Dubai Residential Prices Keep Falling

Average residential property prices in Dubai have fallen for the second consecutive quarter this year according to the latest index from real estate advisors Colliers International.

Ita quarter three 2010 Dubai House Price Index recorded a 6% decrease in house prices since the second quarter and has reached the lowest recorded level since the second quarter of 2009.

The index average house price was approximately AED951 per square foot, down from AED1,015 per fsquare foot in the second quarter.

The year on year performance of the index followed the same pattern as the quarterly results, showing a 6% decline in overall house price values from the third quarter of 2009, with the index dropping from 114 to 108 points for the same period.

‘Since the third quarter of 2009 the index has been hovering around the same values, but the variation is larger, moving from an annual variation of last quarter of 1.8 per cent to 4.8 per cent this quarter. In effect, after a period of stable prices we are beginning to witness a shallow but lengthening slide in overall average prices,’ said Ian Albert, regional director at Colliers International.

‘This quarter’s decline can be attributed to the anticipated summer seasonal slowdown, evidenced by a quarter on quarter fall in transactions of 4% and the continued tightness of finance. Despite some improvements in Loan to Value ratios and interest rates, lenders, the banks and financial institutions remain committed to a conservative lending policy typified by greater due diligence in the lending criteria,’ he explained.

Colliers views the return of Tamweel, one of the biggest lenders in the Dubai market, as a potentially positive sign, especially if the resumption of its lending activities boosts monetary supply and encourages buyers back into the market. It remains, however, difficult to assess the degree of such improvement given the current muted performance of the market and unknown plan for Tamweel.

In the latest HPI report, Colliers enhances its analysis with two further indicators that adopt different views to assess the relative strengths, weaknesses and position of the Dubai residential market. The first compares the performance of the House Price Index to the Dubai Financial Market since its inception in 2007. Since then the HPI, reflective of an investment in the residential real estate market, has provided higher returns and much lower degree of volatility.

The second indicator to be introduced is a Price-to-Rent ratio. The ratio is widely used as an indicator of the underlying value, generated from rental income, of real estate assets. The ratio helps in identifying when house prices deviate from their average, or their fundamental value, indicating either a potential bubble or undervaluing of real estate.

With the second quarter of 2007 taken as the base (equal to 1) the long run average of Dubai residential property is 1.23. This compares to the house price peak in at the end of 2008 when the ratio stood at 1.56 and the severe correction in the first quarter of 2009 when the ratio declined to 1.11.

‘In the third quarter of 2010, the ratio stood at 1.31, 6.4% higher than its long run average. It is envisaged that house prices may fall at a much larger rate than 6.4% as further declines in rental values are expected, which will exert a larger downward press on prices,’ said Albert.

‘This reflects the reality on the ground as occupancy rates fall to 80% and the market is unable to absorb the additional supply without a growth in the population or a slowdown in the release of stock,’ he added.

The consultancy expects around 33,000 units to be released onto the market by the end of 2010, down from its earlier estimate of 41,000 following project delays or rescheduling. However, given Dubai’s history so far, a large number of these units may not be delivered on time and may cross over into 2011.