Over the past decade, Dubai’s property prices have been highly volatile, with the real estate market going from boom to bust. Prices have fallen by 12% this past year, marking the largest drop in the world, according to real estate consultancy, Knight Frank. Following the global financial crisis of 2007-2008, Dubai’s real estate market was on the brink of bankruptcy, tumbling by 60%. A multitude of projects were put on standby and sizeable investors lost a fortune. However, amongst this year’s oil price plummet and weaker currencies in Europe and Russia, Dubai’s real estate market risks yet another collapse.
The fundamental reason behind Dubai’s plummeting property prices is their increasing lack of affordability. Its real estate market has experienced excessive growth rates. Despite unparalleled demand for accommodation in Dubai – boasting fastest growing population in the world – sharp-rising prices have caused affordability to be a key issue. Only the tremendously wealthy have the ability to purchase properties with ever-increasing prices, though they may choose not to. If Dubai is to have a more vigorous real estate market, there must be a negative readjustment of property prices in proportion to the median affordability in Dubai. The Dubai government would much rather see a sustainable real estate market come into fruition in order to reel in regular income, as opposed to heading towards the boom bust cycle that is very much evident in the UK, which may result in the government having to rely on oil-rich Abu Dhabi for a large loan funding a bail out.
Already, Emaar – a real estate development company based in the UAE – has been swift to adjust to the notion of property price affordability in Dubai. The firm has recognised that the global restriction on lending has been a restriction for potential property buyers. Thus, they have introduced two solutions. The first solution is the idea of deferred payment. The buyer is able to defer payment of 25% of the property price. Then, the buyer must obtain a mortgage for 75% of the property value, which must be paid off within 5 years in a lump sum installment to Emaar. The second solution is essentially a rent-to-own option. Within the first 10 months of a tenancy, if the tenant decides to buy the property, the property price remains fixed and the rent paid so far goes towards paying for the property.
There are several key reasons as to why the S&P believes that Dubai is better equipped for withstanding a real estate market bankruptcy than back in 2008. Firstly, the UAE has diversified its revenue sources, particularly by decreasing its reliance on oil. Currently, oil companies contribute to just 2% of Dubai’s GDP. This has meant the present oil price plummet has not proved catastrophic for Dubai’s economy. Thus, the plunge in property prices is unlikely to be highly detrimental to Dubai’s GDP. Furthermore, Dubai’s favourable demographic indicates that the real estate market will remain afloat. Its population – with growth predicted at approximately 6% in the next 2 years – is expected to hit 3 million by the World Expo 2020 to be held in Dubai. Tourism growth will continue to be critical for market growth in Dubai. Between 2010 and 2014, there was a 57% increase in tourism. Solely for the 2020 World Expo, the Dubai government intends to make $6-8 billion of investment, particularly in large infrastructure projects. This should facilitate the real estate market.
It is hoped that the real estate sector has learned from its past mistakes. Numerous measures were implemented following the previous global financial crisis, to protect its economy from another economic downfall. For instance, the introduction of a loan-to-value cap of 60-75% and the compulsory practice of escrow accounts by developers – which can only be published when construction is finalised – has decreased the risk of default. Furthermore, the introduction of the UAE credit bureau – whose role is to monitor personal debts – will aid banks and financial institutions to evaluate mortgage lending risks more effectively. For now, the decline in property prices is set to continue. However, the important lesson for Dubai is that greed and corruption within the real estate market must be stripped.