Dubai Property Booms - Bubble Ruled Out by HSBC

According to Jones Lang LaSalle (JLL), Dubai property prices are set to return to their 2008 peak during 2014.

2013 saw price increases at a rate of 22%, sparking speculation that a property bubble was inevitable however, although prices will continue to rise throughout this year the pace will be slower and the results more sustainable.

The property market is currently around 15% below 2008 levels and is expected to rebound back to where they were in 2008 by the end of the last quarter of this year or first quarter of next year.

Rents continue to be on an upward trajectory with a 10-20% increase expected this year on top of the 17% recorded last year.

The report from JLL shows that some high quality buildings in prime locations have already reached the 2008 peak and it is likely that the top end of the property market will increase even further over the coming year to new highs.

Dubai’s property sector was one of the biggest losers after the financial crisis, with property prices falling by up to 60% in the aftermath. Prior to the crisis, Dubai had enjoyed a prolonged period of popularity amongst international property investors and the premium payable on property at that time reflected the consistently strong demand.

Some analysts are predicting another property bubble although HSBC Global Research has commented that Dubai’s property market “is sustainable and headed for healthy growth”. The fundamentals of the economy – that is the nuts and bolts holding it all together – are sufficiently robust to carry property price increases without risk of the market crashing.

In the first two months of 2014 housing sale prices increased by 6.3% year-on-year with rents increasing by 5.2% for the same period. “We forecast 10-15% growth in prices from current levels in 2014 and relatively stable net yields at 4.5-5%. We expect this trend to continue at least for the next two years as the economy recovers and Dubai maintains its reputation as a safe haven in the region,” HSBC commented.

In terms of the supply-demand dynamic, HSBC also rule out oversupply which could potentially signal a market crash. According to the bank there will be a supply of 90,000 new units in Dubai by 2018 however, the new housing units will be absorbed by the growing population.

“We believe that we have not yet reached the peak of the cycle, and that the market can continue to absorb the expected supply additions over the next few years, even at a population growth rate below 5%. The Dubai population would need to increase by 300,000 people by 2018 in order to absorb all of the new supply”, the bank said.

In 2013, buyers from 140 countries invested US$18.78 billion in real estate in Dubai with Indians buying property worth US$4.90 billion and British and Pakistani nationals taking second and third place with investment worth US$2.83 billion and US$2.34 billion respectively.

The trend of increasing foreign investment in Dubai is likely to continue. HSBC “assume that 30% of this new supply will be bought by foreigners who intend to use them as second homes, which they will not rent out.”