Towers on Shaikh Zayed Road. Dubai’s real estate market could witness a meaningful recovery in 2021. Image Credit: Ahmed Ramzan/Gulf News Archives

Dubai: Dubai real estate downturn is likely to continue during 2019 and is expected to stabilise in 2020 with no meaningful recovery expected until 2021 according to ratings agency Standard & Poor’s.

With relatively high concentration of loans (about Dh300 billion) to real estate sector in the UAE, that accounts for approximately 20 per cent of total loans and about Dh100 billion worth mortgages, (about 7 per cent of total loans), further decline in real estate prices are expected to have asset quality and credit quality implications.

“We think residential real estate prices could decline by 10 per cent to 15 per cent in 2019 and a further 5 to 10 per cent in 2020. In this case, we see no upside for Dubai residential real estate prices in 2021, as we expect it will take a while for the market to absorb oversupply,” said Sapna Jegtiani, a credit analyst with S&P.

Developers’ margins have declined significantly already over the past two years. Emaar Development Dubai’s margins fell to 37 per cent for the nine months ended September 30, 2018, from 48 per cent at year-end 2014; Damac Real Estate Development’s margins fell to 25 per cent from 47 per cent over the same period, reflecting the gradual price decline seen over the past three years.

After peaking in the second half of 2014, Dubai residential property prices have been declining over the past few years and are approaching levels last seen at the nadir of the 2009-2010 property crash, according to S&P. Decline in real estate prices are expected to have impact on profitability and asset quality of banks, insurance companies and corporates.

“Weak market conditions will continue to translate into higher leverage in the real estate sector and has already led to some negative rating actions over the past six months. Our ratings on banks, and insurance companies already incorporate these weakening real estate prices,” said Jagtiani.

Since their last peak in 2014, Dubai property prices and rents have fallen 25 per cent to 33 per cent in nominal terms (according to Asteco). S&P Global Ratings expects prices to fall further, coming close to levels seen at the bottom of the last cycle in 2010.

A further fall in real estate prices in the context of a significant contribution of government revenues linked to real estate and property sectors, there could be adverse implications for sovereign and corporate ratings.