Fund-flows and Replacement Value

In the first week of June 2019, data released by the Dubai Land Department (DLD) established that the total value of real estate transactions in Dubai had exceeded $9.25 billion in the first five months of the current calendar year. This represented an increase of 33% increase on the figure of $6.53 billion recorded for the same duration in 2018⁽¹⁾. On the face of it, one would think that this was an unequivocal sign of a prospering market that industry observers would unanimously hail as being such. However, sections of the press continued to measure the state of the market on the basis of the fact that the prices that properties were attracting had continued to register a downward trend, over that same period. Naturally, such seemingly contradictory reports have left the average investor a little unsure on whether the market is undergoing a recovery from the post 2014 slowdown, or if the trend is continuing.

This uncertainty is hardly surprising. After all, both metrics seem to be a perfectly valid measure of the state of the market. On the one hand, a growth of one-third in the value of total transactions is no small increment. Nevertheless, real estate markets have certainly relied on average prices as a good indicator of whether the market was on an upswing or not. So which is it? It’s not an idle speculation or academic exercise to try and decipher the underlying trend this market is tracing. In fact, real estate markets are notoriously known for coloring the investment outlook by such perceptions.

The secret to understanding the current state, and likely future trajectory, of the Dubai real estate market might lie in taking stock of the figures some other real estate markets have recorded, in the early stages of a market recovery. An interesting detail that is often overlooked or forgotten, after a recovery, is that property prices frequently dip to below replacement value, as the turnaround begins to gather. Sudhakar R. Rao, Chairman of Gemini Group, is of the opinion that a section of industry observers may be ignoring some unusual factors currently in play. “I believe that the apparent contradiction between certain statistics to do with the market are only skin-deep. Normalcy-bias can sometimes blind us to what the figures are actually saying, just because they need to be seen in a particular context. Is it possible for prices to stagnate while the market is growing? The answer, according to me, is yes. Mortgage rates and many of the innovative payment plans that the developer community has introduced, have resulted in an eco-system that demands a closer and more nuanced look”, Sudhakar Rao says.

A more nuanced understanding

According to figures reported by The Property Finder Group, the Dubai luxury homes market experienced a rise to 194 transactions in H1 2019, up from 115 for the same period in 2018⁽²⁾. The Deloitte Middle East Real Estate Predictions 2019 expects prospects for the industry in Dubai to remain positive over the long-term, beyond 2019 as well⁽³⁾. The recently released KPMG Global Construction Survey has found that more than half of the industry leaders they surveyed in the UAE construction sector – an industry intrinsically linked with the real estate market – are expecting a 6-10 % growth over the next year⁽⁴⁾. How do we reconcile this optimism with the fact that another section of voices is reiterating the fact that lower prices are the indicator to watch?

According to Sudhakar Rao a significant aspect that needs to be taken into account is that the Dubai real estate market is more mature than in previous eras. “Most of us can easily recall the era when a significant share of investors in the Dubai market were looking for a quick profit. Property flipping was commonplace and a lot of the money in the market was speculatory in nature” Sudhakar Rao explains.

“While current activity in the market does include increased interest among foreign and other investors, recent regulatory changes are creating a surge for home ownership among expatriate residents as well. The increased focus on the affordable properties sector is another indication of the fact that a lot of future growth will be driven by far more stable segments, than in previous years”, he adds.

It is not unusual that a market which looked at return on investment as a primary indicator for years, contains within it a section that continues to fret about when prices will rebound. However, as Sudhakar Rao points out, with the city of Dubai growing in stature as an international destination, as well as the real estate market entering a more stable and mature phase, long term growth may be more accurately reflected in metrics other than pricing over the immediate term.

Macro trends – or looking beyond cycles

It is significant that the current interest in the Dubai real estate market among international investors is driven by the prospects of long-term growth and the fact that current prices constitute a ‘bargain’. Both these expectations reflect confidence in the market over an extended period. In other words, there is an intrinsic acknowledgement that the market is now a mature and stable aspect of the economy. With the several progressive initiatives undertaken in recent years by the Dubai government, to give expatriate residents more reasons to invest long-term in the local economy, these trends will be further strengthened.

Sudhakar Rao believes that this reframing of the Dubai real estate market is the most crucial indicator to keep an eye on. “As Dubai takes its rightful place on the global stage, and with the diversification of its economy, we will witness an increasingly mature real estate market in which demand stays robust and prices are a secondary, though important, metric. It may take some time for sections in the market to take a more nuanced view, but I believe that signals from the Dubai real estate market should now be interpreted taking a holistic view, rather than based on isolated aspects alone”, Sudhakar Rao concludes.