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Property prices down, but UAE better-equipped to face fall: S&P

Posted by Coast Sea on June 22, 2015

Companies in better position to absorb decline

Property prices in Dubai’s residential housing market are expected to fall by 10 to 20 per cent this year, says Standard & Poor’s (S&P), a global ratings agency, but asserts real estate development companies are in better position to absorb the decline.

“We generally believe that our rated issuers could absorb a 10 to 20 per cent drop in residential sales prices in Dubai because they are better armed than they were in 2009 in terms of revenue predictability and mix, product mix, and solid capital balance sheets,” the agency said in a report, “Inside Credit: The UAE’s Property Market Is Prepared For The Current Correction.”

The companies rated are Emaar Properties, Aldar Properties, Damac Real Estate Development, DIFC Investments, Dubai Investments Park Development Company, Emaar Malls Group and Majid Al Futtaim Holding.

The agency foresees additional supply and slightly lesser demand constraining prices and rents in residential real estate market over the next 12 months.

According to, 20,170 additional units are planned for delivery in 2015 though the three-year annual average stands at 11,600 units.

HSBC Global Research said in a previous report that Dubai may see supply of 90,000 new units by 2018, but the market will absorb – fairly easily — the new supply even if the population grows less than 5 per cent per year.

“We believe that we have not yet reached the peak of the cycle, and that the market can continue to absorb the expected supply additions over the next few years, even at a population growth rate below 5 per cent,” the bank said.

Even Moody’s Investors Service, a global ratings agency, believes that the government spending on infrastructure and encouraging more foreign investments in various sectors will support the real estate market over the next five years.

Quoting Reidin’s residential property price indices, S&P said price growth has already started to cool down, with prices declining between 4 and 5 per cent from January to April 2015.

Dubai housing prices fell slightly in the first quarter of 2015 with apartments falling 2 per cent, villas down one per cent, and rents flat compared with the final three months of last year.

“We believe that prime areas will probably resist better than recently developed zones. We forecast a 10 per cent price correction for Dubai in 2015 as part of our rating assumptions. In our view, the fall is likely to reach 20 per cent for the worst locations only,” S&P said.

It added there will be slightly lesser demand from non-residents, citing subdued activity by Russian and citizens of other Gulf Cooperation Council countries.

Shortage of units

Abu Dhabi was experiencing a shortage of quality housing, the report said, starting this had resulted in rents increasing but at a slower pace than 11 per cent recorded in 2014.
“With only 5,000 units scheduled for delivery in 2015, if rental caps or similar regulation aren’t introduced, we may continue to observe rent increases in the capital. The only dampener we foresee for Abu Dhabi is the currently softer economic conditions driven by lower oil prices, which could keep rent growth in the single digits,” the ratings agency said.

Emirates 24|7 reported on June 16, 2015 that Abu Dhabi was planning to release a provisional rent index by year-end. The emirate removed the five per cent rent cap in November 2013.

It, however, states that the UAE will not face a similar real estate crisis witnessed in 2009, referring to the below five reasons in support of its view.

1. UAE economy is diversified

Dubai’s economy, especially, is more diversified and less reliant on oil. Non-oil companies are contributing to a large share of GDP and employment, and their expansion may partly offset weaker demand from oil-related companies.

Further more, non-national investors dominate real estate investment in the UAE, and in many cases, their spending power is unaffected by the decline in oil prices. Indian and Pakistani investors, for instance, accounted for more than 18 per cent of investment transactions in the UAE in first-quarter 2015.

2. Demographics are supportive

Population growth in the UAE is a fundamentally supportive factor for real estate prices and rents in the next five years or so. We assume 5 to 6 per cent population growth for Dubai and 7 to 8 per cent for Abu Dhabi for the next two years in our base case. Planners also expect Dubai’s population to reach about 3 million by the time it hosts the World Expo in 2020.

3. Tourism to drive market growth

Strong growth in tourism, especially to Dubai, should be supported by large infrastructure projects over the next decade. The Department of Tourism and Commerce Marketing data reveals the emirate saw 57 per cent growth in tourism to 13.2 million international visitors in 2014 from 8.4 million visitors in 2010.  Besides, the Dubai government plans $6 to $8 billion of investments for Expo 2020. Tourism growth should continue benefitting some real estate segments such as hospitality and retail.

4. Learning from the past

The local regulator has established protective measures since the last crisis. We believe the risk of default has fallen considerably due to the implementation of a loan-to-value cap on mortgages (between 60 per cent and 75 per cent) and developers’ mandatory usage of escrow accounts, which can be released only when construction is completed. The presale mechanisms, which our rated developers use in particular, will help improve the predictability of revenue and cash collection.

The UAE’s new credit bureau that monitors personal debts will also help banks and financial institutions to assess mortgage lending risk more accurately.

5. Positive geopolitical developments

Stabilisation of the political situation between Russia and Ukraine, a rebound of the Russian ruble against other currencies, and the possibility that the US will gradually lift sanctions on Iran are all alternative scenarios that could also support the real estate market in the region.

By Papag Deulgaonkar

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