Complex Made Simple

Rents and property prices to surge in 2008

This is a question that tenants and potential home buyers are asking all the time. But with talk about the rent cap not being renewed for 2008 and an explosion of investment banking growth in Dubai, combined with inflationary local salary rises, it is a matter of how much, and not whether rents and prices rise.

It is arguable that the UAE is living in its own new era. Oil prices and oil revenues are at an all-time high. The government is proactively expanding the local economy through private sector led investment. And the cushion of oil surplus reserves is there to fuel this boom whatever happens in the global economy.

At the same time, the focus of expansion in Dubai for 2008 will be the financial sector. Deutsche Bank’s regional chairman Dr. Henry Azzam recently said 2008 would be a ‘bonanza’ for investment bankers in the UAE with a large number of high value IPOs coming up both at home and in neighboring states.

These are the guys with the fattest pay packets who can pay the highest rents. As they roll into town these new residents will gradually displace less highly paid residents in the best areas; this phenomenon has already happened but it is going to become even more noteworthy.

New perspectives

Some new banking residents will quickly spot just what good value Dubai property is compared to where they came from, and buy immediately. Meanwhile, other existing residents will be frightened by rising rentals and decide to take the plunge and buy themselves.

Unfortunately the supply of property in Dubai has been slower in coming on stream than expected. Therefore, although 2008 will see many new buildings being completed this is still unlikely to be enough to satisfy demand.

Another factor likely to be driving prices upward in 2008 will be the falling cost of mortgage finance. The UAE currency peg means that if the US cuts its interest rates next year – as seems inevitable with the US financial crisis now in progress and markets point to 3.5 per cent – then home finance costs will fall in the UAE at a time of rising rents.

No-brainer

Indeed, with UAE inflation in 2008 almost certain to top the current rate of 10-15 per cent, depending on who you talk to, then real interest rates will continue to be negative. This means that inflation is eroding the real value of your debt and that borrowing money to buy real estate is a no-brainer.

Those Dubai residents who fear a housing crash should search back on Google to find articles written in the late 1990s about an imminent crash in UK house prices. In fact, UK house prices went on to double or even triple and have barely started to show signs of weakness this autumn, despite the credit crunch.

In Dubai it definitely looks as though the real estate boom is set for at least another year, and the prospect is that the good times may roll on for a lot longer than that as markets usually overshoot on the upside. So how much will rents and prices rise? 10-20 per cent looks on the conservative side.

See also:
Special report: Buying Property in the UAE
Buyers want more in Gulf property boom
Middle East real estate: when will the boom end?