What next for Dubai property?

|By Matein Khald| During the 2008 post-Lehman financial meltdown, home prices in Dubai fell by 60-70 per cent and a generation of offplan flippers and leveraged investors/buyers (a mortgage, by definition, is a highly leveraged and speculative financial product. There is a reason the word “mortgage” derives from the French “mort” or death!) were wiped out. However, the Arab Spring, global liquidity and the successful debt restructuring of Dubai World saw a massive rerating of Dubai real estate in 2012-14. This property market peaked in April 2014 and prices have since fallen 20-25 per cent. The Dubai property market is in its first major correction since the effects of the credit Armageddon of 2008-10. What are the prospects and opportunities for Dubai property in 2015?

It is premature to bottom-fish in most segments of the property market. Average villa/apartment prices have fallen at least three to four per cent in the first four months of 2015 but has not deterred developers from new supply. Property transactions have, not surprisingly, plummeted to a trickle compared to the peak levels of early 2014. Banking sanctions and recession in Russia has meant an ice age for Russian buyers. The fall of sterling from 1.70 to 1.50 against the US dollar has also made Dubai property expensive for UK buyers.

The Dubai government has rightly discouraged speculative bubbles by raising property transaction taxes and the Central Bank of the UAE closely monitors bank lending to real estate/construction (16 per cent of total loans in the Arab world’s largest banking sector). The memories of 2008-09 are far too traumatic for bankers, investors and homeowners to indulge in the luxury of amnesia. This is the reason that offplan “developers” can lure few Dubai residents to their “pie in the sky”, highly-speculative schemes and must rely on outrageous marketing gimmicks like free luxury sports cars.

Both CBRE and JLL data confirm that the legitimate housing market is in correction mode in 2015. JLL had predicted that the oil price crash and the lack of affordability metrics in the UAE would mean at least a 10 per cent additional correction in Dubai home prices and rents. Since there has been no revival in property prices three weeks before summer and the holy month of Ramadan, JLL’s market call is unquestionably in the right direction. Standard and Poor’s, one of the world’s leading credit rating agencies, expects Dubai property prices to fall 20 per cent due to new unit supply risk and investor sentiment hit by oil prices. I trust S&P forecasts since they are not in the business of selling dreams, hype, overvalued property or hugely toxic leveraged mortgages to “investors”.

It is no coincidence that bear markets in Dubai property have been correlated with major bull trends in the US dollar. Think about the savage home price corrections of 2008-09 and 1997-99, which both coincided with King Dollar. This is because oil prices are highly inversely correlated to the US dollar. Since April 2014, the US dollar index rose almost 20 per cent until mid-March 2015 while oil prices fell 50 per cent, a $360 billion deflation shock to the GCC in lost revenues. If the UAE dirham was floating, it would have depreciated against the US dollar as other petrocurrencies from the Canadian dollar to the Norwegian kroner have done (The Russian rouble, of course, is both petrocurrency and Putincurrency).

However, the UAE dirham is pegged to the US dollar so the burden of adjustment to an oil/deflation shock falls on the property market and UAE equities, which both peaked in May 2014 just as the US dollar Index began its epic rise. A new variable in this cycle is the spike in expected deliveries, expected to range from 22,000 to 25,000. This is at least 10,000 units more than new supply in 2014 and makes an autumn bull run in the property market impossible. Note that many sellers based in Britain, Russia, India and Carolingian Europe will slash ask prices this summer to cash in on their 2015 currency windfall due to the rise of the UAE dirham/dollar since last summer. As with crude oil in 2014, the market faces a simultaneous demand and supply shock.