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INCREASE IN PROPERTY SUPPLY TRIGGERS MORE CAREFUL PROPERTY SELECTION
In our view, increase in new launches and new property unlikely cause a sharp decline in Dubai property because it is propped up by robust economic development. At the same time investors should increase attention to details when selecting the property to invest. During the last years as the market has been growing cost of mistake of individual property selection was relatively low. With increase in property supply and maturing of real estate market demand for property will become more picky in terms of areas and premises meaning that divergence in price dynamics will grow among properties and areas. As we mentioned in previous reports property selection is a becoming a key to successful investments.
As exhibit below demonstrates property prices do not exhibit a close correlation with new launches nor with new premises entering the market. While it does not mean that prices do not depend on supply, other factors also impact the price dynamics. Below are the examples of some of these factors.
Exhibit:
Source:
Expectations
Given the positive expectation about the country’s economic and institutional developments international demand for UAE property is strong. As we mentioned in previous articles Dubai and Abu Dhabi prices still look favourably compared to many large cities if evaluated against quality of life and public wealth. While these is some risk that favourable expectations do not materialise the government’s adherence for reforms and good track record in achieving economic goals gives some reassurance that the property market will avoid massive corrections.
Oil price
The property prices historically demonstrated some correlation with oil prices. During sharp oil slumps Dubai property market followed the trend. However, institutional reforms and diversification of economy is gradually weakening this link. In our view, if there is a sharp decline of oil prices (which is not anticipated) it will largely affect cheaper premises given that demand for that segment is shaped by economically more vulnerable strata of population.
Exhibit Historic links to oil prices but weakening
Migration of wealth
Dubai’s with all its adventures which we mentioned in previous articles position itself as a desired destination for wealthy people. Many people purchase properties in UAE attracted by high quality of life, low taxes and other benefits. These people buy property as an additional home in their stock of property which they can use for residence or rent.
As a summary, increase in property supply will increase property price differentiation. Cheaper stock in less preferable areas with weaker infrastructure will exhibit lower liquidity and price deceleration or price correction. Premises in prestige locations or those located in buildings with some advantages (that single them out from commoditised stock) will still experience demand from wealthy/ affluent people attracted by Dubai economic growth and good quality of life.
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