After some strong gains in 2004, pundits are convinced that Dubai property prices still have room for further upward movement. There are four main reasons to believe that this market has room for higher prices, quite apart from market momentum.
The Dubai freehold property market is barely two-and-a-half years old as it enters 2005. In that time the cost of housing has been rising at something between 10-25% per annum.
Partly this reflects that fact that a few early freehold projects – such as the Palm, Jumeirah and Jumeirah Beach Residence – were sold at prices designed to get the market moving. Today property is priced to deliver a return to the developer, as well as to meet considerably higher construction costs.
However, Dubai property can typically cost around a third of a comparable UK property and perhaps half a similarly located property in the US or Singapore. Therefore, there is head-room for prices to rise nearer to international levels.
The first factor likely to boost prices in 2005 is a rise in rental yields and general inflation in the UAE. Demand for property in Dubai currently exceeds demand and the 20-25% increases in rental charges seen in the second half of 2004 are likely to be repeated in 2005 unless something changes drastically in the market.
There is also a tendency towards higher general inflation in the UAE due, ironically, to higher oil prices, and the impact of the falling US dollar on euro-imports. Rising rents and higher inflation have respectively direct and indirect links to higher property values.
Secondly, the legal situation of property in the UAE is likely to become clearer in 2005. A new federal or Dubai property law would enhance the comfort of buyers and cement the freehold revolution in statute, although for all practical purposes nothing would change.
Thirdly, a knock-on effect of a new set of property laws would be the maturing of the mortgage market. There will be more banks entering the market, leading to a greater choice of mortgage products. This will mean greater competition for customers and that will keep mortgage interest rates under control, and might even lower them from present high rates of 6.5% which reflects the low volume of transactions and immaturity of the sector.
More finance in the marketplace, with a wider choice of lenders and more attractive terms will encourage more people to buy homes. This will drive prices up by stimulating demand, putting more money into the marketplace and removing a perceived 'risk' premium.
The fourth factor to watch is the 'internationalization of the Dubai property market'. As more and more foreign buyers enter the market then they will increasingly bring with them established standards and perceptions, and both de-mystify the Dubai property market and inject more cash. This is certainly a phenomenon that lay behind the boom in prices in 2004 and there is no reason to think this will slowdown in 2005.
Indeed, global housing markets – particularly the UK and Spain – are now witnessing falling prices, and much of the money that might have gone into retirement properties in these markets may turn towards Dubai. Likewise if the UAE stock market underwent a correction in 2005, and it does look awfully overstretched, investment funds would head towards property.
None of these factors suggests that Dubai property will not have a correction itself at some stage in the future. All property markets eventually run out of steam. But surely the factors analyzed here show that the Dubai property scene still has some considerable room to grow in the immediate future.