Dubai: Rental and capital values in Dubai continue to strengthen.
Reidin.com’s data for May showed apartment rents and prices outperforming the villa segment on a month-on-month basis.
Dubai has been ranked higher than prime markets such as Monaco, London, Hong Kong and Moscow in a recent survey comparing increases in property values. Dubai is the only city from the Middle East on the list.
Property transactions in Q1-2013 have risen to Dh44 billion, up by 63 per cent from the same period last year. Apartment sale prices rose 2.13 per cent month-on-month and 17.3 per cent year-on-year (June 2012 to May 2013), while villa sales prices were up 1.56 per cent month-on-month and 12.2 per cent yearly.
Analysts have observed prices are back to 2006-07 levels in the popular areas and premium locations. The Armani hotel apartments have reached peak levels, which could be a warning sign for a market that was struggling last year.
The inflow of positive economic news and the recent upgrade of the UAE to an emerging market by MSCI has also buoyed investment prospects. This has led to much optimism among market participants, sometimes matching the irrational euphoria observed in 2008 before the crash.
It is therefore becoming an enormous task to juggle those realities with property owners and banks who are demanding ever higher valuations for their properties. In many instances, agents are submitting to their will for making a sale or getting that account. Anecdotal evidence suggests many banks are pressurising values to improve/increase their valuation to enhance their loan-to-mortgage ratios and balance-sheets.
The effect of this has been felt in areas such as Downtown Dubai and villa communities where rentals and sale prices have spiralled over the past year. The effect has been cascading to mid-priced communities such as Discovery Gardens and Sports City, where rents have spiked by 30 per cent over the first quarter.
These increases have also been propelled by generous housing allowances offered by state-owned entities which are higher than the current going rate. Since these allowances are only reimbursed when the employee take possession of the property, tenants are selecting properties by the highest rental value that meets their allowance.
Another reason for increased rents is the falling rental yields in an era of increased expenses. Landlords are increasing rentals to balance returns on their portfolios.
Such spikes have economic implications as tenants in these areas feel squeezed by sudden increases and rethink the viability of renting in the emirate. This might also lead them to demand an increase in salaries which might push up the cost of doing business. There is already a buzz around the expat community in the emirate that another phase of price inflation might be around the corner.
Most buyers want completed properties, though off-plan sales are now generating tremendous interest as reflected in sales launches from leading developers. The off-plan market has remained under control due to stringent regulations relating to minimum holding periods and payment methods, which have reined in speculators.
However, a few are finding a way around the law and selling off-plan properties demanding 10-15 per cent premium within a week by creating various MoUs and shadow companies. Institutional players are securing big blocks of property sales, for the purpose of investment, creating a false sense of demand.
It would be an exaggeration to say that we are heading towards a crash; however, on the side of caution, key transactions can be monitored. Banks need to remain prudent on the demand side, both the central bank and commercial lenders should take a more cautious stance towards property lending.
Emphasis must be laid on realistic property valuations rather than favourable valuations. Developers must ensure that they meet market needs on the supply, meeting genuine demand which can be accomplished by analysing the type of sales — institutional or retail. Retail or end-user sales must be encouraged as these are more stable and fall in line with long-term interests of the industry.
— The writer is the head of valuations and research at Chesterton International.