Once the world’s hub of luxury high rise development, the United Arab Emirates city of Dubai has learned the hard way. Oversupply and high rents in glamorous high rises along the Persian Gulf (Arabian Gulf for the Emiratis, however) fell to the basement floors during the 2008-09 financial crisis. As a result, UAE’s two most popular cities for fancy housing projects — Dubai and Abu Dhabi –forced stricter regulations on buyers and developers. The outcome means oversupply is no longer a dire concern, and the luxury market in these two cities is much more sustainable. All of this bodes well for long term investors in this former Arabian frontier economy.
“The UAE market is headed for broader stability. Over the next few months, there will be a correction in areas seen as overvalued while at the same time there will be pockets that will maintain their upwards climb,”
Thanks to tighter regulations by the U.A.E. government and a more conservative business plan from property developers, the residential real estate market of Dubai in particular is becoming more stable. Although property prices skyrocketed 35% in 2013 and rang all sorts of alarm bells at the International Monetary Fund and World Bank, 2014 has seen Dubai real estate investors take their collective heads out of the clouds.
Dubai housing was all the rage in the early 2000s. Then, the U.A.E. government was busy building up the city as a gateway between the East and the West. Dubai smashed stereotypes of the Arab world. It was modern, sleek, innovative, inventive, and had sex appeal. Brokers and traders from Europe moved to Dubai for the flash and the promise of a brighter future. But the rug got pulled out from under everyone when the multinational firms that were setting up shop in Dubai were losing money due to the U.S. foreclosure crisis. Bad bets on mortgage backed securities and other derivatives meant a hefty price had to be paid for all involved, including Dubai developers like the state owned Dubai World which had to restructure some $26 billion in real estate debt. Dubai World is famous for building the mix-used real estate project known as the Palm Islands.
Tighter regulations slowed investment. For example, between 2006 and 2008, real estate accounted for 40% of Dubai’s total investment. Between 2011-13, it collapsed to 19%, according to the Dubai Statistics Center.
Fiscal policy continues to unwind the large expansion projects. The increase in Dubai’s real estate registration fees from 2% to 4% started in October 2013. It was a welcome step in addressing speculation in the real estate market, and further increases could be contemplated in case the pace of price increases does not abate.
“Newly implemented regulations on loan concentration and real estate exposure for banks will help protect the soundness of the banking system, which has remained amply capitalized and liquid. The new loan concentration limits will help contain risks to banks’ balance sheets in the context of newly planned megaprojects,” said Harald Finger, IMF mission leader to the U.A.E.
Dubai will host the World Expo in 2020.
Moreover, for real estate investors wary of housing bubbles, the new maximum loan-to-value ratios for mortgage lenders will provide banks with a buffer against undue exposures, while also helping to limit the degree of speculation in the real estate market.