Dubai Property: The brow of the hill (page 1 of 2)

Concerns about property bubbles abound around the world. Dubai is no exception. In recent years, we have seen a dramatic price appreciation. By the end of 2005, we estimate that property prices had doubled in the previous 3 years. There have been several causes of the boom. First, the dramatic expansion in non-oil activity led to an increased demand for housing as more and more people relocate to the city. Second, high rental yields (estimated at around 8-10% for the apartment sector and 6-8% for the villa segment) have attracted investors into the market.

Third, the excess liquidity generated by the region's petrodollars has led to a sharp increase in speculation in asset prices around the region. We have already seen the bursting of the stock market bubble, which resulted in the Dubai financial market index losing over 65% from its peak a little over a year ago.

Finally, we have identified a fourth category of buyers - insurance buyers. There are indications that many buyers are actually buying a property in Dubai - which brings with it the right to reside in Dubai - in order to have somewhere to go should the situation deteriorate in their own countries. This buying, we believe, is particularly prevalent from South Asia, Russia and Iran.

Given these sources of demand, there is still currently a shortage of supply.

This demand-supply imbalance has led to a significant rise in valuations and rents. We have argued before that residential property prices are likely to come down around 20-30% in the next 2-3 years. And we believe that we are getting close to the peak in residential property prices. While demand is likely to remain strong in the coming years, as Dubai continues to focus on diversifying its economy away from oil, the key is supply.

The good news, for those who have had to stomach sharp increases in rents in recent years, is that supply is set to grow rapidly in 2007, outstripping demand growth. Prime Group has estimated that, taking into account delays in the delivery of properties, 52,000 and 63,000 properties will be delivered in 2007 and 2008, respectively. Given a reasonable assumption of 7% population growth for the emirate, it suggests this will lead to an excess supply of around 6,000 units in 2007 and 33,000 units in 2008. This is likely to mean that we will see property prices and rents falling in the coming 24 months.

There are scant signs of this happening in the immediate future. Our updated residential property market index suggests prices have risen an average 18.8% so far this year. However, what is extraordinary is the 12.9% jump we saw in October after weakness between July and September, when we saw prices fall over 1.0%. The data is fairly volatile (for notes on how the index is constructed, please see the Appendix). What is interesting is the fact that the overall property price index has fallen in five out of the last eight months, but two of the rises, in July and October, were dramatic. The first can be explained by the announcement by the government that foreigners would be able to buy freehold properties.

The jump in October may have come from a realisation that estimates for the release of properties reported for the second half of the year are unlikely to be attained. Indeed, one developer at one point suggested it would be releasing 60,000 units onto the market in the second half of 2006 and Prime Group now estimates the full year market figure will only be 40,000. There may also be a seasonal effect at play here.

We break down our property index by type (apartment and villa) and by geography.