To understand why Dubai’s housing market hasn’t quite performed in terms of what many analysts expected, it is perhaps important to not only look at trends in more developed markets but also the concept of investor expectations.
From Singapore to London, New York to Hong Kong, prices and sales have been cooling off, with transactions down between 17-40 per cent in the last four months. The earlier V-shaped recovery gave investors a false sense of how quick the recovery would be, and in many instances they underestimated the speed with which developers would offer new product in the marketplace.
This, combined with the aura (often misplaced) of trophy properties outperforming other segments has caused many of these markets to be top heavy, and has led to the phenomenon known as “saturation of participation”. In effect this means the plethora of offerings at the higher end has led to investor fatigue.
Meanwhile, while most of the scars from the preceding downturn have disappeared, some of the resistance in chasing prices continues to play itself out in the form of lower transactions, even adjusting for seasonality. The housing market struggles to pass the baton from bargain-hunting investors who typically pay cash, to traditional end-users who rely predominately on mortgages.
Amid this anxiety of reduced activity, there are a number of bright spots that need to be focused on in Dubai. The first is that the incidence of speculation has dramatically decreased.
From the slow deflation of off-plan premiums in the secondary markets to reduced asking prices in ready units (as exhibited by a 30 per cent drop in the velocity ratio across communities), it is clear the artificial price inflation has been successfully checked.
Second, this slowdown has gradually made it a buyers’ market again; not necessarily in terms of bargains that were available in 2011, but in terms of greater negotiating power by prospective purchasers. The gap between listed and transacted prices has systematically reduced (and in some cases have even inverted) indicating that sellers have become more realistic in terms of their price expectations and are adjusting.
Third, the flurry of off-plan project launches have led to a multitude of offerings that prospective buyers can choose. Gone are the days where long queues were being witnessed outside developers’ offices around the time of project launches.
Buyers have become more discriminating in terms of their purchasing decisions and are doing so with a great deal of more information. In this regard the authorities have taken various steps in making the market more transparent.
While many more such initiatives are in the offering, it is clear these efforts have borne fruit and that there is no more of the herd mentality witnessed in the heady days of 2007-08. Last, but perhaps most striking, has been the incidence of mortgage activity.
I have used mortgage transactions as a rough proxy for capturing end-user demand, and historically it has been a useful indicator in gauging end-user demand in particular communities. Using this proxy, what emerges is that end-user demand across communities has remained relatively stable.
Moreover, end-user transactions as a percentage of the overall have increased by up to 35 per cent on a year-over-year basis in communities such as Arabian Ranches, Emirates Living and Dubai Marina. This is perhaps the most compelling indicator of a more stable market going forward.
And even though the market does not currently offer enough housing options in the mid-tier, the lack of speculative activity and the emergence of end-user demand will compel developers to offer products in this segment in the near future.
The feedback from market participants is that the activity has become normal, and that the wild swing in prices appears to be a thing of the past.
What remains going forward is the macro-theme of securitisation of real estate. With more than $300 billion of construction projects in the pipeline, it is of no surprise that the health of the economy is symbiotic to the growth of the real estate sector.
To avoid a boom-and-bust scenario in the past, a proliferation of REITs and development real estate funds would not only deepen the capital markets but also enable the average investor to participate in the upside potential of this sector.
Just like the first equity mutual funds that were offered in 1997, we expect similar announcements for real estate funds in the near future.
— The writer is the Managing Director of Global Capital Partners.
