Dubai Residential 2013

The Dubai residential sector ended the year on a strong note.
Average city-wide villa prices increased 3.1% quarter-on-quarter
(Q-o-Q) and average apartment prices gained 5.4% Q-o-Q in Q4
2012, taking total annual returns for villas to 18.4% and
apartments to 16.6%. The rental market also showed strong
improvement, with villa rental rates up 8.9% and apartment rates
up 10.6% for the year. Reflecting the continued flight to quality and
a dearth of supply, units located in Emirates Living, Arabian Ranches
and the Palm Jumeirah outperformed the rest of the market.
For 2013, our conversations with investors point to a discord over
the sustainability of recovery of the Dubai property market that
undoubtedly benefited from a strong pool of liquidity from
elsewhere in the region. In our view, Dubai will continue to offer a
familiar refuge for investors from several Middle East and North
African (MENA) countries that still face elevated uncertainties, amid
systemic economic turmoil and a challenging security situation.
We expect the enduring real estate recovery to advance further in
2013. Unlike 2012, when strong price appreciation was largely led
by mid to high-end villas and apartments in well-established
neighborhoods, we expect 2013 to witness a more broad-based
recovery with expectations of modest gains in both price and
rentals. This broader-based recovery will be led by tenants who
cannot afford to pay the higher rents in the well-established
locations moving to cheaper, secondary locations. This will increase
the demand for these areas, rentals will rise and sale prices should
follow.
Jones Lang La Salle (JLL) estimates that around 4,600 residential
units (mostly apartments) were delivered to the market in Q4 2012
and another 35,000 units should enter the market in 2013. A
sizable portion of these units will be delivered in secondary locations
in the outskirts of the city, such as Dubailand, Dubai Sport City,
Dubai Silicon Oasis and Jumeirah Village. Despite the still-attractive
indicative gross yields, investors will need to act prudently and avoid
the surplus of properties in some of the neighborhoods that can
sustain little, if any, additional supply. These areas are likely to face
downward pressure in price and rentals as more units get delivered.
Following fill-in project announcements within existing
communities by developers in H1 2012, the H2 2012 marked a
return to high-profile project launches announced by the Ruler of
Dubai and the re-instatement of certain stalled projects. The most
notable of these is the Mohammed Bin Rashid (MBR) City to be
developed jointly by Emaar Properties and Dubai Holding.
Meanwhile, Emaar successfully launched two high-end serviced
residence projects – The Address BLVD and The Address Fountain
Views. The latter was the first project launched after the Central
Bank of the UAE (CBUAE) announced its intentions to impose
pre-defined caps on loan-to-value (LTV) ratios for all mortgages
depending on a number of criteria.
Specifically, the CBUAE stipulated that the maximum LTV ratio for
first-time property purchases should not exceed 70% for citizens
(60% for subsequent houses) and 50% for expatriates (40% for
subsequent houses). In response, the UAE Banking Federation,
formally the Emirates Banks Association (EBA) – the local banking
industry lobby – has called for a LTV limit on first-time property
purchases of 80% for citizens and 75% for expatriates. While
acknowledging that the objective of the CBUAE is to effectively curb
speculation in the property market, the UAE Banking Federation
also recommended a maximum LTV of 50% for properties under
construction regardless of residency status. To this effect, various
independent property agents have learned that Emaar Properties
has stipulated that it will not permit off-plan buyers to resell the
units in the Fountain Views development unless buyers paid at least
40% of the purchase price. It is known that the market is still
circumventing this condition by the practice of signing
Memorandums of Understanding (MOUs).
The Central Bank is expected to hold active discussions with local
banks over the next few months and the potential impact on the
property market will be predicted on the final terms agreed with the
banks. However, in its current form, we don’t expect the regulations
to have a significant impact on high-end off-plan project sales as
they are primarily driven by cash investors. That said, the initiative
certainly underscores the regulator’s intention to prevent the
property market from overheating to levels experienced in
2007/2008 and potentially indicates stricter regulations in the near
future. It is noted that the overheated market in 2007/2008 was
principally due to the speculative, off-plan market. The CBUAE’s LTV
restrictions will have more effect on the other end of the residential
market, namely the “end-user” who is buying completed units as
an investment or to live in it themselves.
Residential sales transactions in Dubai totaled c.AED161 billion in
2012, up 62.7% year on year (Y-o-Y). In terms of total value,
mortgage transactions comprised 28% of total transactions during
the year. As a result, we expect the proposed stipulations to
dampen the recovery in residential property prices to some extent,
as a sizable portion of residential transactions are still backed by
mortgages.
Dubai can sustain the recent improvement in investor sentiment
through tangible efforts towards regulatory reforms and improved
transparency. To this effect, a senior official of the Dubai Land
Department (DLD) was recently quoted as saying that the DLD had
received feedback from various stakeholders on the Draft Investor
Protection Law and that the law could be implemented in H1 2013.
The law focuses on enforcing the delivery requirements for
developers in favour of investors. It should also address, and limit,
the practice of on-selling prior to completion of developments,
commonly known as “flipping”. Another aspect that would
improve the appeal of freehold property would be the full
establishment of Owners’ Associations. These entities still remain in
at an interim stage until RERA formalizes this, which would move
the operational responsibility away from the developers and on to
the owners.


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