Even though the Dubai property market has reached scary lows over the last few months, there are serious concerns that the worst of the fall in property values is yet to come. A number of reports lately have highlighted significant issues which have yet to be resolved and could get very much worse before they get better.
Reports on Dubai property
A report by the Swiss banking giant UBS has highlighted the potential for further significant falls in Dubai property prices in the short to medium term. Indeed, the company is suggesting that falls of up to 70% from the recent market high could still be on the cards with significant oversupply, lack of demand and prospects of widespread defaults.
Even though Dubai property prices have fallen by over 40% since the market high in the third quarter of 2008, it appears that the risk reward ratio is nowhere near the level required to tempt overseas property investors back into the market.
In addition, the latest trends in property investments globally show that the tide of cross-border activity has turned, with buyers retreating to home countries and local markets to scout distressed opportunities in the downturn.
Since the financial crisis toke the world by storm, real estate trading activity has achieved a stunning global uniformity with very similar patterns. Worldwide sales volume and the number of trades plummeted to one-sixth their levels of two years ago and fell 73 % from Q1 2008 to just $47 b and 1,014 properties in Q1 2009, according the latest Global Capital Trends report of Real Capital Analytics. The broad drop in activity cut across all property types and just about every market.
According the Jones Lang LaSalle’s report, the Middle East remains one of few global regions where positive economic growth is forecast for 2009, with the IMF forecasting growth of 2.5 percent.
Dubai population set to fall by over 17%
It is estimated that over the next two years we could see as many as 17% of the Dubai population return home as the economic downturn continues. While the figure of 17% may seem on the high side, it is worth remembering that this is an economy and population which grew after the introduction of significant numbers of overseas workers, overseas investors and overseas businesses.
Property vacancy rates could hit 30%
The UBS report is forecasting that residential property vacancy rates in Dubai could reach a staggering 30% by the end of 2010 and again have a serious impact upon both the property market and economy of the region. It goes without saying that reduced demand will see landlords reducing the rents, which will then feed into a potentially lethal downward spiral where tenants hold the upper hand and landlords are held to ransom.
The reduction in the population and increase in property vacancy rates will also have an impact on businesses in many areas of Dubai, which would then reduce consumer spending further.
Dubai Government debt
Dubai authorities have taken on substantial debt over the last few years in an effort to expand the economy, attract overseas investors and businesses. Prior to the credit crunch and worldwide recession, there was no doubt that this investment had produced significant results but there was always a concern that the authorities had taken on too much debt in too short a period of time. It is estimated that net debt is around the $110 billion mark , although we have seen significant refinancing deals announced over the last few months, which should at least take some of the short-term pressure off the authorities.
Oversupply in the property market
While a significant number of Dubai property developers either exit the market or go out of business, there is still substantial oversupply in the short to medium term. Properties are laying empty, with their value literally falling day by day, and unlikely to change hands in the short to medium term. Against this background of oversupply, falling demand and a reduction in the Dubai population, there seems little on the horizon to take away the pain being felt in the region.
This also offers an opportunity to property investors and property developers, who have the option to reduce their asking prices significantly in order to try and find buyers (creating a potentially devastating knock-on effect on prices), or else hold steady and try to battle through the downturn. However, when you consider the precarious finances of many investors and property developers in the region, there are very few that will be able to retain substantial amounts of property, which are non-income producing and falling in value day by day.
Is the Dubai property market set to improve?
While there is no doubt that the Dubai property market continues to attract the attention of many investors around the world, few are willing to invest into property at this time. Past performance should not be considered when looking to the future, as this can cloud investors’ judgment.
Even if the Dubai property market stabilises and potentially recover in the short to medium term, there are many foreign investors, who are nursing significant losses and weakened financial position in their home markets. Overseas investment in Dubai peaked during 2008 and is unlikely to reach those levels for some time, if ever again. Whether we have seen the best of the Dubai property market remains to be seen, but the short to medium term omens are not good and despite the authorities trying to prevent potential problems, many investors are taken a back.
While it may be wrong to envision the end of the Dubai property market, there is no doubt that increased government debt, reduced demand for property, chronic oversupply of property and the potential reduction of the Dubai population do not bode well for the future.
