Experts see Dubai house prices dropping for another 18 months

Research firm Phidar said that Dubai’s residential market had been hampered by a lack of demand – both from institutions and occupiers.

Property became more expensive for buyers from key markets such as India, Pakistan and the United Kingdom throughout last year as the dollar increased in value. Pictured, DIFC. Satish Kumar / The National

Apartment prices in Dubai will continue to drop further in the next 12 to 18 months because of weak demand from institutional buyers and occupiers, the research firm Phidar Advisory said.

Apartment prices in Dubai declined a further 3.7 per cent in the second quarter of this year, and villa prices fell by 1.1 per cent compared with the first quarter, Phidar said.

Jesse Downs, the managing director of Phidar, argued that Dubai’s residential market had been hampered by a lack of demand – both from institutions and occupiers. The former have been put off by the strength of the US dollar (to which the dirham is pegged), while the latter continue to be dissuaded from buying or upsizing because of the uncertain economic environment caused by lower oil prices.

Property became more expensive for buyers from key markets such as India, Pakistan and the United Kingdom throughout last year as the dollar increased in value. Ms Downs said that although currency fluctuations have been “relatively flat” since the start of the year, there is likely to be a slight weakening of investor demand in the third quarter because of the 11 to 12 per cent decline in sterling after the Brexit vote.

The decline in demand from occupiers has meant rents have continued to fall even though supply has been relatively weak.

“It’s been three of the lowest years of supply in a decade,” said Ms Downs, pointing to completion rates of fewer than 20,000 homes a year. She added that the annual addition of 20,000 new homes “is usually a pretty healthy number for Dubai”.

“In fact, the market usually needs that many units. The conclusion that we’ve come to is demand is weakening, and that ties up with anecdotal evidence. You see people leaving, you talk to recruiters who will be honest, and they say there is no job growth.”

Phidar's gloomy prognosis runs counter to other property consultancies, which have argued that the market has shown signs of bottoming out in the first half of this year, with prices flattening. Yesterday, the data provider Reidin also reported its first quarterly increase in residential property values in two years, with a 1 per cent increase in values for the three months to the end of June.

A study published last week by the broker Land Sterling argued that Dubai apartment prices dropped by just 0.4 per cent in the past three months, weighed down by price declines in secondary areas. Prices dropped by an average of 5 per cent in Dubailand, and by 3 per cent in Business Bay and Dubai Sports City. Meanwhile, prices grew by 2 per cent in prime areas including The Greens, Palm Jumeirah and Downtown Dubai during the quarter. Prices also increased by 1 per cent in Dubai Marina.

Phidar said that gross yields for apartments increased to 9.7 per cent, as the 3.7 per cent drop in prices outpaced a 2.2 per cent fall in rents. Gross yields for villas compressed to 4.7 per cent because prices declined by 1.1 per cent, but rents fell even faster by 3.6 per cent.

Ms Downs argued that villa prices had held up relatively well in recent months as more owner-occupiers had bought homes, but said this looked “unsustainable”, predicting further declines in both sale prices and rents for the villa market this year.

Follow The National's Business section on Twitter