Dubai Property Goes Back To The Future

Dubai police had to be called in last month when the crowds at the Emaar Properties office in Emaar Square got out of control. That could be seen as a metaphor for the Dubai property market.

Investors can have incredibly short memories. Money has been piling into Dubai real estate for the past 18 months. Villas prices are up 24 per cent over the past year. That’s all very well but house prices in Dubai crashed by 60 per cent in 2009. Will it be any different this time?

Real estate investors familiar with the capital investment cycle that drives this sector know very well that booms and busts are a well established phenomenon in global property. What made Dubai different last time was the fact that this was the first cycle in which foreign investors were allowed to participate as prior to 2002 they could not buy in Dubai.

Indeed, the new foreign buyers pushed the market to overvaluation and a bust. Is it happening all over again? The obvious answer is yes. Money has been flooding into Dubai property recently. The most desired villa address, The Meadows saw a price jump of 10 per cent in Q1. If you bought a Jumeirah Park villa at the start of last year the gain is more like 30 per cent. That said apartment prices have actually been going up faster than villas.

Where is all this money coming from? You have the rich escapees from the Arab Spring nations and the problem nations of the surrounding region. There are Europeans fleeing high taxation and planting new roots in Dubai, and even Chinese worried about a property crash at home and squirreling money away overseas.

It is fair to say this is not those who got their fingers burnt on dodgy off- plan schemes coming back. Most of the buyers want completed property, though off-plan sales are now receiving quite amazing support. That’s surely one indication of a boom in the making, and the crash to come.

The question is when might such a crash occur? Real estate generally moves in three to five year cycles, it is not an up and down yo-yo like the stock market. The sell-offs are usually much steeper than the longer boom periods that last for years.

On that estimation Dubai is not much more than 20 months into this upcycle in real estate. It started back in September 2011 after the $25 billion Dubai World debt rescheduling was signed off. Then Nakheel re-started work on some of its projects and the whole real estate sector began to come back to life with bargain hunters appearing.

Dubai’s prime property is cheap by global standards and is overdue for a re-rating to a level suitable for such a global hub city on the edge of rising Asia.

The ArabianMoney newsletter concludes that we therefore have two to three or so years left of rising prices before the real estate cycle turns down again. That would also be consistent with global money printing by the central banks continuing for a long period and the Federal Reserve did say the end of 2015 would be the earliest that it would allow interest rates to rise.

Your not inconsiderable tail risk is that the Fed policy goes horribly wrong as it did in 2007-8 and there is another global financial crisis. Then Dubai property would be just another casualty again among many asset classes.

Normally it is changes in interest rates that bring property booms to an end. But how much higher will Dubai property prices be by then and how much will they fall before the next upswing?

Meanwhile, the flippers who could turn a 30 per cent profit on a villa bought off-plan last month will be counting their profits.