There were four distinct property market cycles in Dubai since 2002, when the government first allowed expatriate home ownership in designated free zones in the emirate.
The 2003-08 bull market saw home prices rise fourfold, a spike in rents, massive offshore capital inflows, a surge in bank lending to developers and construction companies. Dubai also witnessed dozens of new product launches, flotation of property finance firms Amlak and Tamweel and exponential rise in the number of real estate brokerages. Dubai was one of the world’s best-performing property markets, thanks to such iconic projects as Palm Jumeirah, The World, Burj Khalifa and Emirates Hills.
The 2003-08 bull market in Dubai property prices coincided with a post-9/11 plunge in the US Dollar Index as the Federal Reserve slashed interest rates to zero and a tenfold rise in the borrowings of UAE banks in London’s wholesale funding markets. UAE bank annual asset growth rose to a breakneck 25-30 per cent and construction/property lending rose to one-third of all loans.
This secular growth in property loans by UAE banks could only be financed via the issuance of medium-term notes and commercial paper in the London offshore money markets, not via organic deposit growth in the UAE. In essence, the fate of the Dubai property market became linked to the fate of international banking loan growth. This was the reason the failure of Lehman Brothers in September 2008 triggered a credit shock in the UAE banking system and a significant fall in property prices, even though Dubai had no US-style subprime mortgages or toxic CDO derivatives.
In 2008-10, home prices began to fall more than rents, so yields in Dubai rose to among the highest in the world. The decline in home prices also restored affordability metrics to Dubai even as the $25 billion restructuring of Dubai World’s debt restored normal risk premia in the local financial markets. Bank lending to property, which contracted sharply in 2008-10, began to rise again, albeit under the aegis of new UAE central bank rules on loan to value for home mortgages and client risk limits. The creation of the Real Estate Regulatory Authority also led to a regulatory umbrella for the property market and hundreds of unlicensed, undercapitalised real estate brokers were forced to exit the industry. Escrow accounts imposed cash flow discipline on property developers and imposed linkage between client payments and progress in new construction.
By 2012, when the Arab Spring ignited billions of dollars in capital inflows to the UAE as a geopolitical safe haven, the Dubai property market was mature, diverse, regulated and undervalued. Saudi Arabia also engineered a 4.2 million barrel a day output cut, the biggest in the history of the Opec, that enabled oil prices to stay in the $100-$125 range in 2011-14. Dubai property prices soared in 2013-14. Emaar, whose shares had fallen to lows below Dh2 in 2009, rose sixfold, as a bellwether of resurgent global interest in Dubai’s property market.
However, the 30 per cent surge in the US Dollar Index and 65 per cent fall in Brent from $110 to below $30 since the summer of 2014 have led to a new bear market. The collapse of the euro, Russian rouble, Indian rupee, Turkish lira and British pound sterling against the UAE dirham in 2014-16 naturally hit offshore demand for Dubai home prices. The rise in the three-month Emirates Interbank Offered Rate from 0.60 per cent to 1.05 per cent in 2015 led to a rise in property finance costs and a liquidity squeeze in the bank home finance markets.
Home prices in Dubai fell 15-20 per cent in 2015 as transaction volumes halved. However, since Dubai is a magnet for high income expat talent in its new sunrise knowledge industries (the DIFC, healthcare, media, technology, etc.), rents fell only three per cent, making yields on Dubai property attractive again. What next? Global property firm JLL expects home prices and rents to fall 10 per cent in 2016. Global shocks from China, crude oil, geopolitics and Wall Street stock market declines have also hit investor sentiment across the GCC. It is premature to call a bottom in the property market as long as King Dollar reigns supreme, crude oil falls below 2008 levels, home finance costs continue to rise and new supply/vacancy rates lead to a fall in apartment and villa values