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Fri 11 Sep 2009 04:00 AM

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To buy or not to buy?

Dubai's five-year real estate boom has finally run out of steam. Anil Bhoyrul looks at where prices are headed amid growing project delays and cancellations.

To buy or not to buy?
Property prices in the emirate dived 42 percent in Q1 2009, according to Colliers.
To buy or not to buy?
A Jones Lang LaSalle report says that 22,400 units are expected to be completed across Dubai in 2009, and a total of 60,000 new units are expected to hit the market next year.

Dubai's five-year real estate boom has finally run out of steam. Anil Bhoyrul looks at where prices are headed amid growing project delays and cancellations.

Andrew Partridge has spent the last six months trying to buy a new house in Dubai. He has spoken to hundreds of estate agents, brokers and so-called ‘experts', trying to gauge whether prices have bottomed out. "The only thing I know for sure is that nobody knows anything for sure," he says.

The Dubai-based financial services manager is not alone. Like Partridge, thousands of people living in the emirate have been tempted this year to take the plunge, and give up renting for owning. The spectacular crash in house prices, estimated at 50 percent this year alone, has made buying affordable again.

But while property prices may have fallen, take up hasn't been great. Most buyers are asking the same question: how low can prices go?

"I saw a three-bedroom apartment in the Palm Jumeirah for AED2m ($544,000), which was going for AED4.2m ($1.1m) this time last year. I can afford it, but the problem is that if prices fell another 10 percent, my new home would only be worth AED1.8m ($490,000). It might take five years for me to get back to the buying price. It's a risk, it's a gamble, and I'm not sure what to do," he says.

Views from the experts

Like Partridge, most potential investors have scoured the endless reports published on a near weekly basis, but even these only seem to add to the confusion.

In August, international property adviser, Jones Lang LaSalle (JLL), issued a report stating that prices in Dubai had plunged 49 percent since the third quarter last year, with rents tumbling 35 percent in the same period. While values fell 24 percent in the second quarter, the rate of decline slowed, with the gap narrowing between asking and achieved prices.

Rents also fell less sharply in the second quarter, the report added. The average rent for a two-bedroom apartment fell by 15 percent in the second quarter, compared to 22 percent in the first three months of the year.

Some 22,400 residential units are expected to be handed over in 2009, in spite of over $24bn worth of residential projects being put on hold or cancelled, JLL said in the report.

On the demand front, transactional volume remained stable between Q1 and Q2 in comparison to the 58 percent decrease between Q2 2008 and Q2 2009.

Craig Plumb, head of research at Jones Lang LaSalle MENA, says: "The stabilisation of transactional volumes is an important indicator, which reflects improved confidence among real estate investors. The narrowing gap between asking prices and achieved prices is a further indication that the real estate market is beginning to stabilise, albeit at significantly lower levels of pricing than those seen earlier in the year.

"While there have been a large number of projects delayed or cancelled, there remains a significant level of new supply, with around 22,400 residential units expected to be completed across Dubai in 2009."

Meanwhile, the rate of decline in Dubai house prices slowed in the second quarter with values falling 9 percent, international real estate advisors, Colliers International, said in its August report. The real estate consultancy put the housing market's better performance down to a 50 percent increase in transactions from April to June and a slight easing of mortgage availability.

However, it said financing still remained tight and cited expatriate job losses and lack of transparency from developers over project delays and cancellations for the 9 percent drop in the second quarter.

Falling property prices

In the first quarter of 2009 property prices in the emirate dived 42 percent, according to Colliers.

Ian Albert, regional director at Colliers International, says: "After a significant decline in the first three months of the year, the market witnessed a deceleration in the rate of decline in residential prices in the second quarter. Thankfully, the magnitude of the decline that occurred in Q1 2009 was not, and is now very unlikely to be repeated.

"In the coming months the market will be searching for further evidence of market stabilisation as we draw nearer to the bottom of market prices. However, the results of the third quarter are traditionally distorted by the summer holidays and the holy month of Ramadan, and we would expect Q4 2009 to be a better indicator of future trends." Narrowing of the gap

So what does all this mean for investors? One of the key pieces of data appears to be the narrowing of the gap between the bidding and asking prices of units. In January this year, as the property market went into free fall, the difference was a massive 25 percent. In other words, sellers putting a property on the market for AED5m ($1.4m) would receive offers near the AED3.5m ($953,000) mark. Today, according to JLL, that gap has fallen to around 7 percent, meaning the prices wanted from the seller and offered by the buyer are far closer.

Most experts see this as a sign that the worst is over and the market has come close to its bottom. At least that would be the normally accepted theory, except that there are external factors to consider this time around.

"Normally you would say that going from 25 percent to 7 percent means the crash is over and that prices could even start rising soon, because buyers realise this is a good time to buy," says investor Aaron Morby. "But you cannot take each figure at face value, you have to look at all the other figures that come with this."

By other figures, investors are looking at the factors that may skew any recovery: the same JLL report says that around 22,400 residential units are expected to be completed across Dubai in 2009. This is a strong new supply chain, and even if no new projects were started in 2010, a total of 60,000 new units are expected to hit the market next year.

Some investors point to the Palm Jumeirah as a strong example of this. While prices there appear to have steadied, a massive new supply of units is in the pipeline, including the Golden Mile and Marina Residences.

"There's a lot more choice, a lot more supply and lot less demand coming, which means that prices could fall further, regardless of what the overall figures are saying," says one estate agent on the Palm, adding: "We have seen prices fluctuate a lot, and there hasn't been a big drop in the last two months.

"But the fear is what will happen when all these new properties come on the market, and whether or not they will push prices down again. Many property investors are taking a wait and see approach."

If matters are confused in the completed residential market, they look decidedly bleak in the off-plan market, where  property sales are ‘dead' and prices continue to slide, according to Mohanad Alwadiya, managing director of property adviser Harbor Real Estate, speaking on a local radio station last month.

While he said there were signs of stabilisation of completed properties in areas such as Downtown Burj Dubai and the Palm Jumeirah, Alwadiya said investors lacked confidence in the off-plan market, where prices have slid up to 50 percent since the emirate's property collapse last September.

"In some areas, mainly in off-plan, prices continue to drop. This is natural. Confidence levels in off-plan projects is very low. Off-plan sales are almost dead," he added.

On a more positive note, Alwadiya said that his company had seen 45 percent increase in buyer queries during the second quarter, compared to the first quarter.

With some differing data coming out from different property experts, only time will tell where Dubai's once mighty real estate market is heading.

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