Published on 19 March 2006 at 02:47 pm
Filed in Property News for Dubai » Confusion Clouds the Property Investment Market in Dubai
Property investors in Dubai should have been celebrating last week following the passing of Law Number 7 on the 14th of March that finally allows for the foreign freehold ownership of property in certain designated areas in Dubai, but celebrations were muted.
Never before has there been so much uncertainty and extreme division of opinion in a country’s real estate sector and confusion is definitely clouding the property investment market in Dubai. So, is Dubai’s real estate market poised on the brink of an impressive rise in fortunes or teetering on the verge of a spectacular collapse? We examine the facts…
On the one hand there is strong evidence to suggest that the passing of Law Number 7 by His Highness Sheikh Mohammad Bin Rashid Al Maktoum will result in an upswing in Dubai’s property market fortunes.
Those expatriate and non-GCC overseas buyers who speculatively entered the marketplace before the issuance of title deeds was possible are now in an excellent position to resell their properties and take their profits without having to pay the developer from whom they purchased massive charges for the transfer of ownership for example, and this is expected to create a strong resale market in Dubai.
There remains intense demand for completed property in Dubai which is why rental rate increases have been capped by the government. Previously the only way those moving to Dubai could find immediate housing solutions was to rent, and those investors with completed investment properties available for letting were increasing rents to astronomical heights which resulted in the government’s intervention. If Dubai now develops a healthy resale market those moving to live in Dubai should have the ability to purchase property or at least have the choice between renting and buying a completed home which should remove the need to cap rental rate increases and bring more economic flow to the real estate market in Dubai.
On the other hand the fact that many of those who bought off plan properties in Dubai are expected to take up residence in their completed units this year means that there will be less demand for either rental accommodation or even resale property. Could this be the reason that certain developers are now offering incredible incentives to those who agree to purchase unsold off plan properties? Developers have been offering potential purchasers luxury cars and other incentives if they commit to purchasing new waves of off plan properties that can have up to a 3 year build period…is this because they are finding it hard to shift their stock, is this because the desire to own property in Dubai has diminished?
One needs to examine the desirability of the market closer to determine whether or not its appeal has faded. Dubai remains a tax free emirate in which there are a constant plethora of employment opportunities available to qualified international professionals. The fact that employment opportunities abound, salaries and incentives offered are usually very impressive and that an expatriate can reside in Dubai and legitimately avoid having to pay the local government any personal taxes means that the emirate remains a desirable place to live. Naturally enough this fact alone means that there is a constant demand for property in Dubai to buy and rent.
A factor that seriously reduces the desirability of the emirate however is the rate at which inflation is growing and the cost of living increasing. Depending on which sources an individual prefers to believe, inflation in Dubai is up between 4.1% and 41%. Take the cost of privately educating a child as just one example of how the cost of living in Dubai is spiralling – in the UK it’ll set you back upwards of GBP 46,000 annually but in Dubai you can almost double that figure which makes it more expensive to live in Dubai than in London!
Looked at positively, inflation is a sign that the economy in Dubai is strong enough and healthy enough to cope with price increases which may mean that the property market can also sustain a further boom in price increases.
Looked at negatively, inflation is reducing the amount of disposable income that those who live in Dubai have at the end of each month, reducing the amount people can and will afford to pay for accommodation and eroding the tax free living attraction of the emirate altogether.
Some have said that the passing of Law Number 7 will result in the emergence of a mortgage market in Dubai which will allow more investors the chance to enter the market which in turn will create greater demand for property. Greater demand usually results in an increase in underlying prices which suggests the real estate marketplace in Dubai has legs to run and run.
But looked at in another way…if demand does surge, property developers will have to reclaim more land, build more properties and put more strain on the already creaking infrastructure.
Signs that the government of Dubai seriously need to address infrastructure issues are evident everywhere. For example, in February of this year parts of Dubai flooded so dramatically after just a few centimetres of rain fell suggesting that the drainage systems in the emirate are already overloaded or even substandard. Another serious example of creaking infrastructure is the gridlock that Dubai experiences day in day out and which makes commuting incredibly frustrating and difficult – it really has to be seen and experienced to be believed. Now the government are developing plans to build two new six lane roads right through some of the most expensive residential areas of Dubai – which has upset the expatriate residents who own property in these parts of the emirate but who have absolutely no voice to protest…their complaints are being left unanswered and yet their property values are about to plummet.
And then there’s the stock market. Traditionally the fortunes of real estate markets and stock markets are opposing…as the stock market falls in value and desirability so the fortunes of the real estate market rises because investors are looking for alternative assets in which to invest and vice versa – oversimplified explanation but historically true none the less! Well, in Dubai the stock market seems to be bouncing about all over the place.
Last year the Dubai stock market doubled thanks in part to certain government intervention, so far this year it has lost almost 40% of its value. Last week the market dropped by almost 12% in one day and then it rebounded by 8% just four days later – again thanks to some government intervention. So the confusion that is currently clouding the property market in Dubai seems to be clouding the stock market as well despite the government doing what it can to manipulate it and Dubai’s economic future seems to be uncertain.
The question remains - is Dubai’s real estate market poised on the brink of an impressive rise in fortunes or teetering on the verge of a spectacular collapse? Well, only time will tell…
