Property prices may continue to fall

Drop in rental returns means Dubai is now a less attractive investment proposition Angela Giuffrida After rising sharply in the past year, property prices in Dubai may decline for the next two to three years, according to a report that tracks property investment opportunities in international markets. The Philippines-based Global Property Guide said Dubai was now a less attractive place to invest in property compared to a year ago due to a significant drop in rental returns, and downgraded its investment rating for the city to two stars (negative), from three stars (neutral) last year. "Gross yields are now an average of 5.5 per cent, significantly down from an average of 7.5 per cent a year ago," the report said. "This is largely because prices have risen so fast. Since our last rating on Dec 17 2007, residential prices in Dubai have risen by an amazing 75 per cent. At these levels, Dubai is less attractive than it was previously as an investment property -destination." While gross yields of about 5.5 per cent are expected in countries with stable housing markets and large rental markets, the report said it could not see a strong investment case for buying property at the same yields in Dubai, because of a significant supply overhang. "The new supply coming onto the housing market is clearly slowly changing the balance between owners and renters. "This seems likely to lead to a fall in prices," the report said. "The Government may do its best to stabilise the situation, but we believe the imbalances are simply too strong to sustain present day prices." The report added that while Dubai would remain an attractive hub for business in the long term, it had "somewhat overbuilt", at least from a medium-term perspective. The rating downgrade came as the investment bank, EFG Hermes, released a report today maintaining its forecast of a 15 to 20 per cent decline in Dubai property prices beginning next year. "While we maintain our forecast... we now believe this will be more front-end loaded," the report said. "Market segmentation looks set to move to more-affordable housing and rental projects, facilitating a more sustainable pace of development." Compared to the buoyant first six months of this year, sentiment has been quick to turn among investors, fuelled by the collapse of global banks and subsequent sell-off of property equities. "Investors are adopting a more risk-averse attitude and steering clear of all cyclical sectors." The report added that the current confidence crisis would be short-lived if immigration to the UAE held up, liquidity was made available at both the retail and corporate level, and the improvement in property regulations continued. "We maintain there is room for an orderly rotation from a speculative to more end-user-driven market." The report predicted that Union Properties, a publicly listed Dubai developer, would emerge from the slowdown unscathed. "Union Properties's stable income stream and the limited execution risk associated with its current project pipeline suggest that should the Dubai market take a turn for the worse, it can still generate healthy profits." It also forecasts a stronger market in Abu Dhabi, and for key developers such as Sorouh and Aldar Properties. "Sorouh's well blended strategy of a mix between the sale of land plots, residential and commercial units and the rental properties helps to balance its exposure to the various stages of the real estate cycle," the report said. "We remain believers and long-term buyers of Aldar, highlighting its focus on execution, quality and deliverability. "Once the company has passed through its current capital-intensive phase, we believe it will enter one of very high free cash-flow generation and create significant value." agiuffrida@thenational.ae