UAE real estate market may be “overheating” and rental yields in Dubai and Abu Dhabi indicate “growing imbalances,” according to the central bank.
According to the central bank’s 2013 financial stability report, average sale prices in the both cities have risen faster than rents, and such deviations can be “used to identify imbalances in the housing market.” The average rental yield in Dubai is about 70 basis points below the historical average and those in Abu Dhabi 130 basis points lower.
Investors who have bought properties only with the intention to generate income are now disappointed, as they can’t rent their properties at profit-making rents. Real estate agents are trying to push the rents higher, but the end users are not that eager to absorb the increases. In particular, luxurious apartments and villas in Dubai see stagnation in demand. Property investors have no other choice but to accept the losses. At present, many need to rent out their expensive assets for over 15 or 20 years in order to return the capital investment. However, according to international practices in real estate, the capital return should materialize in 10 years on average.
Home prices in the most areas of Dubai nearly doubled last year, raising concern a bubble may be forming once again. Residential property prices rose an average 24 percent in Dubai and 21 percent in Abu Dhabi, the UAE central bank said. The International Monetary Fund urged the U.A.E. on several occasions to enact stronger measures to curb real-estate speculation in Dubai to prevent an “unsustainable” surge in prices.
To avoid another bubble, the central bank last year issued regulations restricting mortgage lending, and Dubai’s government doubled transaction fees.
While lending for home purchases rose 12 percent or 12.7 billion dirhams ($3.5 billion) last year, less than 30 percent of residential property purchases were funded through bank lending, the central bank said. U.A.E. bank exposure to the real estate sector is less than 23 percent of total loans.
“Bank lending cannot be considered a significant driver of real estate prices,” according to the report. “Analysis of banking data support the hypothesis that the current market recovery is mostly driven by equity buyers and or reliance on external funding sources.”
Price growth for villas and apartments in Dubai have slowed in the first five months of this year, according to data from property broker Cluttons LLC.
To contact the reporters on this story: Zainab Fattah in Dubai at zfattah@bloomberg.net; Arif Sharif in Dubai at asharif2@bloomberg.net
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