7% rent cap strikes a note of realism for 2007

The Dubai property market is now generally judged to be in a transitional phase from a situation of under supply to the over supply of new units.

Part of the logic behind the rent cap, aside from preventing an exodus of residents from Dubai, is that new construction is about to deliver a mass of new accommodation starting this year and accelerating massively in 2008 and 2009.

That high rentals have begun to impact on the number of people moving to Dubai is seen in population data. A record of around 250,000 people moved into the city in 2005 while in 2006 the number was probably closer to 130,000; Road Transport Authority data points to 70,000 new car registrations in the first 11 months of 2006, and there are some 1.7 people per car.

Completions accelerate

Clearly the Dubai authorities do not want to see a further deceleration in new demand for property at a time of exponentially rising supply. EFG Hermes latest report pointed to 69,000 scheduled completions for this year and 139,000 next, while admitting that project delays would hit both totals.

However, with market forces of supply and demand beginning to start to move strongly against rent increases, holding rent rises at seven per cent this year makes a great deal of sense, and should inject a note of realism into the market.

If nothing else investors who see ever rising rentals and the continuation of the high rental yields of Dubai should sit up and think about the future.

For property analysts across the board are predicting falling rentals from the end of 2007 as this massive supply of property arrives on the market. Anybody who is building or investing in property on the expectation of immediate strong rental returns should think again and recalculate their business plan.

Falling prices?

It is also clearly true that falling rental returns will not be compatible with rising property values. EFG Hermes' study has prices falling by 25 to 30 per cent by 2010 but notes this could be out by a wide range of possibilities.

This is not to say that there will not be more money to be made out of the Dubai property boom in the future. In many property cycles it is the people who buy real estate off developers in trouble that make the highest profits of all.

But the Dubai property market today has none of the signs associated with a distressed market, and it could be that excess liquidity and supply delays keep the boom going for longer than expected. Nevertheless, the rent cap for 2007 is a reminder that good times do not last forever for landlords, investors and developers.