Dubai, boom or bust?

Dubai, boom or bust?
31 July 2007

Peter Penhall, CEO of Gowealthy Holdings gives a run down of the Dubai property market and how it compares to the rest of the world.

Mature international markets are going through the natural mode of settling into corrections. To take examples of current housing markets, the US is seeing prices falling for the first time in 11 years with around 4.2 million unsold homes at the end of April. The annualised rate of second hand home sales is also falling by 2.6 per cent to 5.99 million in April, compared to the UK, Ireland, Spain, Denmark, the Netherlands and Australia, where recent price increases have been the largest. Even relatively new to fame, markets such as India are experiencing a cooling in the real estate prices. In any investment market prices eventually revert to a long term average. Home prices are cheaper in absolute and relative terms in Dubai and there is still some way to go, before the notion of a ‘bubble’ can be stamped on.

A rough parallel could be drawn between the Dubai freehold property market and Singapore. In Singapore rental prices are similar to Dubai, but property purchase prices are double. Whether that is going to happen in Dubai, or will Dubai rentals collapse due to oversupply, sending property prices lower is up for argument. It may be a little premature to make a definitive judgment on this critical point. However, we can draw some conclusions.

A quick view of the global property markets in recent years throws up certain consistencies such as static rentals and rising property prices. This can be attributed to falling interest rates, which have increased the real value of rentals and therefore property prices. The Dubai property market has yet to adjust to this, perhaps because the mortgage market is still relatively underdeveloped, and most Dubai property is still bought with cash.

As and when Dubai banks further develop their mortgage lending portfolios to something nearer to normal world levels, a possible expansion of local credit may push up property prices, unless the supply Vs demand equation changes.

The current rental yields, for example are quite high by global standards, at 7% to 10%, which still reflects the fact that the Dubai property market is still relatively under-matured. A longer term return to normalcy would mean either a drop in rentals or a hike in property prices. There are documented studies in the market that show that the Dubai real estate market will first undergo some kind of a correction downwards in capital and rental prices due to oversupply in 2008-9 (EFG – Hermes).

One thing is certain, in the long run, Dubai rental yields will be more in line with international yield patterns. Also, as mentioned earlier, the rapidly maturing mortgage market will see home prices being driven up and result in a drop in rental yields.


‘Will demand match supply?’ This is the million dollar question, and there is no doubt that in the medium-term, demand will sustain at current levels at least. The Dubai Statistic Department figures point to a Dubai population growth of just over 100,000 in 2006, with roughly 50% having a mid-end to high-end home owning potential. With a widely accepted practice of 2.5 people per unit, this would have meant a requirement of around 20,000 units of accommodation.

A shortfall in deliveries by around 10,000 to 15,000 units as per industry learnings, means that there is further pent-up demand this year in addition to the 2007 demand that has arisen due to normal population growth itself. If we follow the same logic, then a demand of around 30,000 to 35,000 units come into play this year which is not too far away from the deliveries that are being predicted for 2007. With many property owners having bought property as second homes and others having the luxury of holding on to their property in case of lower-than-expected rental yields, there will be unoccupied spaces contributing to lower and slower supply growth.

However, if the 139,000 units that the EFG Hermes report counted for scheduled delivery in 2008 do actually enter the market next year, the market will clearly be quickly saturated, and the correction predicted by the report and Standard Chartered Bank among others will be a reality by then.

The buyer demographic is seeing a definitive shift from the typical buy-to-let investor to the end-user segment. The recent spate of property launches and associated mortgage lending facilities and patterns are also a further indicator of this fact and have added to the comfort of the owner-occupier. With rentals and associated expenses in Dubai still showing no signs of cooling down, an increasing number of mid-end home buyers are entering into the market with increasing frequency.

For further information on the Dubai property market and the array of properties on offer visit gowealthy.com.