Are We There Yet? 2012 will be the year of price stabilisation

Towards the end of 2009, a number of real estate bosses and commentators had started talking about recovery. These comments were based on slight price rises seen subsequent to the quiet summer and Ramadan months.

While these were comments from people with vested interests in the market, the unbiased experts were still maintaining that this is not a true recovery, that recovery would not be a V-shaped curve, but rather a W-shaped curve. The slight increase that was being seen was simply temporary and prices would fall further, before rising again.

They also predicted that the second time prices start rising would probably be in 2012-13, and that the rise would be steady and sustainable.

The situation is similar to what happens in the stock market — prices rise in anticipation of an event; but if that does not take place, prices go down. The price rise was not sustainable because fundamentally nothing changed.

Likewise, for Dubai property prices to start stabilising, fundamental changes are required in the market. Supply has to slow down and demand has to rise, only then will a recovery start. So is 2012 the year when this will happen?

Let's first take a look at demand. We were taught in high school economics that demand is the desire to own something, the ability to pay for it, and the willingness to pay for it.

Traditionally, there has always been quite a large group of people who desire to own property in Dubai. This could be wealthy Pakistanis and Iranians looking for a safe haven, or cash-rich Russians and Indians looking for alternative investment options.

Demand base

It could also be European and American investors who are not getting any returns from their stagnating home markets, or the expatriate population wanting to buy rather than rent. GCC nationals too prefer to invest in the region.

Last year's unrest in places like Egypt and Bahrain and the ongoing struggles in Syria have also resulted in increasing demand for rental units and holiday homes in Dubai.

Also, a 4.5 per cent economic growth is expected in 2012, with a number of companies planning growth through new hiring. These could be international companies looking for a hub to explore the growing Asia and Africa regions, local firms planning to grow organically and MNCs previously headquartered in troubled countries. With business growing, the desirability of rental property — both residential and commercial — is bound to rise.

It is evident that the desire to own or rent property exists, as does the willingness to pay for it. However, the ability to pay is still lacking.

Cautious lending

Jobs are still not secure, banks are extremely cautious with their lending, profit margins are dwindling and salaries have shrunk. Landlords are trying to work around this issue — offering rent-free periods and monthly payments.

Also, on the supply side, stock continues to be released, though the rate of increase has surely declined.

Whether this rate of new supply growth will be slower than the rate of new job creation is the fundamental question. The answer to this question will determine the future of the market. Unfortunately, a clear answer does not exist.

However, there are signs of recovery in certain locations. Areas such as Downtown Dubai, Jumeirah Lakes Towers and Arabian Ranches are witnessing stabilisation much faster than areas such as International City, Discovery Gardens, and Dubai Marina.

Whether 2012 is the year when the market will recover is difficult to say. But it can be said with conviction that it will surely be the year when stabilisation takes place and when prices will reach close to the bottom.

The writer is the head of research and valuations at Chesterton International.