Posted by Viruly Consulting on Wednesday, October 6, 2010

The Dubai property has a seen a decade of phenomenal growth, with the amount of commercial and residential space more than doubling every year.  Easy finance, the availability of land, and a conducive regulatory environment provided the steroids for a property boom. But, things changed in 2009. Approximately half the planned projects have been put on hold and estimates suggest that there is sufficient stock to meet take-up for the next decade.

While this slow down can be blamed on the global credit crunch some of the blame should  also be placed on the regulatory environment in which the Dubai property market functions. Ultimately property markets are driven by economic fundamentals and the economic base from which the demand for space arises. Economic growth and demographics affect demand for space, which developers and investors respond to.   With appropriate research these players attempt to match supply and demand, and when this is not achieved values either rise or fall. 

The Dubai property residential market has primarily been underpinned by speculative transactions that have  little to do with occupancy. The process went as follows; you access land and sell it to a developer at an attractive  margin, the developer sells units to investors ( often off-plan) and with little equity makes a considerable return. The investor, who acquires a residential unit, in turn sells it to the next investor making an attractive return. With investors generally exceeding available units this process carries on with investors paying little attention to fundamentals and the valuation of properties.  Often investors merely signed an option and resold the units on completion – the process requiring a minimal amount of equity. With the global crisis negatively affecting the asset base of potential investors, and developers finding it difficult to secure development finance, the speculative bubble started to deflate in late 2008 and property values decline  during the course of 2009 and 2010.This decline was not so much the result of rising vacancy rates (many units had never been occupied in any case), but rather the drying up of investors and debt financing.  Residential property values have declined in the region of 40% - 50% in the past year.

This speculative market was also encouraged by the lax regulatory environment.  It is likely that the market will re-emerge with the rules of the game having changed somewhat (as has occurred in financial markets across the world).  Planning regulations will probably tighten up, selling off plan could become more difficult, and the focus will be on ensuring that an appropriate relationship is maintained between investment demand and the occupation of space.  For instance , in  China  the property boom has  to some degree been managed by increasing  deposit requirements and reducing loan to value ratios.

While the supply of space in the Dubai property market has slowed, a number of developments that are presently underway  will continue to provide space in an already oversupplied market.  As investors and developers  will attempt to offload these developments, the impact of the extra units on the values of existing properties could be considerable.  

Although the short term investment risks associated with the Dubai property market remain high, there is little doubt that long term opportunities are considerable.  This is a market that will mature  with time , losing   the characteristics often associated with youth. 

Viruly Consulting