Questions raised over Dubai property supply amid gloomy price forecast

The fall in residential prices in Dubai which has been taking place over the past three quarters looks set to continue for the second half of this year and the early part of 2016.

The underlying problem appears to be that builders keep outpacing buyers – although at least one developer is wondering if local consultancies’ forecasts are overstating the outlook for supply.

Looking back to the first quarter of this year, CBRE’s UAE head of research and consultancy, Matthew Green, says that sale prices dropped by 2 per cent and rental growth stayed flat.

“We’ve seen these trends continue into Q2, and we see them continuing into the rest of the year,” he said. “In fact, there may be a speed in the pace of sales decline.”

He attributed this to the considerable pipeline of properties that are due to come onto the market this year. At the start of 2015, CBRE predicted that there would be 23,000 new homes delivered in 2015.

“We think that may come down somewhat, but we still think there will be around 20,000 completions,” Mr Green added. That represents a significant ramp-up in supply. In 2013, around 14,000 new homes came onto the market and in 2014 that increased to 16,000.

When asked whether he thought this was made up of projects that were launched prior to the 2008 financial crash, or new launches that have occurred over the past three years, he said it was “a bit of both”.

“There is a lot of product coming in from areas like Sports City and Dubailand. The projects that have been restarted are the ones being completed there. But there are also Downtown Dubai projects that will be handed over and these have been launched in the current cycle.”

Niall McLoughlin, senior vice-president at Damac Properties, said that there has been a lot of unnecessary doom-mongering about the state of Dubai’s property market, and that the pipeline of new homes due to be delivered this year has been overstated by the property consultancies, whose estimates have ranged from 16,000 new units to 23,000.

“We, as a publicly listed company, have reported to the market that we are going to deliver 2,500 units this year. Our main competitor has reported 600. So if you take the top two developers in town, who are delivering, let’s say 3,000 units, and the market is saying that the supply this year is going to be 21,000 – where is the rest coming from?” he asked.

“If you take a typical 30-storey tower, with around 200 units, that would mean you’d need another 90 towers. We’re stumped and we can’t get to the bottom of where these numbers are coming from.”

He also argued that the decline in property values can be explained by the fact that in 2013 and early 2014, many of the project launches that took place were at prime sites in Downtown Dubai, where apartments can generate up to Dh2,000 per square foot. Now, developers are building in peripheral locations where prices are around half of that.

“It’s a different product, and that’s key to the Dubai market. It has matured and there is a need for more value accommodation.”

Craig Plumb, head of research at JLL MENA, said that Damac has a point when it comes to completions – but added that the supply numbers come from the developers themselves.

He said that JLL’s own data, which said that 720 units were delivered in Q1 but forecasted a further 22,000 completions this year, “is based on what developers inform us each quarter, and in reality they are always overly optimistic”.

“It is quite normal that many of these units will be delayed into 2016 and 2017.”

Indeed, a ReidIn / Unitas Consultancy study released today found that the completion rate for projects due over the past three years has been just 61 per cent, meaning that almost four in 10 that were expected to be delivered have not been.

If this trend gets any worse, it argued that the anticipated fall in demand may not take place at all.

“The price action of Dubai’s real estate market will be greatly influenced by the rate of completion of ongoing projects,” it said. “If the rate falls below 60 per cent, we opine that the lopsidedness will cause prices to trend upwards. However, if developers stay on course and deliver projects as per schedule, the variety of options for buyers and renters will force prices/rents to fall further.”

John Stevens, managing director of the consultancy Asteco, said that if property values don’t hold up then projects will be held back.

“Rental declines will depend on whether the anticipated supply is actually delivered during 2015, and, if this is significantly delayed, downward rental adjustments may be seen only from 2016 onwards.”

He also sees a trend towards more affordable homes, stating that “value for money has become more important than property prestige”.

He pointed to a recent move by Dubai Municipality to allocate more than 100 hectares of land in the Muhaisnah 4 and Al Quoz 3 districts to developers capable of building affordable homes aimed at those with salaries of between Dh3,000 to Dh10,000 per month as evidence that the affordability issue is being addressed.

Mr Plumb expects sale prices and rents to drop by around 10 per cent over the course of 2015. His assessment matches a June 22 report from Standard & Poor’s on the UAE market, which suggested a drop in values of 10 per cent across Dubai, with some of the less popular areas potentially experiencing falls of 20 per cent.

Dubai Land Department data for the first five months of 2015 shows that the value of all residential units sold (excluding off-plan and land sales) fell by 46 per cent year-on-year to Dh10.3bn (2014: Dh19bn).

Volumes have also dropped, which Mr Plumb attributes to the mortgage cap and the doubling of the transfer fee (to 4 per cent from 2 per cent). Both changes were introduced in late 2013 to cool the market. Mr Plumb also said that the increase in value of the US dollar, to which the UAE dirham is pegged, has made property more expensive to buyers from some markets.

It is at the top of the market that prices have fallen fastest, according to the ReidIn / Unitas report. Affordable homes, of less than Dh1,000 per sq ft, have witnessed a 13 per cent decline since mid 2014, while prime property values are 26 per cent lower.

“This corresponds to the hypothesis that the real estate market had become top heavy, and at the lower end of the market there has been buying activity in select communities, to capitalise on price declines,” it said.

Perhaps more worrying, though, is what Mr Plumb describes as “reduced confidence among investors, who now believe prices are stable at best, and probably declining, and there is therefore no rush to buy real estate”, said Mr Plumb.

“Many have adopted a ‘wait and see’ approach,” he added.

Rizwan Sajan, the founder and chairman of Danube Properties – which recently launched its Glitz 3 project containing 352 apartments in Dubai Studio City – believes “wait and see” is a mistake.

He acknowledges that the market is “a little slow” as a result of shaky investor confidence.

“People have liquidity, they have the cash. But they are a little confused whether they should invest or not,” he said.

“If you ask me not as a developer but as an individual, I would say that when that confidence returns, at that time you will probably be too late to buy. If at all you are serious about investing in Dubai, then you should do when the market is slow.”

He made the argument that compared with cities that he views as Dubai’s peers – London, New York, Hong Kong and Singapore – properties are typically valued up to three times higher than they are in the emirate. “It won’t be very long until Dubai catches speed.”

The picture in Abu Dhabi is very different – largely, said Mr Green, because the pipeline of new homes to be delivered over the next three years is around half of that in Dubai.

Rents and sale prices have continued to rise steadily – at around 3 per cent per quarter, according to CBRE – ever since the emirate removed its rental cap in September 2013.

Mr Plumb says that values are also being upheld as a result of “limited quality supply across all price points”. JLL recorded an 11 per cent increase in rents in 2014. This continued into the first quarter of 2015, when they rose a further 4 per cent.

Asteco’s Abu Dhabi general manager, Jerry Oates, said that while Abu Dhabi has many major projects due to complete over the next two years, there is only the Hydra Avenue scheme at Reem Island that is likely to be handed over in the next six months.

“There is nothing significant that is likely to be completed within the next 12 months,” he said.

Mr Green added: “When you look at its pipeline, you have about half of the supply coming through in the next three years as you have in Dubai. In Dubai, you have 65,000 units coming through – in Abu Dhabi, you have 27,000.”

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