Dubai house price inflation lifts off!

Dubai is going through a real estate boom, and prices have really picked up this summer. But at the top-end of the market real estate is now changing hands at London and Beirut prices.

Consider the Golden Mile on Palm Island, where a two-bedroom apartment will cost around $750,000. Or the recent example of the Burj Dubai Residences, here a one-bed apartment that sold in phase-one six months ago for $200,000 is now $325,000 in phase two.

Similarly the Marinascape luxury apartment complex launched last week by Trident Holdings is priced substantially higher than its earlier Waterfront development. Directors said building costs were up by 20% since the Marinascape was conceptualized six months ago.

So is Dubai property already loosing the allure of value-for-money? Certainly right at the top-end rental yields are now unlikely to cover the local finance cost of 6.5%. And, of course, it will be some time before the buyers can collect rents because none of these properties is actually built.

There is probably more value further down the real estate hierarchy. Rental yields on some modest studios are still considerably higher than many luxury apartments. However, the rising premiums on original cost now being paid on executive villa developments in Dubai suggest that the whole market is on a rising trend.

How long will this continue? Judging from global market experience, the uptrend in property markets usually lasts longer than expected and there is an element of prices shooting beyond sustainable levels. Dubai does not seem to have reached this late stage of the property cycle just yet.

Indeed, some agents say Dubai is half-way into a three-year property cycle. If that is true then selective buying still makes sense. But in a market that only came to life two years ago with the creation of freehold ownership, such judgments are a tough call.

On the other hand, there is massive liquidity in the Dubai real estate sector, with lots of equity, and very little debt as the mortgage finance industry is also still in its infancy.

Thus there are many levers that the Dubai Government could pull to keep the local real estate moving forward. Mortgage finance could be extended to cover premiums over the original selling price, which is does not at present. Mortgage rates could be kept steady at their current 6.5% - a level that gives finance companies a 5.25% margin - rather than rising in line with UAE interest rate increases.

The Dubai Government could also introduce a new real estate law to allow property titles for non-nationals to be registered locally, which would boost confidence. And it could ultimately restrict new building, if things looked to be getting out of hand. So Dubai property could get a lot hotter before it cools down.