After entering positive territory in the middle of 2011, annual residential price growth in Dubai’s mainstream segment has been very strong indeed. However, after peaking at 35% at the end of 2013, the growth rate has now been slowing.
According to Khawar Khan of international real estate firm Knight Frank the deceleration in price growth can be attributed to a combination of higher transfer fees and the mortgage caps.
But he pointed out that the new rules have impacted Dubai’s luxury homes market to a much greater degree. Indeed prices increased by just 6.3% year on year in the second quarter of 2014 compared with 24% in the mainstream property market.
‘Established, mainstream locations such as Dubai Marina remain very popular among western expats and continue to see healthy demand and thus price growth. That in turn has led some investors to look elsewhere for value, including newer developments in areas such as Jumeriah Village, Dubai Sports City and Dubai Silicon Oasis where prices are rising off a relatively low base,’ said Khan.
‘Therefore with demand for residential property remaining strong in both newer, as well as more established, mainstream locations in Dubai, prices in this segment continue to post strong gains,’ he explained.
He also pointed out that the new mortgage rules implemented by the UAE Central Bank are stricter for those buying residential property worth over AED5 million. For example, if an expat buyer was to purchase a property above that value, they would need to raise a 35% deposit. By comparison, the same buyer looking for a property worth less than that amount would require a 25% deposit.
‘Thus, while the new mortgage caps have hit the residential market as a whole, they have had a lesser impact on the mainstream segment,’ added Khan.
He explained further that after halving between 2008 and 2010, both mainstream and luxury home prices have since largely recovered. However, rents in the latter segment haven’t been able to keep up, which in turn has led yields to harden. By comparison, as a result of a stronger recovery in rents, mainstreams yields continue to look relatively attractive to investors.
Finally, Dubai’s strong economic conditions and buoyant labour market continue to attract foreigners in their droves. ‘Since this rising population needs decent, and not always luxurious, accommodation, we expect demand to outstrip supply in the short term. All else equal then, we believe that mainstream residential prices will continue to rise faster than luxury home prices over the next 12 to 18 months,’ added Khan.
