Residential rental yields in Dubai and Abu Dhabi could indicate growing imbalances, it said in an official statement
Residential rental yields in Dubai and Abu Dhabi could indicate growing imbalances and overheating in the country's real estate sector, the United Arab Emirates central bank said on Sunday, in the first official warning about soaring property prices.
"Current average rental yields in Dubai and Abu Dhabi are approximately 70 and 130 basis points below historical averages, which could indicate growing imbalances - overheating real estate market," it said in an annual financial stability report.
"Monitoring development in the UAE real estate markets and the banks' exposure to it remains a core financial stability priority," it added.
House prices in Dubai, which suffered a property market crash in 2008, topped the global rankings in January-March for the fourth consecutive quarter, soaring 27.7 percent from a year ago, a report by Knight Frank property consultancy said.
At the same time, rents surged 30 percent on average but have doubled in some of the emirate's popular residential areas, nearing record highs.
Last month, the International Monetary Fund warned that Dubai, whose government and state-linked companies need to repay over $50bn of debt by 2016, may need stronger tools to rein in speculation.
In contrast to the months preceding the UAE's 2008 property crisis, the current property market recovery is not marked by rapid credit growth, the central bank also said, adding that banks' exposure to the sector totalled AED287bn ($78.1bn), or less than 23 percent of overall loans.
Real estate-related lending accelerated slightly in 2013, with the growth rate above 10 percent or one percentage point higher than overall loan book growth, the report said.
Bank finance for the purchase of residential property increased 12 percent in 2013 or by AED12.7bn, the central bank said, adding that bank lending was not a significant driver of real estate prices.
"While this indicates that banks were increasingly participating in financing the real estate recovery, the funds provided by the banking sector were only enough to finance the purchase of less than 30 percent of the residential properties that were completed in 2013," the central bank said.
"Analyses of banking data support the hypothesis that the current market recovery is mostly driven by equity buyers and/or reliance on external funding sources."
The central bank also said it planned to introduce new rules on liquidity and begin consulting with banks on a new capital regime in line with the Basel III framework in the second half of 2014. Basel III global banking standards will be introduced around the world over the next several years.
The UAE's new rules on capital would include requirements for enhanced capital, the application of a new leverage ratio and a shift in definition of capital which places greater emphasis on paid-up capital, retained earnings and disclosed reserves.
The report also said the UAE's financial system could grow faster without creating major imbalances in the system and that there was currently no build-up of vulnerabilities in the banking system.
With the general rapid rise in prices across a lot of important areas in the UAE, such as real estate, education and health insurance, it is safe to say that this country is becoming a little less attractive to a lot of people. It is a fact that a lot of international companies are relocating staff out of the UAE so as to rationalise expenses. Schools are reporting sudden availability of places for the next academic year, where as only six months ago the waiting lists were insane.
After having lived here for 30+ years I am able to speak to a number of friends from across the spectrum of UAE society and without exception the sentiment is not good. People are worried, salaries are not rising at all. Something is coming after summer, maybe not as big or anywhere as bad as 2009 but it is time for a "correction" (I know, such a cliched term here). Present growth is not sustainable and this is already being shown on the ground.
On the contrary the sentiment is quite good as the economy is booming, projects are being built, home prices are at their highest since 2008, and there is a positive vibe because of the Expo win. The main problem people are facing is higher rents, and that is a small sacrifice to make to live in a booming economy. Some people will leave, but there are many more well heeled people coming in from other Arab countries and also those HNWI who are fleeing the high taxes in Europe
Very well said, it is hard for new small business investor as well to establish and invest in the UAE when rental prices are raising so much in the "Expats " areas such as Dubai Marina , Jbr and all around. If you are an EU expat and want to settle down a business in the UAE you would not live in Sharjah or Barsha or Downtown such as Deira or Bru Dubai , so its better to think to pack back and move back to EU or the US where rental prices are not the only decision of mostly " Indian" owners so very much greedy for more as everyone was saying " expo 2020" but the investors are coming only in 6 years and nothing has changed around yet but we are facing constructions everywhere and still we should pay more while they are building up ?
Furthermore most buildings are not entertain, nothing has actually changed but got worse and because one of this " rumeur" everyone has increased their prices without any added value... It is understandable that a rise to occur to come back up from the econ
Basem you are correct, but I ask you how can a country function only with HNWI? When you mention high teas in Europe, you do understand that you actually get a higher rate of taxation, "fees", here in the UAE than in Europe. HNWI in Europe actual pay a lower rate of tax than most middle class individuals due to the way in which they invest there monies. I am glad to hear that the economy is booming for you. But it is not for a large % of businesses. Probably explains the perpetual state of sales in all the shopping malls here in the UAE.
The fees which we pay in UAE are still much less than the taxes (and fees) that we pay in especially Northern Europe.
I simply do not believe that companies will move out due to a rent increase and school fees are still "lover" than Singapore and Hong Kong.
I hate the increase in rent, but leave? No way!
Will Real Estate prices and rent go down? If Dubai will have 30.000 new units delivered within the next years I hope that we at least will not have further increases
We are living the new normal , low to medium growth and accelerating asset prices . Asset prices are growing based on comparative fundamentals of the region and to some degree beyond the region . Dubai definitely tops the region with its offerings and it would be naÃ¯ve to compare it to old Dubai .
And good things don't come cheap .
The system is temporarily unbalanced but will get normalized as prices will stabilize and market prices will take hold .
Business do not up root and move they improvise.
Dubai has every thing right going for it including a stable investment environment , I see higher growth and higher prices and many opportunities.
I so agree with you
I am one of those (expat) who are seriously thinking about living the country due to this price increase on rentals, schools and health insurance specially.
UAE has def became less attractive. Salaries still the same n now we have to struggle to pay everything.
If nothing changes, for sure many families and companies will leave.
Basem, what you are describing is the perfect recipe for poor business sentiment (i.e. looking forwards). High rents lead to higher prices for everything else, with productive workers being pushed out by non-productive HNWIs and/or demanding large salary increases, in either case harming Dubai's competitiveness. The real benefit of expo 2020 will only be felt gradually over the coming years in the build-up to the event, and in the meantime has caused owners and landlords to totally overestimate the value of their properties. So whilst asking prices may indeed be higher than they have been for years there are significant gaps between that and what properties are actually selling for, and indeed in many areas the owners have dropped their asking prices in recent months if they are serious about actually selling their property.
Henry, the relative cost of fees here or at home will vary from person to person depending on where they are from, and what their personal circumstances are, so it is not right to generalise and say "we all pay much less".
The Scandinavian countries have some of the highest taxes in the world so it is perhaps not surprising that you find UAE fees so reasonable.
Likewise, a single person, or a couple with two professional jobs, no kids and a modest apartment will probably find the cost of living reasonable. Conversely, a family with a few children and a single wage-earner, paying for school fees, larger accommodation and possibly health insurance and flights depending on their employment package is probably going to have a different view.