United Arab Emirates: 03/04/2006

Dubai Property Law re-ignites real estate boom

Anecdotal evidence suggests that the promulgation of the new Dubai Property Law on March 12th has caused a surge in demand for local real estate at a time when available property is in short supply. The result is an up-tick in prices that could turn into a new leg for the Dubai real estate boom.

It is much too early to make any definitive judgment about the impact of the legalization of freehold property ownership for foreigners in Dubai last month. But buyers and sellers have remarked upon a sudden pick up in activity from nowhere, and an almost daily upward movement in prices.

This is what agents such as Asteco had been forecasting, namely that a number of cautious buyers were hovering on the brink of commitment but waiting until the new law was finally passed. The question is whether this phenomenon will prove transitory or a more permanent feature of the marketplace.

Perhaps the truth is half-way between these extremes. But with Emaar Properties only having delivered 13,000 properties up until the end of 2005, Dubai is not exactly awash with properties available for sale at the moment, while the city's population is expanding by more than 200,000 a year.

Supply shortage

It is not hard to see that a relatively small pool of available homes - most now being occupied by happy tenants or owners - is today being pursued by considerable demand. High rents in Dubai also increase the pressure to buy, both for residential and investment purposes.

Yet Asteco has also published a well known statistic of 85,000 plus housing units a year coming on stream over the next three to four years. The problem is that actual delivery of this property flow is subject to construction delays, and the huge new supply has still to hit the market.

When it does - and it may not be really felt until mid-2007 now - then market forces would suggest that Dubai house prices should begin to first stabilize and then fall back, with more sellers than buyers.

Prices still rising

The problem with this argument is that nobody can predict how high house prices might go before they hit the ceiling, possibly in mid-2007. For if prices were to really spike in a market blow-off situation then they could still go a lot higher than they are today.

Certainly in terms of investment the rental returns on Dubai property usually represent 'fair value' to landlords with yields of 6-8%. For property to be judged expensive then yields would need to halve to something closer to current global real estate levels.

That these levels have not yet been reached most likely indicates that capital values have not peaked either for Dubai property.

It is also possible that later on rentals could fall without impacting seriously on capital values, thus adjusting the rental yield to something closer to most other major property markets. Either way a margin of safety exists in Dubai property that is not widely appreciated.