Expert Eye

Current upswing has some way to run yet before a broad-based bubble appears

Whether we like it or not, cycles will always exist in our industry because humans are involved and humans tend to make decisions based on history and are not necessarily adept at predicting future events.

Dubai’s property scene is undergoing a cyclical event as I write. A correction, neatly timed, to allow the market to sit back and review the landscape, was certainly due. With it comes a promise of growth as the market plans its next foray.

Although cycles are accepted as inevitable, their nature in terms of length,levels of volatility or catalytic events can be difficult identify and predict. The er to the magic ques-n “When does a cyclical upswing in real estate es become a real estate bubble?” is an elusive one.We need to understand the everything causes of growth the characteristics of a e to gauge when sustainable growth becomes unrealistic over exuberance.

Upsurge in real estate demand is typically fuelled belief regarding positive future outcomes usually formulated in reference to a past event(s}. Assuming there is a sufficient and continual level of funding, a cyclical upswing will start and gather momentum.

In Dubai’s instance, the recent upsurge in demand was created by many market factors and catalytic events. Its well-publicized debt solution, booming tourism industry, relatively affordable dirham and asset affordability all drove a new level of confidence in the emirate. If you add to that a geopolitical position, which provides a prime destination for billions in capital fleeing troubled regimes around the region, you can see why demand would be accelerating.

Housing bubbles usually start when demand driven by speculative exuberance and short-term investor focus is driven to a point where the market no longer associates price levels as being representative of a realistic valuation of the underlying asset. Investors, particularly those with the short-term focus of speculators, divest their property holdings and prices start to slide. The bubble, as they say, will have burst.

So, where is Dubai relative to its cycle? There is no doubt that it has made a remarkable recovery and, if a broad -based “bubble” were to form in its property industry, it is still some way off.

The key is sustainable economic growth of around 5% through 2020 and the 5%-7% annual population increase expected to come with it. The amount of infrastructural, development and economic initiatives, culminating in the hosting of the World Expo in 2020, is indicative of the government’s determination to outpace the rest of the world in terms of emerging from recession. Progress will always attract those seeking opportunities and the potential of prosperity; in effect, people needing somewhere to live, work and conduct business.

So, how is the real estate industry poised to capitalize on the population growth that will accompany and support this economic expansion? There have been cries for a greater proportion of Dubai’s property inventory to be in the more affordable category. The good news is, the residential inventory pipeline coming on stream in 2014 and 2015 is mainly comprised of units situated on the outskirts of Dubai with projects being handed over or about to be completed. This inflow of affordable property removes a barrier to population growth and business expansion as one of the main contributors to the cost of living in Dubai, accommodation, is being addressed.

Yet, this is not to say that real estate bubbles will never occur. The market can fall victim to the shortcomings of human nature. However, after conducting a rational appraisal of where the market is relative to its cycle, identifying the risks and estimating the cause and effect of potential catalytic events, we conclude that the current cyclical upswing has some way to run yet before a broad-based bubble appears on the horizon.

Expert Eye


Mortgages and other tools- keys to growth 

Financing tools are critical to allowing buyers to participate in the industry.

When the latest set of new regulations on mortgage lending were implemented, many industry analysts were of the opinion that the reduction in the level of leverage and the increase in the required equity in a property transaction financed by a mortgage were not likely to have a great impact on the amount of speculation in the market. These opinions were based on the fact that the majority of property transactions were being settled in cash.

The latest figures from OLD have confirmed what we have all been surmising, that despite being 4.6% higher than the corresponding period in 2013, the property market in Dubai in the first six months has been slowing, with the second quarter producing Dh52b worth of transactions, down 15% on the Oh61b written in Ql.

The slowdown can be attributed to a number of factors: capital inflows seeking a safe haven were sure to weaken; alternative investment opportunities were sure to emerge as prices started to rise; the implementation of the 4% transfer fee and the developers’ proactive attempts to limit speculative practices had an initial effect; the new law regarding rental price increases also had an effect; some investor nervousness and trepidation have led to hesitancy in buying into a market that they feel is at its peak. Add to the list the implementation of the new mortgage laws, and there is a compelling suite of probable reasons for the slowdown.

The regulation of mortgages is interesting partly because the supply of mortgages is an industry in itself which is inextricably linked to the growth and contraction of mature property markets around the world. One only has to look at the current rush by financial institutions to capture a higher market share of the mortgage market to understand that providing mortgages is a lucrative business. Yet, of the 30,380 real estate transactions in Ql 2014 in Dubai, only 6,922 transactions were financed by mortgage. This is a worrying continuation of a trend as, according to UAE Central Bank data, mortgages only grew 1.1% to Dh708.32b at the end of 2013 compared to Dh700b a year earlier despite the huge growth in the industry during the same period. Some mature and stable markets are 85% reliant on mortgage financing.

The new mortgage cap has certainly produced a definite lag in demand as clients adjust to the new financial realities and many of them are planning to participate within the next three years.

And here comes the rub: that demand may never take significantly longer to be reflected in actual transactions as the low mortgage rates of today will probably not be available in two or three years.

The likelihood of interest rate rises in the US as early as Q3 2015 will make financing a UAE mortgage increasingly more costly due primarily to the AEO being pegged to the USD. The effect of widening interest rate differentials around the world will still affect affordability as some currencies will strengthen versus their peers, making investing in UAE more expensive when utilizing currencies with low interest rates.

We have been encouraging our clients to buy a more affordable property now and benefit from lower interest rates, and upgrade to their dream abode later. In addition, we have been recommending to developers that they implement easy payment schemes and/or implement rent-to-own schemes for the same reason.

The importance of main- tainting affordability for the average buyer is critical. The bedrock of any property industry is its owner-occupiers, and financing tools such as mortgages, easy payment  or lease- to-own schemes are critical to allowing them to participate in the industry.

It is they who will have a major influence on the future long- term growth prospects of Dubai’s real estate industry, and it is critically important for the industry to ensure their participation.


Why should I use a broker instead of directly approaching the end-users or developers?

A broker or property consultant can help you determine what you are really seeking or require. Once your requirements are determined, he can help set your expectations with regard to availability and affordability. Setting a realistic budget based on disposable income, lifestyle expectations and willingness to take on debt is an important part of the process as is explaining how you can get the most for your budget. Any good property consultant will have extensive market intelligence on asset type availability, configuration, developer or contractor reputation, price, finance availability, etc. There is also the process of negotiation and finalizing a purchase. You will pay a consultant to add value by finding the property you require, saving you money, minimizing your risk, ensuring you are legally compliant and providing you with peace of mind.

Should I use my cash money to buy property or to seek a finance provider?

If your cash is currently employed in other assets, earning more than the current mortgage rates on offer, I recommend you borrow to finance the purchase of your property as long as you have the option of using your cash to pay down the mortgage once your mortgage interest rates start exceeding the return of your other investments. Property finance has been cheap for some time now but the opportunity to take advantage of today’s low mortgage rates will probably not be around in two or three years. We have been encouraging clients to buy as soon as possible and benefit from lower interest rates. Even where they had not found their perfect home, some of them settled for a less-than-perfect choice and plan to upgrade to their dream abode in the future. With careful planning, they will benefit from low interest rates in the ensuing few years, enabling them to grow their equity more quickly to a point where they can more easily afford their true dream home.

Should I assign a finance advisor when purchasing my first home, or should I do that myself?

I always recommend that clients consult with a financial advisor prior to purchasing property as this requires careful planning and a clear understanding of what it will entail, the effects it will have on lifestyle, the risks it may pose and the benefits of generating wealth through ownership. Sometimes it is difficult for clients to take an objective and realistic view because of emotions surrounding the purchase. A financial advisor can help you assess all these elements by helping you determine what you actually require, what you can afford, how best to use available finance and current assets, and how owning a home is going to enable you to grow your wealth. The financial advisor will view your property purchase as one part of your overall financial landscape and guide you into committing the right type and amount of resources to acquiring that dream home. I plan to invest in real estate.

Would you recommend investing in villas or apartments?

Villas provide lower rental yields but higher capital appreciation and vice versa for apartments. But the market rarely moves uniformly. There is always a difference in the investment returns to be expected from different asset types, in different areas, at different stages of completion, over different periods of time. In today’s market. I am recommending to my clients to invest in affordable apartments, or construct a portfolio of affordable apartments and villas. Projects such as those located within Dubailand Residence Complex including Queue Point in Uwan, Skycourts, Sarah Ajmal and Windsor Residence are filling the affordable housing void and, if you wish to diversify asset types, I suggest you consider Pacific Village as this project offers high quality, affordable and extremely spacious modern villas and townhouses. All provide affordable solutions with little compromise and have the potential of providing excellent returns.

Question of the Week

What are the steps in buying property in Dubai?

There are a series of checks and requirements to be completed to ensure an issue-free transaction. The first step is to consult a financial advisor who can help you determine what you can afford. You should then obtain a pre-approved mortgage if required.

Then you select a registered broker or agent, who can add value by allowing you to make the best decision.

Searching for the property of your dreams can be a frustrating and time-consuming experience. While you can delegate this to your appointed property broker, I recommend you conduct your own search as well. It will assist you in gaining an appreciation of what is available for your budget.

Once you have a property that is of interest to you, your broker must complete the necessary background checks to ensure there are no impediments to a sale.

If all is in order, you proceed to make an offer. If your offer has been accepted you need to sign an MOU which details the terms and responsibilities of both parties. You then provide a 10% deposit.

If you have applied for a mortgage, your bank will be informed of your intentions and carry out a property valuation. When the bank gives the go-ahead, the seller applies for an NOC from the developer.

An appointment is then made with the DLD to complete the transfer. The seller, buyer, respective agents and bank representatives attend to formalize the transfer. When all documents and transactions have been completed, you will receive the title deed.