Complex Made Simple

High oil prices and the impact on Dubai real estate

With Goldman Sachs forecasting $150-$200-a-barrel oil over the next six to 24 months, Dubai real estate is on the threshold of a new era of higher prices as the oil boom moves to another level. But is this in danger of fuelling a speculative bubble in off-plan property developments? And what does that mean for the price of completed homes in the secondary market?

The summer months offer time for a little reflection on what has past and what the future might hold.

In terms of Dubai’s property market we appear to be entering a new era in which previously cheap prices shoot up the global scale, and recent price moves have been dramatic.

If Goldman Sachs is right then high oil prices are not about to go away, and the economic boom in the Middle East will power ahead, attracting new players and capital like bees to honey.

The worker bees have to live somewhere and if they come from the highly paid financial sector that will mean luxury accommodation.

And it is not just the Abu Dhabi teachers who are winning pay awards to account for higher rents this year.

The latest MasterCard survey of consumer confidence in the UAE noted that local pay rises are ongoing.

Price spiral

This wages and prices spiral will send local inflation rates to still higher levels, and rents and property prices will be a part of this process.

Rental inflation this summer is running at over 20%, according to the rents actually obtained in the marketplace by local agents.

And, if anything, capital values are rising at a higher rate because lower rental yields are now acceptable as interest rates have fallen sharply.

So the immediate outlook surely has to be more of the same with the arrival of another round of new residents this autumn sparking further rental and house price increases.

And as these new residents increasingly come from countries with much higher property prices, this is no barrier to migration.

Potential real estate problems

However, where potential problems do lurk is in the huge off-plan sector. There have been a few projects cancelled this year, with developers getting into trouble with higher than expected construction costs.

But construction price inflation is running out of control, and more of these problems will emerge.

Could this off-plan sector form a speculative bubble that could collapse? This is always possible in markets showing exponential growth, and buyers really have no more than a promissory note from the developer.

It is very different in the secondary market for completed property. These units actually exist in a market that is critically short of supply.

Only as new supply tips on to the market will this factor begin to weigh on the market, and some agents say the estimated flow of 26,000 units for 2008 does not even meet projected demand.

Therefore, those buyers flocking to off-plan for discounts and leverage might be wise to consider buying in the secondary completed housing market where a speculative bubble is far less likely to emerge, and where the residual value of owning a property will always protect them from a total loss of capital.

See also:
Dubai developers turn to auction to settle true market value
Compulsory real estate diplomas to test agents’ ethics