential property price index (RPPI) surged by a record 18.89% (18.26% in real terms) during the year to November 2012, according to Reidin.com.

• Apartment sales prices in Dubai increased 11.6% y-o-y to November 2012.
• Villa sales prices soared by 23.7% over the same period.

In contrast, the Abu Dhabi all-residential property price index dropped 6.5% during the year to end-November 2012.

• Apartment sales prices in the capital plunged 10.7% y-o-y to November 2012.
• Villa sales prices dropped by 1.8% over the same period.

Dubai’s RPPI is calculated monthly and covers 7 cities, 8 main districts and 4 major projects. Abu Dhabi’s RPPI is also calculated monthly, and covers 7 cities and 4 main districts.

The average sales price for high-end villas in Dubai rose by 18.2% to AED1,300 (US$354) per square foot (sq. ft.) in September 2012 from AED1,100 (US$299) per sq. ft. in January 2012, based on a report published by Cluttons. Likewise, the average price of mid-range villas in Dubai increased by 18.2% to AED650 (US$177) per sq. ft. from AED550 (US$150) per sq. ft. over the same period.

Demand is rising strongly in Dubai. Property transactions in the emirate rose by 21% to AED63 billion (US$17.15 billion) in the first half of 2012 from H2 2011, based on figures from the Dubai Land Department. Foreign property transactions rose by 36% to AED28.3 billion (US$7.7 billion) in H1 2012 from the same period last year.

In the third quarter of 2012, Dubai’s total residential stock was about 349,000 while the total residential stock in Abu Dhabi was around 202,000, according to Jones Lang LaSalle MENA. From end-2012 to 2014, about 37,000 new housing units are expected to enter the Abu Dhabi market and around 50,000 new housing units are projected to enter the Dubai market.

Rentals also reflect the strength of Dubai’s market and the relative weakness of Abu Dhabi. During the year to end-November 2012, housing rents in Dubai rose by 7.2% while they dropped by 6.2% in Abu Dhabi, according to Reidin.com.

To prevent speculations and another property bubble from emerging, the central bank recently issued circulars to banks cutting the maximum loan-to-value (LTV) ratio for Emiratis from 80% to 70% for the first property and 60% for the second unit. In addition, the LTV ratio was further cut for expatriates to 50% for the first unit and 40% for the second unit. The new rules are expected to be enforced at the start of 2013.

In 2013, demand is likely to remain suppressed in Abu Dhabi, while property prices and rents in Dubai are expected to continue rising, according to Jones Lang LaSalle MENA.

From spectacular boom to a great crash

Following the passage of the long-awaited foreign property ownership law in March 2006, a deluge of foreign money boosted Dubai’s ambitions. Europeans, including Russians, accounted for 20% of the buyers of all property categories. GCC, Arab nationals and UAE nationals make up 28%, Asians 40%, and Iranians 12%, according to figures from Global Realty Partners. The overall foreign ownership index of property kept by Colliers International soared 116% from Q1 2007 to Q3 2008.

From 2002 to 2008, Dubai’s property prices almost quadrupled, and large-scale developments turned Dubai into one of the fastest growing cities in the world. Some of the biggest projects include Jumeirah Garden City (estimated cost: US$95 billion), Dubailand (US$64 billion), The Lagoons (US$25 billion), Palm Jumeirah (US$14 billion), and The World (US$14 billion).

Then the global credit crunch hit. Amlak and Tamweel, the UAE’s two largest home finance companies, stopped offering new loans. The two mortgage lenders accounted for more than 50% of all mortgages in the country.

Foreign investors suddenly disappeared at the end of 2008, as the global financial crisis hit the emirates. This caused transaction volumes to plummet. The overall foreign ownership index was 50% down by Q4 2010, from its peak in Q3 2008.

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Almost half of all the construction projects in the UAE, worth around AED1.1 trillion (US$582 billion), have been either put on hold or cancelled, in response to falling demand and deteriorating market conditions. The table lists some of the megaprojects being delayed or cancelled:

However, with the economy already returning to growth, construction on some halted projects is expected to resume by end-2011.

In an effort to help the market, the government has announced over AED165.25 billion (US$45 billion) worth of future projects, which includes investment in transport infrastructure. This is expected to create more jobs and increase demand for real properties.

New index shows Abu Dhabi price falls

According to a new property index launched recently by the real estate agents Cluttons, prices in Abu Dhabi were down by around 12% in the last quarter of 2010 from the previous quarter.

The new index shows comprehensive price data for both villas and apartment sales over the past year. The index is based on prices and transactions in ten leading residential areas in Abu Dhabi. Properties included were categorized into high-end (e.g. Raha Beach), medium (e.g. Al Reef), and low end (e.g. Mohammed Bin Zayed City) according to specification.

“An important feature of the Index is that it only considers valuations and sales achieved, and excludes new launches, that are typically priced higher. This helps it reflect the real story and act as a true barometer of the state of the market,” said Harry Goodson Wickes of Cluttons.

Key rate unchanged

Mortgage interest rates in Dubai have, in the past, followed key US Fed rates, because of the peg to the US dollar. The dirham (AED) is pegged to the US dollar at AED3.67 = US$1. In 2008, when the Fed successively cut key rates, the UAE’s central bank was forced to track US monetary policy, causing inflation to hit a record high of 12.9%.

The Central Bank of the UAE set its first benchmark interest rate (overnight repurchase rate) at 4.75% in September 2007. The new repo rate gives the country slightly more flexibility in responding to changes in the US Fed funds rate.

After the Fed slashed its key rate to just 0.13% in December 2008, UAE´s benchmark rate was also reduced to a record low of 1% in January 2009. The key rate has been unchanged since then.

UAE’s mortgage market springs back to life!

Perhaps surprisingly, banks and other mortgage lenders in the UAE are returning to the market and offering new mortgage products. Tamweel, one of the largest Islamic mortgage lenders, is back in the market, having stopped trading its mortgage shares in November 2008 due to the global credit crunch.

More fixed-rate mortgage products have been introduced. In addition, “fee free” products, which allow borrowers to switch to a new lender at a lower cost, have been offered starting during the last quarter of 2010.

The UAE’s mortgage market has expanded rapidly in recent years. Mortgage loans grew from 4.1% of GDP in 2001, to 14.7% of GDP in 2010. In December 2010, total outstanding mortgage loans rose by 15.2% to AED163.2 billion (US$44.44 billion) from December 2009.

Loan-to-value (LTV) ratios are also increasing again, with some lenders offering as much as 80% LTVs on some projects. In the first quarter of 2011, mortgage loans were offered with interest rates ranging from 5.8% to 6%.

Rent control survives, alas

In 2006, the peak of the property boom, the government introduced a rent cap of 15%, to control rent increases. Then in 2007, the rent cap was tightened to 7%. In 2008, the rent cap was again reduced to 5% in an effort to curb inflationary pressures.

In January 2009, Dubai’s Real Estate Regulating Agency (RERA) unveiled a new rental index to replace rent caps. Following this a new rental law was released, establishing the rental index as a benchmark for rent increases.

Then in January 2011, RERA issued Decree No. 2, allowing adjustment of the rental index tables every four months to keep the rental values up-to-date which will also help in capping the rental rates.

Landlords and real estate leasing companies are required by RERA to register rental contracts on the newly-established e-registration portal system, the Ejari System, or face penalties for non-compliance. This will enable the authorities to track the movements of rental values in Dubai and to construct a full and accurate picture of the market. In addition, RERA introduced a rental increase calculator to assist tenants and landlords compute their rent cap figures.

On the other hand, in Abu Dhabi, the 5% rent cap was kept unchanged in 2011 from last year, according to the Abu Dhabi Executive Council. In addition, some amendments were issued to laws concerning the tenant-landlord relationship. These include:

• A lease will now be automatically renewed at the end of the contract period unless either party requests it terminated before then.
• The notice period to vacate a property is two months before the end of the contract term for residential properties.

Rents still falling

Residential rental rates are still falling. Homeowners unable to sell properties are renting units out, causing the supply of rental houses to rise sharply. Based on the latest report released by Asteco, a property management company:

• In Dubai, apartment rents dropped by about 3% in Q4 2010 from the previous quarter, and 17% from the same period last year
• In Abu Dhabi, apartment rents fell by 7% q-o-q in Q4 2010, and 16% to 30% from a year earlier

Annual rents in Q4 in Dubai ranged from AED23,000 (US$6,263) to AED120,000 (US$32,679) for one-bedroom apartments, to from AED70,000 (US$19,063) to AED190,000 (US$51,742) for large three-bedroom apartments, according to Asteco.

On the other hand, annual rents in Abu Dhabi in Q4 ranged from AED35,000 (US$9,531) to AED130,000 (US$35,402) for one-bedroom apartments, to from AED70,000 (US$19,063) to AED260,000 (US$70,804) for three-bedroom apartments.

Rents in specific developments:

• At the Discovery Gardens, annual rents for one-bedroom apartments range from AED40,000 (US$10,893) to AED50,000 (US$13,616); and two-bedroom apartments from AED55,000 (US$14,978) to AED75,000 (US$20,424)
• In International City, annual rents for a studio apartments range from AED15,000 (US$4,085) to AED20,000 (US$5,446) while one-bedroom apartments rent for AED22,000 (US$5,991) to AED25,000 (US$6,808)
• Annual rents at the Golf Gardens, located next to the Abu Dhabi Golf Club, were at AED250,000 (US$68,081) and up for a three-bedroom villa in Q1 2011
• In MBZ City, annual rents for villas closest to the Mazyad Mall start at AED140,000 (US$38,125)

Gross rental yields in Dubai are moderate at around 5.6% to 6.5%, according to a research conducted by the Global Property Guide in September 2010. Yields for smaller-sized apartments have moved up, but not those for larger-sized apartments.

Healthy economic growth

Overall GDP growth for UAE was 5.2% in 2011, after a minimal growth of 1.3% in 2010 and a contraction of 4.8% in 2009, according to the International Monetary Fund (IMF).

UAE may better the IMF’s real GDP growth forecast of 3.5% in 2012, thanks to high oil prices and an upturn in tourism, services and manufacturing, according to the Central Bank of the United Arab Emirates.

“Dubai may achieve 4 per cent growth or more as it was stated in the Dubai Economic Outlook for the year 2012; an equally high growth is expected in the emirate of Abu Dhabi following the recent decisions to create two new industrial clusters and to go on with some landmark projects; increased public spending in the Northern Emirates and expected high oil prices for the whole year”, according to the central bank.

From 2004 to 2008, the UAE economy expanded by an average of 7.9% per year, after an astonishing GDP growth rate of 16.4% in 2003.

In November 2012, UAE’s inflation remained flat at 0.5% from the same period last year, according to the National Bureau of Statistics. In Abu Dhabi, consumer prices rose by 0.8% in November 2012 from a year earlier, according to Statistics Centre Abu Dhabi (SCAD). On the other hand, consumer prices in Dubai dropped by 2.17% over the same period, according to Dubai Statistics Center.

UAE’s inflation is expected to remain below 1.5% in 2012.

This article was republished with permission from Global Property Guide.