Life & Style | People
Overcoming risk
Greater enforcement of laws and improved transparency will further boost the Dubai property market, says Jesse Downs of Landmark Advisory.
- Andy van Smeerdijk; editor;Freehold Weekly
- Published: 00:00 October 15, 2009
- Jesse Downs; Director of research and advisory services at. Landmark Advisory
- Image Credit: Silvia Baron
A year on from the bigger and bolder Cityscape Dubai 2008, this year's event was "really about observing and understanding investor confidence," says Jesse Downs, director of research and advisory services at Landmark Advisory. Whether developers are willing to show greater transparency and boost investor confidence, however, remains to be seen.
While the market has a long way to go, a number of positives have come out of the past 12 months, she says. "Although prices have declined considerably, the real estate industry has gone through a year of consolidation and is subsequently much stronger today. Obviously, there has been a return to fundamentals, which will ultimately benefit the local real estate markets in the medium to long term."
Yet for existing and prospective homeowners, the question remains: when will prices return to the peaks of 2008? "Eventually properties will return to 2008 levels," says Jesse. "The real question is: will it be in five years or 20 years? While this will inevitably depend on a number of factors that are impossible to predict at the moment, I don't think this will happen within the next five years.
"While the build time for villas can be shorter than an equivalent number of apartment units, villa communities are also more prone to rephrasing. However, our anticipated supply for villas is relatively manageable, compared to apartments. It will likely take four to five years to absorb all the existing and anticipated supply. All else being equal, I would imagine average villa sale prices returning to 2008 average levels in seven to ten years. It's important to emphasise that some of the better designed and constructed developments will fare relatively well and could recover earlier."
When you bought your property is crucial, she adds. If you bought at the peak, you'll have longer to wait.
"For example, at the height of the market in the third quarter of 2008, a four-bedroom villa in Jumeirah Islands sold for Dh10.8 million. At the lowest point for this development, a similar unit sold for Dh5 million, which represents a 53 per cent decline. Today you can find this type of unit for Dh5.8 million, which is a peak to current decline of 46 per cent. Obviously, anyone who bought at the peak has experienced considerable deterioration of their equity. However, the project was originally launched in 2003, when this villa would have gone for approximately Dh1.9 million.
"Anyone who purchased in 2003-2006 can still sell and realise modest to significant capital appreciation. This is an obvious statement, but it's really all about timing. Based on their purchase price, owners are generating gross yields varying from 3 per cent (based on peak prices and current rents) to 15 per cent (based on primary market prices and current rents). Of course, based on current market price the yield is approximately 5.5 per cent, which is solid compared to other markets. In some European markets, for example, a 3 to 5 per cent yield can be the norm."
JESSE ON...
…what the market still needs
"Both regulation and enforcement of existing law combined with improved transparency would greatly help the market become more competitive. With regulation, there is lingering uncertainty regarding the enforcement of the existing laws, which leave investors unsure of their realistic rights, responsibilities and options. This increases the market risk. When faced with a lack of transparency, the ensuing information vacuum is filled with rumours and supposition. In terms of investment, it becomes challenging if not impossible to accurately assess the risk. The default position is to assume the worst and opt out of the market altogether. In this case, it is better to be transparent."
…the mortgage sector
"We also need to see improved lending terms and activity in the mortgage market. With the prevalence of cash purchases and developer financing through a payment plan, the mortgage market is still relatively undeveloped. We need an improvement in activity and a decrease in mortgage rates. There is growing unmet end-user demand."
…Landmark's research
"A year ago when the real estate market started to falter, the perception of market research transformed virtually overnight. Over the past year we've seen the market become much more discerning and demanding in terms of the quality of research. Institutions and individuals are reading the reports with a much more critical eye. In fact, each time we produce a report the public provides us with feedback, both positive and negative."
...office prices and rates
"The anticipation of excessive new supply in the next two to three years combined with flagging demand fundamentals will lead both office sale prices and office rents to decline. The interesting factor to watch will be the evolution of landlord psychology. Landlords are still hesitant to extend lease terms beyond one year as they feel the market may recover. Eventually we will see standards like lease terms of three or more years. Landlords need to accept the market reality; there is no quick fix. Due to risk in this sector, opportunity costs, and the operational expenses from maintenance fees, it is wise to improve lease terms to attract long term, stable tenants. As this will take time, rents could be sticky in the short term."
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