It is almost accepted wisdom that the Dubai property market will undergo a correction, with debate mainly over the timing and extent of a downturn. Therefore, it seems realistic to begin looking at which parts of the market are most likely to be affected and which are most protected from a slowdown.
The signs that the Dubai property market may be passing or have passed its peak are accumulating by the day, although the Gulf News is still full of expensive advertisements from groups selling new projects off-plan.
Caveat emptor: buyers beware! It stands to reason that the more recent an off-plan project the most exposed it will be to a downturn. The developers may not have received much money from deposits and buyers are far more likely to back out of staged payments than at a later stage of construction.
There is also a view that many of the developers in the late part of a property boom cycle will be less solid concerns than those developers in the early stages. For as a boom progresses it attracts more and more developers who think they can easily repeat the successes of the pioneers, and they may be sincere in intent if not able to complete delivery due to forces beyond their control.
History shows that the late stage of any economic boom also attracts dishonest businessmen looking to cash in on a bubble market. They look to promote projects on the back of the genuine success of other developers and investors, but hope to capitalize on an unregulated market and vanish into the night when money stops coming in.
So step one in avoiding trouble in the Dubai property market is to avoid all such schemes from new developers in the late phase of the real estate market, unless the product is something really unique which is unfortunately what all these developers will claim and only a few will actually deliver.
Step two would be to avoid investment where the coming oversupply is most dramatically evident. That means high-rise apartment towers of luxury specification.
It is quite possible to argue that Dubai is building the right number of units to supply future demand but far more difficult to square that demand with the number of luxury apartments now under construction. This might offer a buying opportunity in the future but not now.
The argument against this is that rental yields on apartments are presently 8-10 per cent and therefore very attractive to investors. But do not forget that if rents fall, as many predict, then that means that these rental yields could fall very sharply, undermining capital values.
On the other hand, villas look a better investment. There are far fewer of them than apartments, and the best locations are in short supply. But rental yields have already been squeezed by price rises on the back of low-cost villa mortgages, so the position relative to apartments may not be as strong as sometimes thought.
Yet nobody should panic and think real estate is going to tumble like Dubai share prices. Houses are a necessity and illiquid and this tends to prevent big price collapses. They also protect capital against the ravages of inflation and currency devaluation. And they remain a first-class long-term investment even when they fail to be one in the short-term, as what goes down will go back up eventually.