What lies beneath this resurgence?

Amidst the euphoria surrounding Dubai’s win to host the World Expo 2020, fears of another property bubble continue to linger, especially with the International Monetary Fund (IMF) raising the alarm on escalating property prices. Property Weekly speaks to different stakeholders in the industry to feel the pulse of the real situation.

Is there a bubble in the making?

Craig Plumb: There are worrying signs that the residential sector of Dubai’s real estate market is seeing prices grow at an unsustainable rate and some of the characteristics of the market in 2007-08 have certainly returned, with high levels of investment sales and some investors onselling units quickly in the secondary market.

We do not believe this currently constitutes a bubble, but steps need to be taken to ensure that another bubble does not emerge. It is definitely in the long-term interest of the market to see four or five years of sustainable price growth, rather than a period of unsustainable price increase, followed by another correction.

Mario Volpi: Looking at the rate of price increases this year, one would say that all the indicators are pointing towards a bubble forming. This alone, with no intervention from the authorities, would cause a definite boom-bust cycle. The jury is out on whether we are heading for trouble. This uncertainty is due to the intervention from the government and the Central Bank putting in place legislative measures to cool the market.

Mat Green: The residential market has now seen two years of growth, as the sector continues its impressive recovery. This recovery has seen sales and leasing rates rising ever higher each quarter, albeit average rates are still 20-30 per cent below 2008 levels.

While current fundamentals are strong, the level of growth witnessed during this period cannot be sustained indefinitely.

Niall McLoughlin: No. We believe that the property recovery in Dubai is sustainable. Dubai real estate has seen a gradual and sustained recovery since the downturn, with increased local and international investment. For instance, the market is still showing healthy signs, with continued new launches, strong pre-sales, price recovery spreading across communities and confidence from cash buyers remaining strong.

Pawan Dhawan: We believe the real estate industry has matured, which can be seen in the number of initiatives and measures that have been launched or proposed. Dubai’s real estate prices are still lower compared to those in prime global cities and are still well below the 2008 peak levels. With strong fundamentals, coupled with the right initiatives and regulations, the possibility of a bubble in the near future is bleak.

Rob Jackson: While there is undoubtedly potential for another boom-bust cycle due to unsustainable market drivers, a combination of ever-increasing regulation, financial controls and lower inflation have the potential to avoid a repeat of the last catastrophic market collapse.

We read about Dubai’s safe haven status as being a strong driver for the property market, but this is not, and should not be, a sound basis for a sustainable property market. A sustainable market needs to be attracting investment from further afield and, in particular, institutional investment.

Is the talk of another bubble just paranoia?

Volpi: Everyone, from CEOs to domestic workers, is interested in what the market is doing. Therefore, discussing whether a bubble is forming or not is a normal part of our psyche. There is always fear of talking ourselves into a situation, but I feel the authorities do have a handle on the situation, so there really is no need to panic.

Plumb: It’s certainly not paranoia and it’s good that the consensus is that another bubble would be a negative scenario and that steps need to be taken to help ensure this does not happen again.

Jackson: There is undoubtedly a risk, but further regulatory steps could be imposed by the government, if necessary. One of the major unknowns at present is the impact of the World Expo 2020 on property rental and sales prices. Any increases pegged against this by landlords and sellers are again totally arbitrary and based on sentiment, and this is where an urgent need for controlling the valuation process is required.

Don’t you think the way prices are escalating in the past year is not a very healthy sign?

Volpi: The rapid price increases this year is definitely not healthy at all, and, if this continues, we would for sure see a reaction. Prices go up and down, not just one way. My prediction is that we will see a correction in prices towards the end of spring or beginning of summer next year.

Plumb: Residential prices are growing at an unsustainable rate in many locations. Average villa and apartment prices have increased around 18 per cent in the year to October, while the overall rate of population and economic growth has been 4-5 per cent. This suggests an element of speculation is driving the market, which needs to be controlled and managed as house prices cannot continue to exceed the rate of underlying demand growth for a sustained period, without a bubble developing.

Green: While recent regulatory changes are an encouraging sign of a maturing marketplace, further regulation of the off-plan market is still required to help reduce price volatility and reduce the negative impact of speculation.

The current level of growth is not sustainable in the long term, with the rising cost of living already becoming a real concern for residents. As such, further regulation may be required, starting with the off-plan market, which is a key driver of escalation in other parts of the market.

McLoughlin: While Dubai property prices have increased consistently over the past couple of years, we believe prices remain significantly below peak. Dubai is an increasingly highly regulated real estate market, boosting confidence and investment in the UAE from overseas buyers.

Jackson: One of the principle challenges in the current market is the quality of property valuations provided by real estate professionals in the UAE.

Artificially elevated property valuations are undoubtedly contributing to the overheating property market and can impact the confidence of investors from outside the region. We are keen to see a consistent, professional approach to valuations, and, as a result, members of the Royal Institution of Chartered Surveyors (Rics) who undertake property valuations in the UAE are to be regulated under a new scheme designed to deliver transparency and boost investor confidence in the property market.

Dhawan: Prices are driven by market dynamics — supply and demand play an important role in driving such property prices. With investor confidence back, we have witnessed strong interest in quality properties from end users. In particular, consumer interest in residential property continues to rise in the revitalised real estate market, with concentration on established locations and developments that offer better facilities and amenities.

McLoughlin: Following the 2008 global downturn, the government has introduced regulations to more closely control the Dubai real estate market, including the regulation of all off-plan sales, the introduction of permits before a sale and the mandatory 20 per cent payment before construction. This has led to higher barriers into the Dubai residential sector.

It was also recently revealed that the Dubai Land Department is in the process of issuing a number of new legislation to further regulate the real estate market over the next two years and the recent mortgage regulations will also provide a more rigid structure.

Plumb: I think the Dubai market will always be partly driven by investment demand from outside the country. This makes it prone to pronounced cyclical ups and downs. It must be remembered that the Dubai market is relatively young (less than 15 years old) and volatility is a sign of less matured markets all lover the world.

There is definitely a need to better regulate the market. This may not necessarily require new regulations, but could also be assisted by more effective and consistent enforcement of existing regulations.

Volpi: For now, the measures that are in place are definitely doing their job. Therefore, the government and banks should be commended for keeping the ship steady. Do not be under any illusion that this is the end of any other cooling measure. If necessary, the authorities will bring other plans to prevent a collapse of the property market.

Dhawan: New rules and regulations on rental disputes, abandoned projects, foreclosures and quick auctions have already set an ideal ground for the real estate sector to thrive, which will nicely balance out the mortgage cap and the increase in property registration fee. We expect new regulations to boost investor confidence and put flippers at bay, and encourage end users to invest in the UAE real estate sector.

Jackson: While the Dubai Government is making positive steps by introducing improved regulation, there is still much that needs to be done, particularly in the disciplines of property valuation and property measurement.

Already, various stakeholders recognise the risk of an unregulated valuation market and since Rics has announced the introduction of its valuer registration scheme, there has been widespread formal support.

Green: A number of regulations have now been implemented to try and discourage speculator activities, and while they may dampen demand, it is unlikely that these steps alone will be sufficient to fully curb such activities in the short term. This is highlighted by the continued interest in off-plan property, with the majority of recent launches achieving high absorption of units.

The recent move to double property registration fees was also a step in the right direction, although ultimately this may do more to constrain end users than it does to limit the actions of speculators, in an environment where the majority of properties are being purchased in cash.

The steady economic growth should provide Dubai’s residential market with a solid platform to grow organically. Instead, we are seeing a rapid rise driven by speculation. How the market performs over the next two years will be correlated to how it is regulated.

Do you think the present growth rally is different from the pre-crash period?

Volpi: Definitely. During the previous boom, the market was driven by a very small end user part and a very large investor part. This time around, the end user market plays a major role and continues to fuel the recovery of the mortgage market, too. The fundamentals of this growth are such that different people are buying for what is perceived to be the right reasons (live in/rent out) rather than the wrong reasons (flipping).

Plumb: The clearest difference this time around is that the level of price escalation is certainly not as high as that seen in 2007-08. There are a number of reasons we believe the market is better positioned to avoid a sudden crash this time around.

These include higher levels of existing and future supply, which provides tenants and buyers with more choices, a lower proportion of off-plan sales, more government regulations and less access to finance. Excessive liquidity played a major part in fuelling the boom in 2007-08.

Many developers and investors are still working their way out of problems from the last market crash, and they are therefore siding with regulators in their desire to avoid another bubble developing.

Jackson: One of the other factors to consider at present relating to residential property is that salaries or remuneration of UAE residents is not increasing in line with the increases of property rent and sales prices, unlike in 2008-09 when companies were awarding significant remuneration increases to match inflation and retain staff.

In simple terms, the market seems to be reaching a point where residents are simply not prepared to pay the elevated rent and sales prices that landlords and sellers are asking.

Green: Today’s market environment clearly has some major differences to that in 2007 and 2008. For example, the availability of mortgages is currently more constrained with lower loan-to-value (LTV) rates and more stringent checks and requirements to receive approval. Five years ago, LTV rates were as high as 95 per cent for expatriates and up to 100 per cent for UAE nationals.

The ease of access to credit allowed a far wider demographic of investors to purchase homes, many leveraging themselves well beyond their income, in a trend that was made possible by the absence of a UAE credit bureau.

Another major difference is the composition of cash buyers compared to mortgage purchasers. It appears the current growth in sales is being driven by the actions of cash-rich investors, or those with easy access to finance from other emerging markets.

What are the lessons that Dubai should have learnt? What should be the way forward?

Jackson: Sustain the drive to adopt international best practice and standards by Dubai Government and UAE-based lenders, but with an immediate focus on the whole process of property valuation, regulating UAE-based valuers and following a consistent international standard for property measurement. Such steps would most certainly improve transparency and investor confidence and help deliver a healthy, sustainable, long-term growth in the UAE property market.

Green: Clearly, a number of lessons have been learnt, and that is reflected in the maturing nature of the regulatory environment whereby authorities have tightened controls on the availability of mortgage finance, in development where they have added new levels of security to weed out unscrupulous developers and in sales where they have increased registration fees.

That aside, there is still work to be done to build a more sustainable marketplace that not only encourages end users but also encourages long-term investors rather than short-term speculators. Proper regulation of the market is essential to avoid what was witnessed in 2008.

Volpi: I do think Dubai has learnt its lessons from the past, purely by the legislative laws passed since the crash of 2009 and all the changes to fees and the like. The government is watching the situation closely and will not hesitate to step in with further changes should the need arise.