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Premium for luxury property units shrinks 50pc in Dubai

DUBAI —Launch-buyers of luxury apartments are getting lower returns this year with the premium for upmarket developments in Dubai plummeting from 60 per cent to 30 per cent this year.

According to a market study, although prices in the luxury segment are still at a premium to their price at launch two to three years ago, on average, high-end properties were being sold at a 30 per cent premium, as at the end of August, to their launch prices compared to more than 60 in 2006.

"This narrowing of realised premiums reflects the fact that developers are leaving less money on the table for launch buyers. The same conclusion is true for middle-income projects which have seen premiums shrink (end of August 2007 versus launch prices vis-à-vis year end 2006 prices vs. launch prices) from 30 per cent to 20 per cent," a recent study by EFG-Hermes said.

The study said with demand for villas remaining high, average prices have risen by around 16.4 per cent year to date. "Limited supply expectations for the number of villas coming on stream over the next few years, remains one of the major reasons for price appreciation. Another is that the handover of units and a buyer's ability to see the tangible end product has drawn attention to certain projects and thus led to a rise in values. This has happened for example with Palm Jumeirah. Also, larger family homes continue to benefit from strong capital appreciation," it said.

According to the report, the increasing correlation between the price of a particular project and its location, the track record of its developer, attention to design detail, and quality of the finished unit, suggests that buyers have become more discerning. "Today, there are examples of keenly priced properties that have seen prices remain constant or sometimes even fall due to a lack of one of the above characteristics as buyers have become more selective."

It observed that over the past eight months, the introduction of new laws and increased legal clarity have provided support to the Dubai property market. These new elements include the passing of the broker's law, the establishment of the escrow law, and the creation of the Real Estate Regulation Authority (RERA).

"These legal changes are encouraging improvements that reflect the government's commitment to a sound and loophole-free legal structure to govern the fast growing market. At the same time, there are still issues that need resolution.

These include the yet-to-be-approved Condominium Law, which will govern the rights and obligations of homeowners in tower-style developments, the absence of a mortgage law or any kind of legal framework to govern the rights and obligations of mortgage providers and holders, and issues related to mortgage defaults and repossession, and the lack of clarity on inheritance," the EFG-Hermes study noted.

"Thus, while Dubai moves towards incorporating international best practices and legal standards, it is unlikely that we will see loopholes such as the lack of foreclosure laws tested until more end-users begin to occupy their homes.

At the same time, we believe that the RERA in particular is a key strength for the Dubai market," the study pointed out.