The UAE property market is heavily reliant upon expat and international buyers and is, therefore, vulnerable to international economic dips. 2016 has been a challenging year for much of the global economy; and as a result, international events have adversely impacted local prices and sentiment. But the UAE property market showed resilience, maturity and despite a general decline in prices, gave buyers reason for optimism.
Prices slipped. Rents fell more than sale prices, meaning rental yields declined. Falls were slight but gradual. A further easing of the market in agent speak.
In the past, it has been suggested that the UAE real estate prices have been driven by hype rather than the fundamentals of supply and demand. Back when flippers lined up for hours at new project launches hoping to onsell the property later that day; few could argue. Today we have a market dominated by end-users and long-term investors enjoying world leading rental yields. But like a boat in open waters, international waves have been crashing across the bow.
By the start of 2016 started prices in most communities across the country had been falling for up to 18 months since their mid-2014 peaks. Many have tried to time the bottom, but for various reasons, prices have continued to fall.
Reason 1: The Oil Price;
In a region heavily dependent upon oil revenues, there is an obvious correlation between the oil price and the performance of other industries.
Despite Dubai, in particular, being far better diversified than other GCC economies, oil underpins the economic performance of the region and has a direct impact on property prices. Moreso, over the last decade, oil price movements have seemingly mirrored the rise and fall of UAE property prices. If the UAE property market is sentiment driven, nothing creates more sentiment than the region’s major commodity, employer and revenue generator.
Oil hit a 14 year low in February 2016, falling below $27 USD per barrel, resulting in the lowest sentiment we’ve seen since the GFC fallout.
Reason 2: The Currency Factor;
A historically strong dollar made UAE property more expensive and less attractive for an expat and international investor dominated the market; many of whom did the sums and figured out they could get more for their money elsewhere.
Reason 3: Brexit;
Around midyear oil was back over $50 USD per barrel and sentiment was improving; we were hit by the Brexit. While the mid to long term implications of the Brexit are likely to be positive for the UAE, its’ immediate effect was to devalue both the British Pound and Euro; both of which seemingly fell off a cliff following the announcement and have continued to fall. This made UAE property relatively more expensive. The UK and European buyers shifted their attentions back home. Asian and GCC investors snapped up good buys, particularly in London. Local prices dipped further.
Reason 4: The Mortgage Cap;
The UAE Central Bank first announced the Mortgage Cap in late December 2012 as speculators began ramping up UAE property prices. It was formerly implemented 12 months later and caps lending to 75% of the property value for a first purchase (80% for locals). Mortgages on properties priced above AED 5 million were capped further (65% expats/70% UAE nationals). Second or subsequent properties further still; 60% for expats.
This policy along with the doubling of the DLD transaction fee to 4% helped avoid a repeat of a 2009 style crash where property prices fell 50%- 60% within a year. But by mid-2016 after two years of falling prices and as the market faced a number of external challenges, it was proving to be counterproductive.
During summer came some respite. Although there was no change in the official Central Bank policy, some lenders re-interpreted the guidelines and began offering mortgages that allowed 75%/80% of the purchase fees to be borrowed and added to the loan. This stimulated the market and mortgaged transactions increased. Our mortgage brokerage division, mortgagefinder.ae experienced three consecutive record months from September. 68% of clients during this period took the opportunity to add the bulk of their purchase costs to their loan.
As of December 2016, the median advertised price for a Dubai apartment for sale on propertyfinder.ae was AED1444 per sqft; 6.7% lower than 12 months prior. Dubai villas were costing AED1126 per sqft; down 3.8% compared to Dec 2015. The median Dubai apartment was advertised for AED95 per sqft; down 10.4%. Dubai villas for rent were asking AED59 per sqft; down 10.8% compared to 12 months prior.
Prices and falls were similar for apartments in Abu Dhabi although villas for sale actually edged up by 0.7%.
Outlook for 2017
Oil is predicted to average between $50-$60 USD per barrel in 2017; lower than historical averages but buoyant enough to maintain reasonable levels of optimism, revenue, and employment.
The US dollar is predicted to remain strong and increase further. US interest rates are tipped to increase to slow their economy and although UAE banks typically rely on depositor funds for lending, local rates are likely to increase ~0.5% per annum as a direct result.
We witnessed excess demand and clear undersupply in affordable housing, particularly in the affordable villa segment in 2016. This trend is likely to continue and to cause upward pressure on rents and prices in this segment.
Increased competition from new stock entering the market if combined with sluggish regional economic conditions may cause downward pressure on prices and rents in emerging newer Dubai communities but these same communities will continue to offer world leading high single-digit rental yields.
Prices are expected to be stable in “blue chip” communities in Dubai and Abu Dhabi and may begin edging upwards towards the end of next year.