THE slide in Dubai’s residential property market has only just begun and any investor considering investing in in bricks and mortar there would be well-advised to steer clear for now, according to the latest research from Swiss bank UBS.
The bank predicts that, from peak to trough, the emirate’s real estate market will slide by up to 70%. It added that Blingopolis’s residential market peaked in the final quarter of 2008, but has only fallen by 25% so far. By my calculations, that means there is a further 45% to fall.
Saud Masud, the UBS report’s author, said: “Our proprietary analysis concludes that Dubai residential property may trough at around the Dirhams 500-800 per square foot level, down 57%-70% from the peak of Dh 1,850 per square foot.”
The research report stated that Dubai’s real estate fundamentals weakened considerably from quarter four of 2008 to quarter one of 2009. It blamed this on a lack of net new demand (due in part to the tightening of the credit markets), investor defaults, a surge in project cancellations to 70%, payroll cutbacks, and over supply.
Masud said that potential investors should sit on the sidelines and consider taking the plunge in the second half of this year. The report acknowledged that the softening of the rentals market – caused in part by the recent exodus of white-collar workers from Dubai, which has led to hundreds of unpaid for cars to be dumped near the airport – will be further deterring investors.
Masud added: “As we move past the summer season and the potential for expat exits picks up, there is the likelihood that rents will begin to drop faster than home prices, thereby compressing rental yields to mid-single digits or below.”
He believes the weakness of the rental market will be a disincentive to buyers who intended to use rental payments to cover their installment payments.
The report also downgraded Emaar, a property developer owned by the Investment Corporation of Dubai, and another developer named Union Properties to ‘sell’ from ‘neutral’, while the Abu Dhabi-based developer Aldar was downgraded to ‘neutral’ from ‘buy’.
Some commentators believes that UBS is being optimistic.
Website International Property Investment believes there is now a case for believing the emirate’s property market may never recover. On 23 April IPI said: “There is a good argument [the luxury end of Dubai’s market] may never recover, given the underlying fundamental issues – pollution, falling expatriate populations, lack of laws to protect small investors and an almost total lack of transparency. Top this off with the liquidity crisis in the financial system, and you have a recipe for disaster.”
Separately, it has emerged that Dubai World’s Nakheel subsidiary -– which is responsible for the archipelago of artificial islands off Dubai’s coast — is in deep financial trouble. It needs to find $3.52 billion in order to refinance a bond by December and another worth Dhirams 3.6 billion ($980m) in May 2010. In the current financial climate, this is likely to prove punitively expensive and may even be impossible.
This blog post was published on 25 April 2009. For more on Dubai click here