Dubai's property market appears to be on the recovery path. Prices registered their first quarterly improvement at the beginning of this year since the price correction that started in the second half of 2008.
The increase was supported by a return of investors' confidence and a gradual increase in economic activity resulting from improved trade and tourism.
However, average property prices still stand 64 per cent lower than they were at the peak of average prices in Dubai in September 2008.
According to data compiled by the Economics Group at the National Bank of Abu Dhabi, average property prices in Dubai rose 3.7 per cent in the first quarter of this year from the previous quarter.
Villa prices in the city continue to rise on the back of stronger demand, while villa rental rates increased about 5 per cent on a sequential basis, mainly for two-bedroom villas.
The demand for villas in established communities such as Emirates Living, Palm Jumeirah and Arabian Ranches remain strong because of increased demand from new tenants as people upgrade their accommodation in light of the current market rates.
As a result, coupled with the shortage of villas, higher-quality accommodation has attracted an increase in prices recently.
On the other hand, apartment rents and capital values have risen in selected areas, but the vacancy rates remain generally high in Dubai.
Supported by a low-interest-rate environment, mortgage providers in the UAE are offering attractive mortgage rates and payment terms to homebuyers, boosting property sales in Dubai recently.
Since the price declines began in the second half of 2008, the demand for property has shifted from speculators to owner-occupiers, propelling the need for mortgages.
Last year, according to the Dubai Land Department, total mortgage transactions in the emirate rose 33.5 per cent from Dh57.4 billion (US$15.6bn) in 2010, indicating a recovery in property financing and the return of healthy activities in the property sector.
In the hospitality segment, Dubai continued to experience growth in visitor numbers in the first quarter of this year, after similar growth last year. During the first quarter, the sector posted a 9 per cent increase in guest numbers and a 22 per cent growth in guest nights, while hotel occupancy rates rose as high as 87 per cent, up 8 per cent from the same period last year, according to data released by the Dubai Department of Tourism and Commerce Marketing.
Similarly, Emaar Properties, which operates nine hotels and three serviced-apartment buildings in Dubai, reported a 25 per cent year-on-year growth in revenue from hospitality and leisure business in the first quarter.
The continued supply of new properties remains, however, a concern for the property market in the short to medium term.
According to the Real Estate Regulatory Agency, since the beginning of 2009, 165 projects have been completed in Dubai, while 291 projects are on hold; 291 projects are expected to be completed and 29 have yet to be started.
During the first quarter of this year, about 3,000 units were added to the residential stock in Dubai, bringing the total to 341,000 units at the end of the quarter. The market is expected to expand by 28,000 more units over the rest of this year, a growth of 8.2 per cent in the current stock.
The vacancy rates in Dubai are currently more than 25 per cent, and the addition of new properties to the existing stock is likely to increase the downward pressure on property prices and rents in Dubai.
In addition, the crisis in the European Union threatens to impair the mortgage market in the Emirates by tightening the liquidity in the system, for example curtailing lending for property transactions.
Although Dubai's property market has improved in recent quarters, it might be too early to judge whether the underlying recovery trend is sustainable, given the continued supply of new properties, the European debt crisis and the global economic slowdown.
However, the downward spiral of property prices in Dubai has clearly been arrested.
Sajeer Babu is a senior investment analyst in the asset management group at National Bank of Abu Dhabi. The views expressed are his own
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