Dubai Property Prices: Should Investors Take Note?

Dubai’s property market was a star that shone brightly right up until the back end of 2007 when the rug was pulled so sharply from beneath it that it collapsed in spectacular fashion.  Property prices are reported to have almost halved last year, to have fallen by a further 41% during the first quarter of 2009 and perhaps now, according to a new price index report from Knight Frank, the bottom of the crash is about to appear.

According to the global estate agency, Dubai’s property prices have ‘only’ fallen by about 7.5% in the second quarter of 2009 – and so with this in mind, should investors begin to take note and re-examine the offerings in Dubai’s real estate marketplace?

In this report we’re going to look into the viability of an investment made into property in Dubai.  We’ll examine whether there are fundamentals that will support the market’s recovery, what is in place to prevent such a collapse happening again, whether there are finance methods appropriate for would-be investors, and what sort of overall investment approach one should use if one wants to enter the market in Dubai.

When Dubai’s ruler announced the right for foreigners to hold freehold title to property in his emirate the take up rate was massive.  So much so that an entire economic sector was born overnight and this fuelled the incredible overall appeal of Dubai as a place to live, work, invest and even holiday.  The rate at which the property market boomed was mirrored in terms of the population increase in the emirate as international businesses flooded the free zones to benefit from the tax optimisation advantages in place in Dubai.  They brought with them international employees from around the world.

Employment soared, property prices shot up, immigration ran at a record rate, rental vacancy rates constricted sharply, rental rates were sky high and the heart of Dubai pumped faster and faster until it suffered from the truly inevitable attack that has almost killed it.  Jobs have been shed as companies have closed offices, gone out of business or just contracted to survive.  As a direct result the numbers of individuals and families leaving the emirate has increased dramatically – and they are taking their money with them and liquidating their assets before they leave.  Elsewhere buyers have flown the market as lofty building projects have fallen around them – and if America has sneezed in terms of its economic collapse, then Dubai has had an acute reaction to the H1N1 virus!

The rate of the rise of success that Dubai embodied has been directly and exactly contrasted by the rate of the fall in its fortunes – and it was oh so inevitable.  Nothing can rise that far and that fast and be sustainable.  Greed fuelled Dubai and greed has been its downfall…but can it recover?

Dubai has potential – it has potential over the long-term - this potential comes from many sources and many base fundamentals…and these all need to be understood and explored before anyone considers making a bet on the emirate’s future fortunes.

What Dubai does not have is a history of a boom bust economy like the UK.  It has boomed, it has busted and now it wants to learn from this disaster and prevent it from ever happening again.  It does not have a state over burdened with debt that will last for generations like the UK has, (although boy, it does have debt!).  What it does have is support from other emirates within the UAE and an already established, if immature presence on the international stage as a growing centre of business.  It can regroup, reassess and rebuild itself to make more of this and to stabilise its economy based on this fact.  Dubai does not have massive reserves of oil to see it through either – therefore it knows all too well that it has to regroup and learn from the mistakes it has made if it wants to survive – and at the end of the day what Dubai does have is a very strong will to return to the good old days.

The shockwave that has shaken the emirate to its core has resulted in all sorts of unpleasant repercussions - from the most obviously visible ones where property projects have been frozen and people have no idea where their deposits and stage payments are, to the less obvious undertones of resentment of foreign nationals in Dubai.  And this reality is one that should not be ignored – Dubai is not a paradise on earth as was once thought.  It is also not impenetrable nor is it immune to base economic fundamentals!  But it is a location with long-term potential.

Nothing is guaranteed, and Dubai as a property prospect is definitely not certain – however, it is a state with enough determination and international clout, enough ‘power’ economically speaking and thanks to its membership within the UAE to rebuild, reassess and rise from the ashes of its recent collapse as once it rose from the sands of the desert.  Dubai will not go away, too much has been done there, too much has already been invested and committed there for it just to disappear.  Therefore, in our humble opinion, Dubai is a positive prospect for the long-term…we believe that over time it will shake off some of its less attractive attributes and sort out some of its human rights issues with relation to its treatment of certain ethnic groups who are foreign workers in the state.  What’s more, the arrogance of its leading families is so strong and drives them to success that they will not accept failure – pure and simple!  They will do what needs to be done to get Dubai’s success back on track.  It is an emirate that offers a great deal.  It offers a tax advantageous location in which to operate your business – it also offers an attractive lifestyle even to this day for the best professionals from around the world – meaning that businesses will return and they will recruit people to work for them.

This will have a direct effect on the property market in terms of demand.  And demand fuels growth.  However, we do not foresee how Dubai’s property fortunes can rebound to the point at which an off plan development is sold out within hours with units reselling up to 3 times for a profit purely during the development period.  Dubai will become less of a speculator’s punt and more of a long-term bet.  What’s more, Dubai’s economic powers want a sustainable model to arise from the ashes of the collapse and are proposing measures to ensure that the market is one where there is realism, where there is less greed and where there is more transparency and less corruption.

At the moment there is little if any property based finance available in Dubai – for anyone.  Even the developers are being starved to the point at which they have had to freeze future projects to concentrate effort and their available finance on the ones they have in hand already.  So if you do want to buy in you’re better off attempting to raise the money outside of Dubai.  What’s more, if you do want to buy in you need to know that no price is set in stone – it really is a buyer’s market and walk away from anyone idiotic enough to suggest otherwise.

If you want to buy in you make an offer – and make a cheeky one at that – you have nothing to lose and you’re taking a large and long-term risk.  So before you commit to the market make sure you have done your homework and are personally happy that the fundamentals are in place for a recovery in Dubai.  You can read an article like this and take our opinion as a basis for your research, but don’t take it as the sole depth of your research because someone else’s opinion should never guide your hand when it comes to making a final investment commitment.  That’s probably what led to so many entering the market and toppling it over last time, they followed the crowd and believed they could not fail.  But come on, anything that rises so far and so fast can only fall sharply at some point.

Yes, Dubai will survive and it will recover – and yes, over the long-term property prices will recover as demand increases and what’s more, rental demand will remain as long as the emirate holds its course as an international financial and business capital.  So, a property investor can make money from real estate in Dubai – probably – but they need to be very sure about the path they follow and the price they buy in at within a given project.  A great deal of homework needs to be done and a commitment needs to be considered a long-term one.  With such a realistic approach and commitment to a market any risks are massively reduced…