At one point just a few years back, Dubai was looking like a faded movie star. The United Arab Emirate’s most high profile city was suffering from poor PR, accusations of overdevelopment, property hubris and facing down a truckload of bad press vis-à-vis human rights and labour abuses. The largely expatriate city of just over two million (over half of Dubai’s residents are Indian nationals, followed by local Emiratis at a distant 17 percent) watched its status as a smart investment location go into freefall. A 2009 Knight Frank Global House Price Index report called the city one of the worst performing markets in the world after prices plummeted as much as 64 percent. It ranked ninth of 50 behind Ireland — which was in the grips of a major crisis at the time.
What a difference a few years makes. Knight Frank, in October, ranked Dubai number one in its Global Lifestyle Review, ahead of lifestyle heavyweights Geneva, Auckland, Monaco, Sydney and Copenhagen. Ironically, Dublin ranked second from the bottom. The report ranked locations based on culture, access to education and cost of living. Just the kind of shot in the arm the city could use.
“It was looking pretty dire for a while but it seems to be back on the investor radar,” theorises Director & Head of Middle East at Hong Kong investment advisory IP Global Paul Preston. “Unfortunately Dubai was one of the hardest hit markets during the recession with prices falling by 49.7 percent.” Property prices were up just over 13 percent in the second quarter of this year, recovering in line with the economy in general. “However IP Global still recommends to exercise caution in respect to Dubai as property prices have risen very quickly over a short period of time which could suggest a bubble. People are now buying properties excessively with the recent news of the 2020 World Expo. Jobs will be created and the need for residential properties will increase but investing into a market place because of the [Expo] or any major sporting events is not how it should be. Investors need to make sure the market places have strong fundamentals and strong domestic demands from renters as well as home owner occupiers,” cautions Preston.
Strength in Diversity
Though Dubai’s economy was rooted in oil and gas, the shift away from a resource-heavy economy to a service and tourism-based one has boosted the value of property and underpinned real estate as another major industry. A building frenzy that ended in the late 2000s resulted in icons like the Burj Khalifa and the Burj Al Arab. The IMF has predicted 4 percent GDP growth this year.
According to research by Colliers International, Dubai recorded a 20.5 percent uptick on its international house price index in 2012. In a statement, John Davis, Colliers’ CEO for the Middle East, explained the market, “Bottomed out in 2010 and has been recovering ever since. Whilst this growth of over 20 percent in Dubai’s HPI [in 2012] is an extremely welcome sign of recovery, I expect that this increase will stabilise once the new bank mortgage law is brought in later this year, restricting the loan to value ratios.”
Changes are clearly afoot. One of the biggest issues for the city was grandiose development with no market, Nakheel Properties’ mostly unoccupied The World perhaps the ultimate symbol of misguided overdevelopment. “As with many markets…supply exceeded demand during the boom years. However the recovery has been built on solid fundamentals such as trade, manufacturing and tourism rather than just property speculations and oil,” Preston says. Key factors propping up Dubai’s gradual resurgence for Colliers include increased availability and affordability of regional financing, the perception of the city as a currency and tax haven and Dubai’s status as an Arab region safe zone in the wake of recent political unrest. “The property market is now more regulated and new LTV caps will be introduced to curb the speculation. Again [we] recommend caution to see whether the economy continues to rally and whether the property regulations will help to stabilise the property market. When property markets increase exponentially in value in small time frames, one has to be weary of value and also the downside potential,” notes Preston.
Nonetheless 2013 performed well, with the market sitting almost 40 percent above its 2009 low. Rents are rising, making it a yield market (approximately 6 percent) for now, with capital gains expected to follow. The potential is there for both to remain healthy — so healthy Preston worries Dubai could overheat and send investors elsewhere.
As a business hub for the Middle East, Dubai can still rely on multinationals operating there (despite a relatively subdued office market), and as such Preston thinks 2014 should be a strong year; investment activity should be concentrated in the residential sector, which Preston believes is undersupplied in quality, affordable villa properties. “According to Fitch ratings the recovery is expected to continue into 2014. We will wait and see what next year brings. Personally I see another year of price growth for the Dubai market mainly driven by speculators, driving the market somewhere near to the high prices of 2007,” Preston finishes, warning 2015 could see a downturn due to overheating. “I just hope the investors who lost money in 2007 and have learned a lesson and don’t make the same mistakes again.”