Sentiment fuelled buoyancy fades in Dubai with property market correction forecast

Dubai’s residential property market has slowed with a correction likely ahead as rents fell in the second quarter of 2017, sales were down to a six year low and vacancies are rising.

Phidar Advisory’s Dubai Real Estate Investment Demand Index (REIDI) increased by 32.6% compared to the first quarter of the year but the firm points out that while this might look positive, it is weak, in relative terms.

Indeed, the apparent improvement in the second quarter of the year is because the in the first quarter of 2017 the index recorded its lowest value since 2002 and the current value is on par with the average last seen in the first three months of 2015.

According to Jesse Downs, managing director of Phidar Advisory, short term gains were driven by exchange rate fluctuations and modest weakening of the US Dollar.

‘We estimate that the residential market is still over valued by around 15% to 20%. “False expectations of a 2017 recovery kept the market temporarily stable, but the fundamentals indicate another phase of correction is required before the market can recover,’ she pointed out.

‘The false start of early 2017 is over and the cracks are starting to show. Sale volumes of completed properties are at a six year low and vacancies are rising across the city,’ she said.

The report also shows that in August, quarterly lease rates declined another 1.1%, while sale prices decreased nominally by 0.2%, pushing yields down slightly to 7.34%, based on a three month moving average.

The consistent, albeit slower, rent declines indicate that sale prices need to adjust downward. The quantitative and qualitative analyses indicate rent declines will continue through 2017 and into 2018 as job growth remains low and new supply is handed over.

‘Rent declines slowed over the summer, but higher vacancies should push rents down faster in the coming real estate season. This is positive because the city will become more affordable for residents, which helps businesses by reducing employment costs. There is a fundamental shift in the demographics of Dubai and the real estate market has not yet adjusted to this new reality,’ added Downs.

Off-plan market transaction volumes remained steady due to developer subsidies in the form of post-handover payment plans. The report says that the result is a shadow financing market, which is creating an unhealthy divide between the primary and secondary markets.

‘Steady off-plan volumes are not an indicator of a healthy residential market. The post-handover payment plans artificially boost demand and will likely lead to overbuilding, compounding the problem in the years to come,’ Downs concluded.