In a damning assessment of the real estate sector in Dubai, analysts say prices have still some way to fall and the emirate is nowhere near becoming a more mature market…
The residential property market is ‘fragile', transactional volumes are ‘weak', developers are having to pool resources to complete and extricate cash from half built projects and the outlook is ‘anaemic', according to a new report from Bank of America Merill Lynch.
Entitled Dubai – aftermath of a bubble, the report predicts prices will fall 15% this year on top of a 45% decline in 2009 and that 44,000 vacant units will put pressure on prices. It says Dubai needs to move away from its off-plan based market to a more conventional end user one but there is little sign of this happening at present.
‘We expect average residential prices to fall by 15% in 2010, following a 45% decline from the third-quarter 2008 peak levels,' it says.
‘We believe the market has conquered the first two phases of the down cycle; namely the exogenous liquidity and confidence shock in the fourth quarter of 2008 and the second-round chain reaction in terms of employment contraction,' it adds.
‘However, we expect a final leg down as the market has yet to fully price for excess inventory. Despite a 45% decline from peak third quarter 2008 levels, capital values are back only to the second quarter of 2007 levels, considering the dramatic 80% gains in 2008 till peak in a fairly compressed cycle,' the report continues.
It points out that after a modest recovery in the third quarter of 2009, residential prices declined 3 to 4% on average in the first quarter of 2010 after a flat performance in the fourth quarter of 2009.
Meanwhile, new sales launches and off plan sales are unlikely to return anywhere close to peak levels over the medium term. ‘We expect further consolidation with developers pooling resources to complete and extricate cash from half built projects,' says the report.
It also points out that the transition from an off plan capital gains driven market to a more conventional end user market is still at the early stages in Dubai and transaction activity is ‘anaemic'.
‘We think it is still early days in terms of clearing inventory and we would need to see a convincing rise in transactional activity before calling the bottom. Trends in the first quarter of 2010 suggest that bid-offer spreads have started to widen again with a modest decline in transaction volumes. This sluggishness in transactional activity is typical in the current phase of the down cycle. Potential buyers are still credit constrained and lacking confidence, while sellers demonstrate balance sheet strength and holding power,' it adds.
There is still negative carry between the cost of ownership and rental yields, and foreign capital flows are subdued. Average mortgage rates and LTVs, while improving, are still prohibitive at 7% and 75%, respectively, it also points out.
‘Dubai's real estate market was built on freewheeling off plan capital flows and needs to transition, in our view, towards end user driven demand in the medium term. End user demand, transactional volumes remain weak. Neither regulation nor demographics are favourable for the creation of a true end-user market and, in the near term, the cost of ownership is simply too expensive to lure potential buyers. Prices have yet to adjust to reflect excess inventory and transaction volumes remain sluggish,' the report concludes.