dubai — Dubai’s soaring real estate prices are
set to peak in the first half of 2009 before a decline in the second
half of the year when 70,000 units are expected to come on stream,
investment bank EFG-Hermes said.
In an in-depth study, the bank said the softening would result in a cumulative price decline of 15-20 per cent by 2011.
“At the
same time, continued supply delays could push forward the year of
supply peaking to 2010 and thus extend the cycle further.”
More
than half of the 70,000 residential units entering the market in 2009
“consists of as-of-yet undelivered supply” that has spilled over from
2007 and 2008.
“However,
we also believe that external dynamics such as negative sentiment, a
potential transfer of liquidity from the real estate to equity markets
and a reduction in foreign demand could accelerate the pace and timing
of a price correction,” analysts at the bank said.
Driven
by a persistent supply lag, Dubai’s robust property sector rose 18.9
per cent in 2007, exceeding projected growth of 10-15 per cent.
This year, prices surged 14.4 per cent so far, already exceeding a growth forecast of 5-10 per cent for the whole of 2008.
Demand
for real estate in Dubai remains robust, spurred by the entrance of
more end-users into the property market, a reduction in mortgage rates
as well as an increase in financing options. and
A
widening of the investor base, with stronger foreign participation and
a recent pick-up in speculative activity also helped to propel demand,
the report said.
Deliveries in 2007 came short of expectations for a fourth year due to contractor capacity constraints, a shortage of building materials, cost increases and inadequate infrastructure.
Delays in the commencement of project construction have also held back supply, the report said.
According
to the report, while Dubai market offers a multitude of choices and is
rich in opportunities and potential returns, downside risks include the
diversion of liquidity from Dubai towards Abu Dhabi and other markets,
the spread of weaker global economic conditions/confidence to emerging
markets, the declining affordability of property, and the spread of
negative sentiment, which could cause the price correction to accelerate and deepen.
“We
nevertheless believe that a price correction is likely and should be
viewed as healthy, especially in keeping with our view that demand is
price elastic and that a decrease in prices from their highs will
encourage new demand. Moreover, with real estate being at the
cornerstone of the UAE’s economic diversification programme, we
maintain that the sector will grow over the long term.”
The
strength of Dubai property market, the report said, is best reflected
in a continued trend of price appreciation that stems from continuing
supply delays, a deepening of demand and liquidity, and limited relief from construction cost inflation.
“The recent rules and guidelines issued by Dubai Real Estate Regulatory Agency (RERA), are expected to increase
the level of transparency, professionalism and confidence in Dubai real
estate and thus spur demand in the medium to long-term.” RERA is close
to publishing rental indices that will help shape the direction of
rental rates.
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