Dubai housing market off to a false start

The Dubai residential sales market will soften further this year.

The Dubai residential sales market will soften further this year, according to Phidar Advisory's new residential research note.
"The market is undergoing a false start now," said Jesse Downs, managing director of Phidar Advisory. "Apartment sale prices declined only nominally this quarter and volumes increased, which could be mistaken for an impending recovery, but the market fundamentals still do not support this in the short term," she added.
Cost of debt has increased steadily over the past year and is set to continue to increase with one to two more Federal Open Market Committee interest rate hikes this year.
"Signs of recent stability in apartment sale prices are not sustainable because rents continue to decline. If the price decline does not match the rent decline, then yields erode and there is no justification for yield erosion in the current market. Additionally, the cost of debt is increasing which should push yields up and demand down, thereby pushing prices down," added Downs.
In the first quarter of 2017, apartment lease rates declined 2.5 per cent, while sale prices declined 0.5 per cent. Lease rates for single family homes (SFH), also referred to as villas, decreased 2.9 per cent and sale prices declined 5.4 per cent.
Rents continue to decline due to weak demand and changes in housing budgets, which will have the starkest impact on high-income housing.
"The rent declines are due to regional economic stagnation as well as redundancies, weak job growth and modest supply growth in Dubai. This will disproportionately impact the high end in the near term, but also the other segments, just more moderately," she explained.
"As the regional hub, Dubai's business prospects are linked to the regional economic performance, which is stagnant. This limits near-term growth potential for businesses, which impacts job growth and thereby demand for housing. At the same time, risk appetite is still tempered and increasing interest rates should push up return expectations, so investors are still wary and expect more."
Short-term capital inflows, specifically foreign investment from key countries like India and Pakistan, could push up volumes, but this is likely a temporary trend with nominal effect.
In Q1, Phidar's Dubai Real Estate Investment Demand Index (REIDI) decreased by 20.4 per cent compared to 2016, driven by exchange rate fluctuations and downward revisions in GDP forecasts. In the first quarter, the US dollar - and therefore the UAE dirham - strengthened against nine of the 14 floating currencies included in the REIDI, compared to Q4 2016.
"It is unsustainable to have yield erosion amid rising debt cost and liquidity constraints," she said. "As interest rates creep up and banks likely impose tighter lending standards, residential volume and prices should decrease," concluded Downs.
- deepthi@khaleejtimes.com