Dubai: The health of the real estate market continues to dominate the local media. A divergence of views is being offered as the global economy adjusts to a period of lower oil prices, and possibly a gradual rise in interest rates.

Real estate markets from Singapore to Hong Kong have experienced negative price growth, and similar concerns have been raised about Dubai’s. Such comparisons may well be prescient in terms of investor expectations and it is imperative to look at the structure of the real estate market.

In particular, there are three predominant forces from which to draw lessons from:


Regulatory structure and the will to enforce regulations

Singapore, Hong Kong and Dubai have intervened in the real estate markets to cool off rapidly rising prices with a series of restrictions, from raising transfer fees to imposing mortgage restrictions. This has allowed for a curbing of speculative activity and for a more moderate boom and bust pricing cycle, with limited spillover effects into the economy.

Dubai stands out in this case for moderating — as well as initiating — demand in various areas of the city with the announcement of projects such as the Dubai Parks, Bluewater Islands and World Central to effectively manage demand-and-supply dynamics. The temptation for excessive tinkering remains and is one that regulators will continue to grapple with.


Global linkages and domestic market sensitivity will exert influence

Exogenous shocks such as the dramatic oil price correction combined with the impact on tourism and trade linkages will exert downward pressure on asset prices as historical correlations have already demonstrated.

This will most likely impact the “trophy” buying phenomena, and already been felt in housing markets of London, New York, Dubai and Singapore as wealthy buyers retreat in light of the recent economic shocks.


Housing markets remain ultimately local

Despite globalisation, the structure of the real estate markets ultimately is influenced by factors such as mortgage availability, demand-supply visibility and population demographics. And also by regulatory frameworks such as the process and ease of house transfers, and finally, the sheer “animal spirits” that links global investors to decisions.

In Dubai, the structure of the markets and increasing regulation has meant investors and end-users have been made aware of the visibility of the supply of domestic housing for the next few years.

The challenge will be one of demand in a market that continues to offer various buying options, especially in the supply of new housing stock. Here the key will be one of affordability, and as prices adjust downwards, it will be interesting to see the transference of tenants to the status of owner-occupiers. (It was a trend on the rise since 2009 and remained so in 2014 despite the price correction).


• Affordable housing

Similar dynamics will be witnessed in the office segment as affordable office ownership will become a key component for SME business creation and expansion, especially in the services sector such as technology, tourism, entertainment and downstream industries.

In both the residential and offices segment there remains a shortage in affordable housing (defined as the ability of the EMI and/or rent being less than 40 per cent of the annual median income). Particularly in the latter, there appears to be paucity in supply over the next two years.

The challenge for regulators as well as master developers in a market where there is a considerable surge in the supply of housing and commercial stock is not only to reduce the probability of a recurrence in the dramatic boom-and-bust price cycle on an ongoing basis.

They have to, in an environment of increasing financial complexity and conflicts of interest, address issues of equity and fairness that will allow for a balanced housing market.

The steps that Dubai’s regulators have taken have been effective in curbing exaggerated market movements. The challenge remains to address the issue of affordability.

Towards this end the incentive structures have already been altered and investors will be well rewarded to act on the same.


The writer is the Managing Director of Global Capital Partners.