Dubai: The current decline in Dubai’s property values could extend to an up to 20 per cent drop from their 2014 peaks, but still far removed from the rock-bottom it touched during the 2009-11 crisis years. In 2009-11, values were off by more than 50 per cent of their mid-2008 peak.

Two macro factors would be at work to counter a sharper correction, S & P reckons. “Dubai’s economy, especially, is more diversified and less reliant on oil,’ it states.

“Non-oil companies are contributing to a large share of GDP and employment, and their expansion may partly offset weaker demand from oil-related companies.

“Furthermore, non-national investors dominate real estate investment in the UAE, and in many cases, their spending power is unaffected by the decline in oil prices. Indian and Pakistani investors, for instance, accounted for more than 18 per cent of investment transactions in the UAE in first-quarter 2015.”

A second favourable outcome should come from the population gains, and will be a “fundamentally supportive factor for real estate prices and rents in the next five years or so”, the rating agency adds.

“We assume 5-6 per cent population growth for Dubai and 7-8 per cent for Abu Dhabi for the next two years in our base case.

“For instance, planners expect Dubai’s population to reach about 3 million by the time it hosts the World Expo in 2020.”

These projections should give some cheer to investors and developers who have seen a steady erosion in values — and demand — since the beginning of the year. Their concern has been that with more launches expected in the second-half of the year, it could create a glut in the marketplace of unsold properties if demand does not rise proportionately.

But the S & P report suggests that developers are much better placed than they were in 2009, when the enormity of the decline in demand took them completely off-guard. Also, both developers and buyers were overleveraged, which is not the case today.

“Real estate companies are better armed to deal with the current slowdown and should be able to absorb it with limited ratings impact,” the S & P report said, adding that the current weak spell should extend into early next year as well.

“The local regulator has established protective measures since the last crisis. We believe the risk of default has fallen considerably due to the implementation of a loan-to-value cap on mortgages (between 60 per cent and 75 per cent) and developers’ mandatory usage of escrow accounts, which can be released only when construction is completed.”

On residential values, Dubai should experience a 10 per cent correction through this year, S & P reckons, while “the fall is likely to reach -20 per cent for the worst locations only. We believe that prime areas will probably resist better than recently developed zones,” the report added.

According to Apoorva Mehra, Senior Client Manager of Acrohouse Properties, “Areas like Dubailand, Jumeirah Village Circle and Jumeirah Village Triangle have had prices dropping by almost 7-8 per cent in the past 10 months. Both apartment and villa values have gone down due to their positioning within the city.

“Comparatively, locations such as Business Bay and JLT have seen drops of 5 per cent ... their proximity to Shaikh Zayed Road and the respective metro stations make them areas in demand. Proximity of Business Bay to Downtown is being preferred by a lot of end-users.”

According to S & P, in Abu Dhabi, a shortage in “quality housing” is “why rents will continue to climb, albeit at a much slower pace than the 11 per cent of 2014,” S & P adds.

“With only 5,000 units scheduled for delivery in 2015, if rental caps or similar regulation aren’t introduced, we may continue to observe rent increases in the capital.

“The only dampener we foresee for Abu Dhabi is the currently softer economic conditions driven by lower oil prices, which could keep rent growth in the single-digits.”