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Low real estate values in Dubai boost sales but are property stocks the real opportunity here?

It’s a fuzzy picture of renewed real estate sales activity in Dubai, low property values, increased sales, interest from retirees yet prices are not yet bottoming out causing a reluctance to sell

Allsopp experienced a rise in investor buyers where 40% purchased properties in cash in Q3 2020 (from 28% QoQ). Dubai Property prices have steadily declined over the last six years, however, the market is experiencing a V-shaped recovery Residential prices in Dubai and Abu Dhabi have fallen the most compared to 150 cities around the world

It’s a fuzzy picture of renewed real estate sales activity in Dubai, low property values, increased sales, interest from retirees yet prices are not yet bottoming out causing a reluctance to sell, and a drop in rental transactions creating lower yields for landlords. 

Amidst all of this, share prices of many leading developers are at historical lows, perhaps presenting an opportunity for stock market investors to make a play.

Real estate activity 

Prominent real estate brokerage, Allsopp & Allsopp, reports a rise in sales transactions by 50% from Q3 2019 to Q3 2020 and rising 73% from Q2 2020. Buyer registration rose by 95% from Q3 2019 to Q3 2020 and increased a further 35% from Q2 2020. 

Lewis Allsopp, Chief Executive Officer of Allsopp & Allsopp said: “First-time buyers are becoming more aware of the opportunities given to them from the UAE government stimulus package which included the increase in loan-to-value of 80% and fees reduced from 33% of the value of the property down to 22%.”

The company experienced a rise in investor buyers where 40% purchased properties in cash in Q3 2020 (from 28% QoQ). 

Property listings brought to the market had decreased by 13% in Q3 2020 compared to Q3 2019. 

Allsopp explains that there was a lack of desire to sell at the moment unless sellers have a solid motive to do so and the decrease in properties coming to the market is causing urgency from buyers being willing to stretch their budget to compete in looking for a highly sought after property leading to an undersupply in key areas for certain property types.

“This undersupply has led the average sold property prices in Dubai,” he said.  

According to the report, Dubai property prices have steadily declined over the last six years, however, the market is certainly experiencing a V-shaped recovery post lockdown, “and I see this continuing through Q4 and even into next year.” 

Also, the average age of buyers 45 years and above has risen by 84% since Q3 2019, and this due to the introduction of the Dubai Retirement Visa in August to avail the 5-year Retirement Visa. To be eligible for a retirement visa, one option is to own a no less than 2,000,000 Dirhams ($545,000).  

The most popular area for sales in Q3 2020 was Arabian Ranches knocking Dubai Marina into second place. 

The company reported a drop in lettings transactions by 33% since Q3 2019 but a rise of 14% since Q2 2020. 

The drop in lettings transactions is down to the travel restrictions, expat tenants who negotiated reductions in rent, others who decided to buy their first home, and fewer expats making their way back to Dubai. 

Prices Down

Abu Dhabi values fell by 8.3% and Dubai by 6.6% over the past 12 months, according to the latest Knight Frank Global Residential Cities Index, as reported by Arabian Business (AB).

Residential prices in Dubai and Abu Dhabi have fallen the most compared to 150 cities around the world.

Taimur Khan, associate partner at Knight Frank Middle East told AB that “A combination of lower oil prices, global and local economic uncertainty, the stronger US dollar, the introduction of stringent mortgage regulations and high levels of new supply have helped provide a correction to the market.”

In September, the annual average price per sqft fell to 896 Dirhams ($244) for 2020, 2 Dirhams lower than the previous low seen in 2010 following the global economic crisis.

According to Dana Salbak, head of MENA research for JLL: “In Dubai, we’re talking about another 10-15% from now until about the next 6-12 months. In Abu Dhabi, a decline is expected, but at a much slower pace. We’re expecting 3-5% over the next 12 months.”

Read: New UAE real estate consortium to boost the property sector

Property stock prices low

Dubai real estate stocks fell from grace given an abundance of unsold homes and uncertain recovery during COVID-19 times.

Shares in Emaar Properties have dropped almost 80% from their 2014 peak when average real estate prices in the emirate were about 30% higher. 

Damac Properties has posted a similar slump since a 2017 high. 

Smaller player Union Properties, which is in talks to restructure debt, trades at a 90% discount from its 2005 levels.

But not even a majority of buy recommendations from analysts, thanks to cheap valuations and expectations of government support, is enough to spur a change in sentiment, reflecting a supply glut. 

A recent announcement by shareholders of Arabtec Holding voting to dissolve the firm is sending an alarming signal on the outlook for the construction sector in the United Arab Emirates, CI Capital analyst Sara Boutros indicated in a note.

Dubai’s economy may contract by around 11% in 2020, as its large exposure to tourism and aviation place it in a position more vulnerable to the effects of COID-19, S&P Global Ratings said late in September. It’s expected to take until 2023 for gross domestic product to recover to 2019 levels.

The DFM Real Estate & Construction Index is down 29% this year, compared with a 20% drop for Dubai’s main index and a 23% loss for a benchmark tracking 70 real estate stocks in developing countries.