Real estate market in Dubai remains weak, damning report shows

Property values in Dubai still to fall according to report

Property prices in centrally located areas in Dubai may be reaching bottom but most could still experience price falls of up to 15% this year, according to analysts.

‘We expect average residential prices to fall by 15% in 2010, following a 45 percent decline from the third-quarter 2008 peak levels,’ said analysts from Bank of America Merrill Lynch in a new report for investors, Dubai aftermath of a bubble.

They also predict that Dubai will have 44,000 vacant units in 2010 even if more people from Abu Dhabi and Sharjah relocate to the emirate. The completion of a significant number of new homes later this year will put pressure on prices.

The pricing environment for Dubai’s residential real estate remains fragile,’ the report adds and says that the market needs to move from an off-plan model to a more conventional end user market, but there is little sign of this happening at present.

‘We believe the market has conquered the first two phases of the down cycle; namely the exogenous liquidity and confidence shock in the fourth quarter of 2008 and the second-round chain reaction in terms of employment contraction,’ it says.

‘However, we expect a final leg down as the market has yet to fully price for excess inventory. Despite a 45% decline from peak third quarter 2008 levels, capital values are back only to the second quarter of 2007 levels, considering the dramatic 80% gains in 2008 till peak in a fairly compressed cycle,’ the report continues.

It points out that after a modest recovery in the third quarter of 2009, residential prices declined 3 to 4% on average in the first quarter of 2010 after a flat performance in the fourth quarter of 2009.

Meanwhile, new sales launches and off plan sales are unlikely to return anywhere close to peak levels over the medium term. ‘We expect further consolidation with developers pooling resources to complete and extricate cash from half-built projects,’ said the report.

It also points out that the transition from an off-plan capital gains driven market to a more conventional end user market is still at the early stages in Dubai and transaction activity is ‘anaemic’.

‘We think it is still early days in terms of clearing inventory and we would need to see a convincing rise in transactional activity before calling the bottom. Trends in the first quarter of 2010 suggest that bid-offer spreads have started to widen again with a modest decline in transaction volumes. This sluggishness in transactional activity is typical in the current phase of the down cycle. Potential buyers are still credit constrained and lacking confidence, while sellers demonstrate balance sheet strength and holding power,’ it adds.

There is still negative carry between the cost of ownership and rental yields, and foreign capital flows are subdued. Average mortgage rates and LTVs, while improving, are still prohibitive at 7% and 75%, respectively, it also points out.

‘Dubai’s real estate market was built on free wheeling off-plan capital flows and needs to transition, in our view, towards end user driven demand in the medium term. End user demand, transactional volumes remain weak. Neither regulation nor demographics are favourable for the creation of a true end-user market and, in the near term, the cost of ownership is simply too expensive to lure potential buyers. Prices have yet to adjust to reflect excess inventory and transaction volumes remain sluggish,’ the report concludes.

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