The significant increase in residential prices in Dubai over the past six months has resulted in renewed discussion of whether we are facing another real estate bubble, similar to that which burst so spectacularly as a result of the global financial crises in 2008/9.
The rate by which residential prices have been rising clearly varies between different projects and different locations, but there is little doubt that both prices and rentals are increasing at a growing rate.
Data from Reidin, based on information provided by the Dubai Land Department, suggests that average prices increased by almost 18 per cent across the market in the year to August 2013, with apartment prices increasing more steeply (20 per cent) than prices for villas (11 per cent). Price increases are being driven by a combination of improved economic and demographic fundamentals and a return of confidence and sentiment that has resulted in renewed speculative activity.
However, while it is Jones Lang LaSalle’s view that residential prices and rents will continue to rise over the short term and that the rates of increase seen recently are not sustainable, we do not think that a bubble will develop this time round.
Why? Dubai is rebounding on the back of the 3T’s – trade, transport and tourism. While there are some worrying signs of overheating creeping into the market, there are some key differences this time around which mean that another bubble can be avoided.
For example, price increases remain significantly lower than the levels experienced in 2007 and 2008 during the previous boom.
Villa prices have been increasing between 15 per cent and 20 per cent on a year-on-year basis over the past six months.
But this pales into insignificance compared to the year-on-year increases of 80 per cent to 90 per cent in the villa market in late 2007 and early 2008. The rates of price escalation in the apartment market are also below those of the previous boom period.
Other significant differences:
• Ample new supply will keep the market competitive and act to temper the rate of price and rental growth.
• The market is less dependent on pre-sales than it was during 2007-08 and there have also been few sales of land plots to sub-developers, a major reason for the previous crash.
• Developers have recognised the need to adopt a more long-term and coordinated approach, with far more emphasis on phasing supply in line with levels of real demand. Better regulations should also help reduce any potential spike in prices.
• Rent controls will protect existing tenants from increases in open-market rentals, and the Real Estate Regulatory Agency now requires developers to lodge between 30 per cent and 40 per cent of the construction cost of projects in a project-specific escrow account before any pre-sales can be launched. The limited available finance is likely to act as a natural anchor, limiting the number and timing of the announced projects that proceed.
Overall, the Dubai market now appears broader based and better regulated, and therefore less susceptible than in 2008. This reduces the likelihood that the current increase in speculative activity will lead to a recurrence of such a sharp downturn as occurred in 2008-09.
While we believe prices in the Dubai residential market are rising at an unsustainable rate, this does not represent another bubble. There are good reasons for hoping that the next 12 months will bring continued price increases but at a more moderate rate. An extended period of slower and more subdued growth would be far more beneficial for the overall market than a continuation of the current rates of increase, followed by another severe correction.
Alan Robertson is chief executive of Jones Lang LaSalle, Middle East & North Africa