Dubai house prices seen declining another 20%

Investment bank Rasmala reckons a 20 per cent downside potential to property prices in Dubai, estimating that an additional 35,000 homes will be delivered in the emirate between 2011 and 2013 – boosting the existing housing stock of an estimated 330,000 units by about 10 per cent.

“We believe the Dubai residential market may see delivery of 30,000-35,000 units of apartments and villas combined between 2011 and 2013, upon an existing supply base of roughly 330,000 units. This translates into roughly 10 per cent incremental supply over three years, which we believe will further depress real state asset values,” the bank said today in a report on the UAE’s real estate market.

“Our house view remains that Dubai residential sales may bottom out at Dh600-650 per sq ft, hence current price levels of Dh750 per sq ft imply an additional 15-20 per cent downside potential to property prices,” it added.

On the other hand, analysts at the investment bank maintain that Abu Dhabi, which will see more houses entering the market than Dubai, will see at least a 20 per cent drop in residential prices. “We expect Abu Dhabi to lag Dubai by about nine to 12 months on the property clock, and we estimate approximately 40,000 units will be delivered there between 2011 and 2013 on an existing install base of roughly 200,000 units, hence 20 per cent incremental supply over three years,” the report said.

“Although we believe Abu Dhabi will retain a certain premium over Dubai in terms of rents and house prices, both emirates markets are largely correlated in our view, given a similarity in demographics (80 per cent-plus expat community), marginal mortgage financing, substitution effect and meaningful supply-demand mismatches between 2011 and 2013. We expect Abu Dhabi to experience at least 20 per cent declines in residential values from current levels of roughly Dh1,000 per sq ft prior to reaching a sustainable trough,” it said.

Rasmala, nevertheless, sees a number of long-term positives for the UAE’s property market, including the receding impact of the Arab Spring on property investments, as well as the affirmative effect of new property visa rules in the country.

“In addition to regional risk subsiding, for UAE specifically visa law changes may have marginal benefits in the near term and potentially greater benefits in the long run,” the Rasmala report said.

“Increasing UAE residency visa tenures from six months to three years for real estate investors is likely a positive development for the sector and, in our view, supports broader confidence. However, a direct tangible impact on property prices is difficult to estimate in the foreseeable future. We believe current property transactions are primarily driven by supply-demand dynamics and associated risk-rewards, while visa implications are more secondary catalysts.”

The investment bank has therefore upgraded regional property benchmark Emaar Properties to a Buy and reiterated Drake and Scull International as a Buy while keeping Aldar, Sorouh and Arabtec as Holds. “We believe the regional risk profile and investor sentiment is gradually turning positive, so we reduce our risk premium forecasts across the board as we ease through the uncertain Arab uprising phase.”