The combination of mortgage caps and a strong local currency are cooling the once hot Dubai housing market.
By Romesh Navaratnarajah
With prices of luxury villas in Dubai continuing to fall, now might be the best time for sophisticated investors to consider purchasing the home of their dreams in an exotic location.
High-end villas, such as those on the iconic Palm Jumeirah, have seen prices take a bigger hit than apartments. Average prices of villas were down by 4.3 percent in the first three months of 2015 from a year ago, revealed property consultancy Cluttons.
Across the emirate, average housing prices inched up a meagre 3.4 percent in 2014, a sharp decrease from the stunning 51 percent rise observed in the previous year.
According to CBRE, the slowdown in Dubai’s once hot housing market can be attributed to the strengthening Dirham which is pegged to the US dollar, making the emirate a more expensive investment destination for European and Russian investors.
Similarly, the sterling and Indian / Pakistani rupee continue to weaken against the dollar, putting a Dubai investment out of reach of Indian, Pakistani and UK nationals, who have traditionally contributed to a large proportion of residential investments, said Cluttons.
Fewer villas finding buyers
Notably, the Federal Mortgage Cap, which was introduced in October 2013 to cool the property sector, has put the squeeze on prices and transactions in the villa market, said Cluttons.
“During 2014, just under 1,300 villas changed hands, down 52 percent from 2013. The number of transactions during Q1 2015 was down 36 percent from the same quarter last year.” The introduction of the mortgage caps means the amount of money required to be paid upfront for an AED5.5 million (S$2.1 million) villa has jumped from 20 percent to 42 percent.
This ruling affects properties priced higher than AED5 million (S$1.92 million), where loan-to-value ratios have been revised from 75:25 to 65:35 for expatriates.
The upward creep in completions is also expected to put further pressure on the values of villas. This year alone, another 4,000 villas are expected to be ready for occupation, followed by just over 6,000 in 2016 and another 3,700 in 2017, said Cluttons (refer to Figure 1).
The firm added that the surge in the supply of villas comes amidst a vastly different financing landscape from when some of these schemes were conceived. “The secondary market in particular will be hardest hit by the rising supply.”
As a result, villa sellers are now very much on the back foot and resale properties are recording severe price declines due to a rise in distressed sellers.
For the second half of the year, Cluttons expects villa prices to continue sliding by two to four percent per quarter. On the other hand, apartments are showing more resilience, but prices are likely to weaken by between 0.5 and 1.0 percent each quarter this year.
“The lure of six to eight percent yields and the growing proportion of apartments priced in the AED300,000 to 500,000 (S$115,000 – S$191,768) bracket is likely to dampen any sharp declines.
“Despite this sluggish outlook, demand is expected to remain very stable in the medium to long term, particularly as the government continues to drive economic diversification, which will fuel job creation,” said the consultancy.
Rents coming down
As for residential rents in Dubai, the market continues to soften. Rents dipped by 1.9 percent in Q4 last year, leaving the total rental value growth at a marginal 0.4 percent in 2014. But the report noted that this has been negated by the 0.4 percent dip in average rents during the first quarter.
Both apartments and villas continued to see rents fall by 0.3 percent and 0.5 percent respectively during Q1.
At the same time, supply levels in Dubai are still edging up, and landlords are growing wary of the threat of longer void periods.
Threat is exaggerated
Moving forward, over 12,600 units are expected to hit the market by the end of next year and a further 15,800 completions are scheduled between 2017 and 2018. Despite this, there is little risk of oversupply, as the population is expected to grow by another 400,000 over this period.
Cluttons concluded that the additional supply means “the supply-demand equilibrium is expected to be maintained as the population grows in tandem with the rising number of completions, suggesting that any strong turnaround in rental value growth is unlikely, given the current projections”.
“With the sources of current and pipeline tenant demand remaining robust and underpinned by the growth in new jobs, linked to both economic growth and diversification… current stabilisation in rents is expected to persist.”
Image: Aerial view of villas on Jumeirah Island. (Photo: Imre Solt: Wikimedia Commons)
UAE Mortgage Regulations
To curb speculation and the flow of hot foreign money into Dubai, the UAE Central Bank introduced new mortgage caps in October 2013, affecting both local and foreign property buyers.
Here’s how the rules work:
• For a first-time property purchase below AED5 million (S$1.92 million), expatriates are allowed to borrow up to 75 percent of the property purchase price and UAE nationals are allowed to borrow up to 80 percent.
• For properties valued at more than AED5 million, the loan-to-value ratio is set at 65 percent for expatriates and 70 percent for UAE nationals.
• Foreign buyers can only receive a 60 percent loan for second and subsequent properties; this figure is up to 65 percent for UAE nationals, irrespective of value.
• UAE nationals and expatriates buying property off-plan will have their mortgages restricted to 50 percent.
• The age limit for the loan repayment period is 65 years for expatriates and 70 years for UAE nationals. Borrowers will be limited to a maximum of 25 years to repay their loan.
• Loan repayments cannot exceed 50 percent of a borrower’s monthly income, or a total of more than seven years’ annual income for an expatriate and eight years’ annual income for a UAE national.
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