After a year or so of growth in Dubai’s property market, many of us are wondering what’s going to happen next. In the past six months or so, I have become used to debating the following question in one form or another: “So…. Is the market going to crash? Because I heard that rents are now X and sale prices are Y, meaning Z will happen again.”
To be honest, it’s probably more of a question for an economist who studies all of the complex factors that drive market cycles, rather than a guy who owns a real estate agency, but even if I cannot answer the question, I can share some facts and figures in an attempt to give an insight into the state of the market as I see it now, for you to draw your own conclusions.
Anyone who was working in the industry in 2008 will tell you that the months and years leading up to the crash were a showcase of speculative purchases and over-the-top sales. With the global financial crisis gobbling up one market after another, while prices in Dubai grew at 35 percent per year, it is painful to think we did not see the looming shadow of a property crash coming.
A look at records of sales, leasing and rental yields, shows that, as anyone renting or buying property at the time will remember, there was a sharp increase in sales and leasing prices followed by a sudden fall.
When the sales and leasing prices fell, everything fell along with them - transaction numbers, the population and so on. We went from doing 500 sales a month to 20 a month. We let 40 percent of our staff go and almost went bankrupt. We were not unusual. Across the market, prices fell by 70 percent and most of the thousands of real estate companies in the country went out of business.
What is interesting is what happened next. Leasing rates stabilised within a year and returned to 2007 levels. However sales prices kept falling for more than two years and only in mid-2011 did they start to rise. This increased gap between sales and leasing meant that rental yields for investors were very strong.
Since then, leasing prices have risen steadily while sales prices, the volatile cousin of leasing prices, have grown at an ever-increasing rate, particularly in the few months after the announcement of Dubai’s winning Expo 2020 bid. Recently, we have almost reached a notable, and possibly worrying, milestone - pre-crisis peak prices.
The sales price rise is good news for sellers, but the flip side of prices being comparable with what they were before they crash is that it prompts fears that the market is over-heating. Another concern for investors is that rental yields are falling. They peaked in early 2011 and then fell, hovering above four percent at the end of last year. They could fall further if sales prices continue to rise faster than leasing prices, making the market less attractive to yield-oriented investors.
Continuing on that theme, having spoken to some of my agents about their experience of the current market, they say that seller and landlord expectations are high, in some cases way too high. Sharon Sweet, who has worked selling and leasing on The Palm since 2007, says: “Over the last three months, I have never before had this many villas available for lease on The Palm.” Landlords are insisting on high rents, she says, ignoring advice that their expectations are unrealistic, with the same applying to sellers.
Sales prices started to increase rapidly on The Palm in July 2013, and Sharon believes that, contrary to what sellers think, they are already leveling, and in some cases falling. “Those who are really determined to sell, drop their prices,” she says. “The others just leave it in the hope that someone will come along, fall in love with their villa and be willing to pay the money for it.”
In others area, sellers and landlords are more willing to listen to advice, according to Adrian Popica, who specialises in Arabian Ranches. “I often come across clients that want to sell for a much higher rate than the market, but once you provide all the facts and show them how a well-priced property will only work in their favour, we manage to come to a reasonable understanding,” says Adrian. “The most important fact to remember is that there is quite a difference between the listing price and the selling price and a good consultant knows what a unit can sell for.”
So, sales and leasing prices are getting close to pre-crisis levels, we have sellers and landlords pushing hard to keep increasing prices and we have falling rental yields. Does that mean we are back in 2008? Well it may very well mean that we are getting close, but there are key differences between the market today and the market in 2008 that may save us this time.
What are the differences between then and now?
The first difference is that real estate is now regulated. RERA, the Real Estate Regulatory Agency, was in its infancy in 2008, so developers where completely unregulated. People without the money to buy land or build property were securing land through a five percent deposit and then financing the land purchase and the construction through off-plan sales. Obviously, if there was any slowdown in sales, the developer and buyers would be stuck with an uncompleted property. Today, developers are required to fully own the land before selling off-plan and have a reasonable proportion of the construction cost held in the bank. These regulations and others mean that far more money is required to develop property, fewer people can become developers and it is not quite as lucrative.
The tighter regulations on developers may be a contributing factor to another key difference in the market - the dramatic reduction in the amount of off plan sales. Dubai in 2008 was property speculator heaven. A buyer could put down ten percent on an AED1m ($272,262) property, with the promise of paying the remainder within two to three years. As a result, a buyer with an appetite for risk could buy the AED1m property with AED100,000 and resell in two months for AED1.1m, receiving a 100 percent premium on his deposit.
With a 100 percent return, it seemed like easy money and people without the funds to pay in full were buying 10 or 20 properties at a time, knowing that they would have resold long before the full price needed to be paid. This led to huge numbers of transactions for everyone in the market - we were doing 500 sales per month compared with 200 per month today.
However, the vast majority of those hundreds and thousands of transactions across Dubai were from buyers who did not actually have the money to pay, it was a false sense of ownership and a giant game of musical chairs where the loser goes bankrupt.
Today, almost all of the properties we sell are completed, and the land department has doubled the transfer fees from two percent to four percent. This is a significant difference because buyers must pay in full when purchasing a completed property and if they want to resell, it will cost more, dramatically reducing speculative opportunities. So if the same AED1m property was completed, a buyer would make only ten percent, rather than 100 percent. It is not quite as attractive and far healthier as that buyer will need to have the money to pay.
Obviously we have to keep our eyes on this, because as the market grows, it is inevitable that more off-plan projects will be launched. Even with the higher transfer fee, we will see a growth in speculators. When that happens, RERA will need to introduce a few additional regulations to maintain a healthy balance.
Dubai’s mortgage market has also matured since 2008. Before the property crash, the mortgage industry was young, and, like most of the real estate industry, it thought it was invincible. A buyer could borrow 95 percent of the value of a property and the underwriting that many of the banks were doing was sloppy and casual. There was misguided pressure on the UAE banks to ‘modernise’ and follow the example of ‘smart’ American banks who were lending 110 percent loan-to-value (LTV) ratios.
Thankfully, the industry has changed and matured into a far more careful entity. LTVs are capped at 75 percent for a first purchase and 60 percent for the second. Underwriting is very strict, and on the ground, and it feels like the banks are taking no chances having learned a painful lesson.
Those “smart” American banks I was referring to, lending to the “sub prime” mortgage market, turned out to be not so smart, and their actions were a major contributing factor to the worldwide financial crisis, which brings us to another difference between then and now. We are now no longer in the depths of a global economic crisis. Somehow, that crisis took an extra year to hit Dubai, but when it did, we were completely exposed, with lending and borrowing at its very peak. Today, the financial markets appear to be healthy, and, due to the changes in regulation and lending, we should be a little safer.
Did I mention the Expo? That is another key difference for between Dubai 2014 and Dubai 2008. There is a lot of hype about the Expo, and hype can make the market jittery, but it will bring thousands of new jobs, and the Dubai population is expected to keep growing fast. The Expo is now a key driver of the property market, but, in 2008, the market was driven by hype alone.
The final and one of the most important factors is that today, we have the Dubai crisis to learn from. Many of the senior people in government and in private companies who were here during the crisis, remember it well and are far more cautious. I know I am. This experience will hopefully bring a sense of caution to the whole industry.
That said, some people, including those who have been in Dubai long enough to know better, are still buying off-plan from developers who failed to deliver properties during the last property boom. These dynamics remind me that we need to be vigilant.
Looking at these factors, you would think that the market is far less likely to crash, and, that what is more likely to happen is that the current sale price growth rate should fall to a more sustainable level for a good few years. But, seeing as most us in the industry failed to see the signs last time, we may be blind to it again this time.
Ryan Mahoney, CEO, Better Homes
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