The UAE's house prices are now falling!
Last Updated: June 20, 2015
During the year to April 2015, Dubai’s all-residential property price index (RPPI) fell by 2.8%, the first month of y-o-y decline since March 2012 and in sharp contrast with the spectacular 37.5% surge during the same period last year, based on latest figures released by Reidin.com. When adjusted for inflation, Dubai house prices actually dropped 6.8% over the same period. Dubai’s RPPI is calculated monthly and covers 7 cities, 8 main districts and 4 major projects. Abu Dhabi’s RPPI is also calculated monthly, and covers 7 cities and 4 main districts.
- Dubai’s apartment sale prices were down by 3.6% (-7.6% in real terms) y-o-y in April 2015.
- Dubai's villa sales prices rose slightly by 0.4% over the same period, but actually dropped 3.7% when adjusted for inflation.
Abu Dhabi, the UAE's capital, also experienced a decline in its all-residential property price index by 1.1% (-5.1% in real terms) during the year to end-April 2015.
- Abu Dhabi's apartment sale prices fell by 3.4% (7.3% in real terms) in April 2015 from a year earlier.
- Abu Dhabi's villa sales prices rose by a meagre 0.1% y-o-y in April 2015, but actually fell by 4% when adjusted for inflation.
Dubai's property market has been one of the world's most volatile. Dubai saw one of the world's worst housing crashes with house prices plunging by 53% from Q3 2008 to Q3 2011. The housing market started to recover in Q2 2012 with double-digit house price increases since then.
The Federal Mortgage Cap, introduced in 2013, has slowed the pace of residential value appreciation in Abu Dhabi and Dubai. In addition, the Dubai Land Department recently doubled property registration fees from 2% to 4% to dampen property demand.
Demand is now plunging. During the year to April 2015, property transactions, both in number and value, plunged by 51.8% and 37.1%, respectively. In 2014, there were 53,871 transactions in Dubai, according to Dubai Land Department (DLD), worth AED 218 billion (US$ 59.4 billion). About 51% were sales, while 44% were mortgages.
Transactions of completed apartments in Dubai dropped 12% in Q1 2015 from a year earlier, while those for completed villas were down by 35% over the same period, according to Reidin.com. The demand for off-plan properties in prime locations such as Dubai Marina has noticeably declined, as interest shifted to cheaper properties in secondary locations.
In contrast, demand in some developments remains stable in Abu Dhabi, despite the ongoing market correction, according to Asteco. Projects in Investment Areas such as Saadiyat Island, Reem Island and Al Raha Beach continued to be the most popular development areas. The Hidd Al Saadiyat, which is currently under construction, offers luxurious villas to homebuyers.
Some local property analysts remain optimistic about the future of the UAE property market. “We think the market is currently letting go of that speculative pricing layer, which once peeled, would result in a more holistic price level. We continue to believe that the current easing of prices is a result of market correction that will soon peg the demand and supply forces at a sustainable level,” said Haider Ali Khan, CEO of Bayut.com.
Others expect large house price falls. Real estate consultant Jones Lang LaSalle and the ratings agency Standard & Poor’s expect that average house prices in Dubai could fall by between 10% and 20% this year.
The IMF, which earlier warned UAE about overheating real estate prices in Dubai, has now backed down from its concerns.
Dubai's total residential stock was around 377,000 units, Abu Dhabi's around 243,000 units, at end-2014. In 2015 around 25,000 new housing units are expected to enter the Dubai market and 10,000 new housing units the Abu Dhabi market.
Due to falling oil prices, the UAE's economy is projected to expand by only 3.1% this year, after GDP growth of 3.6% in 2014, 5.2% in 2013, 4.7% in 2012 and 4.9% in 2011, according to the IMF. Dubai, which has a more diversified and less oil dependent economy, is expected to grow by about 5% this year.
Gross rental yields are now attractive in Dubai, at up to 7.2%
Our rental yields research indicates that some good fundamentals underpin Dubai's property market. Apartments in Dubai now sell for around USD 3,700 to USD 4,300 per square metre (sq m):
- Medium-sized apartments (120 sq. m. and 160 sq. m.) sell for an average of USD 4,000 per sq. m.
- Large apartments (225 sq. m.) cost more, around USD 4,300 per sq. m.
- Smaller apartments (75 sq. m.) are cheaper, selling for around USD 3,700 per sq. m..
This is an unusual pattern - smaller apartments usually are more expensive than larger apartments (per sq. m.) in the other major world cities.
Rents from small and medium-sized apartments average USD 22 per sq. m. per month, while large apartments rent for a little less, at USD 21 per sq. m. per month. Looking from the landlord's point of view, these rental levels mean that a 75 sq. m. apartment can earn rental income of around USD 1,700 per month, while 120 sq. m. and 160 sq. m. apartments can earn rental incomes of around USD 2,700 and USD 3,700 per month, respectively, and 225 sq. m apartments can earn a monthly rental income of around USD 4,800 per month.
In conclusion the gross rental yields, i.e., the gross returns on investment if the apartment is fully rented out, are moderate to good, range from 5.87% on large apartments, to 7.21% on small apartments, the difference stemming from the lower cost of the smaller apartments, in per sq. n. terms.
Tax on rental income is low in Dubai
Rental Income: There is no income tax, but that is slightly misleading, as there is a 5% tax on residential leases, assessed on the rental income.
Capital Gains: There is no capital gains taxation in Dubai.
Inheritance: The thorny issue of inheritance has caused a lot of debate. It is hoped that the position will be clearer once the new Land Law is enacted.
Residents: The Residents' visa renewal fee is AED1,360 (US$370) every three years per person.
Total transaction costs are very low in Dubai
Total round-trip costs are around 5% to 9%. There are no property-related taxes in Dubai, which accounts for the low transaction costs. The buyer and the seller each pay registration fee at 2% of the property value. Real estate agent’s fee ranges from 1% to 5% of the property value.
UAE’s rental law is pro-tenant
The government introduced a rent cap of 15% in 2006, which was slashed to 7% in 2007. The rent cap was further reduced to 5% in 2008, in an effort to curb inflationary pressures.
In January 2009, Dubai’s Real Estate Regulating Agency (RERA) unveiled a new rental index to replace rent caps. Following this a new rental law was released, establishing the rental index as a benchmark for rent increases.
NEW RENTAL LAW
|CURRENT RENTAL RATES|| |
|Equal to or 25% below the rental index|
|26% to 35% below the rental index|
|36% to 45% below the rental index|
|46% to 55% below the rental index|
|More than 55% below the rental index|
However, RERA has come under criticism because the new rent figures were much higher than current rental rates in the market. The rental index, compiled during mid-2008 (at the height of the property boom and before the fallout from the global financial crisis), gives an inflated view of rents in Dubai. The discrepancy caused uproar and confusion among tenants who were left watching their landlords hike their rents to unwarranted levels.
This prompted RERA to update the new rental index earlier than planned. The revised index is due to be released in April 2009. Those tenants who have not yet renewed their contracts are likely to hold on to their old contracts until the new index is released.
Economic diversification will stimulate UAE’s growth in 2015The UAE’s economy grew by about 4.8% y-o-y to more than AED1.54 trillion (US$ 42 billion) in 2014, despite the sharp decline of oil prices during the second half of 2014, according to UAE’s Minister of Economy Sultan Bin Saeed Al Mansoori.
After an economic slump in 2009, the economy quickly recovered, expanding by 1.6% in 2010, 4.9% in 2011, and 4.7% in 2012.
The good economic growth was attributed by Minister Al Mansoori to the government’s efforts to diversify the economy. Non-oil sectors account for around 69% of the country’s GDP, while the remaining share is oil. Driving the country’s economic diversification is the Abu Dhabi’s Economic Vision 2030, and Dubai’s Strategic Plan 2015, which aims to increase investment in industrial and export-oriented sectors. At the federal level, the UAE's "2021 Vision" positions science and technology, research, and innovation at the centre of a knowledge-based and highly competitive economy by 2021.
Non-oil GDP grew by around 5.6% in 2014, and growth is expected to remain in the 5% to 6% range from till 2016, according to the Abu Dhabi Commercial Bank (ADCB).
Due to the acceleration of non-oil diversification, the UAE is expected to grow at around 4.5% in 2015.
“With this good performance, the general budget is expected to see a surplus of 9% of GDP, double the figure of 2012. Inflation rates have been estimated at between 2% and 3% in 2014, thanks to the flexibility of the UAE’s economy and the measures being taken by the government to curb price hikes,” according to Finance Minister Al Mansoori.
Inflation this year is likely to be at a manageable level of around 2.5%, according to both the UAE's Ministry of Economy and the IMF, due to macro-economic measures that the government took after being warned by the IMF of a possible bubble or boom-bust cycle. The UAE’s inflation has already slowed, as the strengthening of the dirham in line with the dollar (to which it is pegged) has reduced the cost of imported food. In Dubai, the overall inflation rate declined to 4.3% in February 2015 from 4.5% the previous month. Likewise, Abu Dhabi’s inflation rate also dropped to 4.6% from 5.0% over the same period.