Global events weigh on Dubai property market sentiment

The Dubai property market is currently dominated by end-users and long-term investors enjoying world-leading rental yields.

The UAE property market is heavily reliant on expatriate and international buyers and is, therefore, vulnerable to international economic dips. 2016 has been a challenging year for much of the global economy and, as a result, international events have adversely impacted local prices and sentiment. But, the UAE property market has shown resilience, maturity and despite a general decline in prices, given buyers reason for optimism.

In the past, it has been suggested that the UAE real estate prices have been driven by hype rather than the fundamentals of supply and demand. Today, we have a market dominated by end-users and long-term investors enjoying world-leading rental yields. But like a boat in open waters, international waves have been crashing across the bow.

By the time 2016 started, prices in most communities across the country had been falling for up to 18 months since their mid-2014 peaks. Many have tried to time the bottom, but for various reasons, prices have continued to fall.

Oil price
In a region heavily dependent upon oil revenues, there is a correlation between the oil price and the performance of other industries.

Despite Dubai being better diversified than other GCC economies, oil underpins the economic performance of the region and has a direct impact on property prices. If the UAE property market is sentiment-driven, nothing creates more sentiment than the region's major commodity, employer and revenue generator.

Currency factor
A historically strong dollar made UAE property more expensive for an international investor, many of whom did the sums and figured out they could get more for their money elsewhere.

Brexit
Around mid-year, oil was back over $50 per barrel and sentiment was improving, and then we were hit by Brexit. While the mid- to long-term implications of Brexit are likely to be positive for the UAE, its immediate effect has been to devalue both the British pound and the euro. This made UAE property relatively more expensive. UK and European buyers shifted their attentions back home. Asian and GCC investors snapped up good buys particularly in London. Local prices dipped further.

Mortgage cap
The UAE Central Bank first announced the mortgage cap in late December 2012 as speculators began ramping up UAE property prices. It was implemented 12 months later and aims to cap lending to 75 per cent of the property value for a first purchase (80 per cent for local UAE buyers). Mortgages on properties priced above Dh5 million were capped further (65 local for expats/70 per cent for local UAE nationals). For second or subsequent properties, it was capped at 60 per cent for expats.

This policy along with the doubling of the Dubai Land Department transaction fee to four per cent helped avoid a repeat of a 2009 style crash where property prices fell 50 to 60 per cent within a year. But by mid 2016, after two years of falling prices and as the market faced a number of external challenges, it was proving to be counterproductive.

During summer came some respite. Although there was no change in the official Central Bank policy, some lenders re-interpreted the guidelines and began offering mortgages that allowed 75 to 80 per cent of the purchase fees to be borrowed and added to the loan. This stimulated the market and mortgaged transactions increased.

Outlook for 2017
Oil is predicted to average between $50 to $60 per barrel next year; lower than historical averages but buoyant enough to maintain reasonable levels of optimism, revenue and employment.

The US dollar is predicted to remain strong and increase further. US interest rates are tipped to increase to slow their economy and although UAE banks typically rely on depositor funds for lending, local rates are likely to increase 0.5 per cent per annum as a direct result.

We've witnessed excess demand and clear undersupply in affordable housing, particularly in the affordable villa segment in 2016. This trend is likely to continue and to cause upward pressure on rents and prices in this segment.

Increased competition from new stock entering the market if combined with sluggish regional economic conditions may cause downward pressure on prices and rents in emerging newer Dubai communities.  

Prices are expected to be stable in "blue-chip" communities in Dubai and Abu Dhabi and may begin edging upwards towards the end of next year.

The writer is CCO, propertyfinder Group. Views expressed are his own and do not reflect the newspaper's policies.