A report on the UAE property sector has concluded that prices for residential property in Dubai may bottom out at between 57% and 70% from the peak levels seen in Q4 2008. The report also downgraded Emaar and Union Properties from a 'Neutral' rating to 'Sell'.
A report by Swiss finance house UBS' Investment Research analysts concluded that Dubai's residential property market still had some way to go before beginning to recover.
'Our proprietary analysis concludes that Dubai residential property may trough at around the Dhs500-Dhs800 per square foot level, down 57%-70% from the peak of Dhs1,850 per square foot,' said report author Saud Masud.
The UBS report also downgraded Emaar and Union Properties (UPP) to 'Sell' from 'Neutral', while Abu Dhabi developer Aldar was downgraded to 'Neutral' from 'Buy'.
The downgrading of the developers comes despite short term market rises of 40% for UPP and 33% for Emaar. This is a result of what UBS sees as weakened real estate fundamentals in the emirate from Q4 2008 to Q1 2009; listing a lack of net new demand, investor defaults, increase in project cancellations to 70%, payroll cutbacks, and a build up of inventory.
The report also states that it sees Dubai as still being in the 'relatively early stages' of the property downcycle, and that the risk-to-reward ratio was not yet compelling for investors.
House price fall
UBS estimates for house price falls to date put the decline at 25% down from the peak. A similar report on Dubai's real estate sector released last week by UAE-based Asteco put apartment prices down by 39% in Q1 2009, with villa prices down by 43%.
'We believe that the majority of investors would prefer to stay on the sidelines and revisit potential purchase opportunities in the second half of 2009,' said Masud, although the report cautions that depreciating rental returns could dissuade some investors. 'As we move past the summer season and potential for expat exits picks up, there is the likelihood that rents begin to drop faster than home prices thereby compressing rental yields to mid-single digits or below.'
The potential for a fall in expatriate tenants is of concern to buyers looking to use rental payments to cover installment payments, with analysts predicting a fall in the expatriate workforce as Dubai-based companies downsize.
UBS predicts population outflow equal to a decline of 8% in 2009 versus 2008 figures, and a further 2% in 2010 – leading to residential vacancy rates of up to 30% by Q4 2010.
The Dubai government has indicated that it is to make certain amendments to article 11 of property Law 13 2008, regulating the system of dealing with defaulters.
Law 9 of 2009 will serve to clarify how much developers can keep if investors default on payments. If at least 80% of the project has been completed prior to default, the investor loses all money paid to that point. The property will then be auctioned as compensation to the developer to account for the missing increments.
If at least 60% of the project has been completed prior to default, the developer is entitled to keep 40% of the original purchase price. If less than 60% has been built the developer is only entitled to keep 25% of the purchase price.
If construction has not been begun prior to default, but this is not due to 'negligence or omission on the developer's part', the developer may keep 30% of the installment money paid up to that point.