Cladding issues could mess with Dubai property market after The Address fire

The property market is certainly not going to be unchanged by the events of New Year’s Eve, writes Peter Cooper.

The fire at The Address Downtown Dubai hotel smolders on New Year's Day. Pawan Singh / The National

How will the fire at The Address affect property prices in Dubai?

Nobody can be exactly sure how The Address fire on New Year’s Eve will affect Dubai property prices. But as high-rise building freehold owners and insurance experts become increasingly nervous about the cost implications of a government survey of all properties to ensure that they conform to the latest fire regulations, the owners of individual units are also worried.

At the very least, it is reasonable to assume that it is going to be more difficult to sell such units in the immediate future, and if they are rented out then they are not going to be as popular.

Conducting a full survey of the estimated 900 high-rise buildings in the city is going to take time, and so will carrying out whatever remedial work is deemed necessary. Some buildings may need to be completely re-clad to be classified as safe again.

There will also have been some long-term damage to the reputation of Dubai high-rises as safe to live in, although it is impossible to quantify, and it is clear that the authorities will do whatever is possible to rectify this situation.

However, the property market is certainly not going to be unchanged by the events of New Year’s Eve, which were watched by tens of millions of partygoers on televisions around the world, and the aftermath in terms of blighting the market for a section of Dubai’s real estate cannot be overlooked either.

The most logical response from buyers would be to favour property in buildings that are unaffected by possible cladding issues over those that may be. Fewer buyers for those buildings will lower prices in the marketplace.

The quicker a building is cleared, the better for prices of its apartment units. But equally, this cannot be done in too much of a hurry, or the impact on confidence will not be sufficient to overcome the damage done.

Apartment owners in these towers are caught between the devil and the deep blue sea. Sitting this problem out is the best answer. Things could get better faster than expected.

For example, interim improvements may be implemented swiftly to make high-rise buildings safer. Simple but effective measures such as sealing balconies so that nobody can smoke on them or light a barbecue fire could be imposed.

Owners who have rented their units out are likely to face difficulties with tenants who may want to leave or expect a reduction in their rent to stay. The current law protects a tenant’s right to stay but does nothing to secure the landlord’s position beyond a small penalty for the tenant leaving.

On the other side of this equation, unless the confidence in Dubai high-rise towers can be restored quickly, there should be a rising premium on low-rise apartment developments and villas. A rising demand for the existing supply of the latter will put an upward pressure on selling prices and rental costs.

This new dynamic in the Dubai real estate market comes alongside what was already looking like a difficult year ahead following an already established downturn of 18 months to two years, depending on how you view it.

The UAE property sector was facing several other factors that augur badly for the year ahead: overseas buyers are vanishing, mortgage rates are going up and consumers are heavily indebted.

Russian and Chinese buyers are thin on the ground. The US dollar-linked dirham is at a 12-year high against major global currencies, and this makes buying a property in the UAE more expensive for many would-be foreign buyers. Global financial markets are also in turmoil.

Mortgage rates are rising in the UAE, and this makes buying a home more expensive in terms of regular payments. An increase of 0.5 percentage points sounds like nothing until you realise that translates into about a 12 per cent rise in monthly mortgage payments.

Finally, The National has carried many articles recently about how local consumers are drowning in personal debt after binge consumption during the good times. When credit is this extended, consumers are hardly in a position to take on a home loan even if they would like to.

The Address fire at the New Year compounds these difficulties for the third year of a bear market for Dubai real estate.

If you want to be optimistic, then you could see this as just setting up even better buying opportunities at the market bottom, and perhaps protecting low-rise villas and apartments from a further downturn.

Peter Cooper has been a senior business journalist in the Arabian Gulf for the past 20 years

Follow The National's Business section on Twitter