Dubai’s Healing Property Market

The emirate still offers higher rental yields than many global cities.

Almost two years ago long-standing readers of this column might recall that I became very interested in Dubai property because prices were on the floor and the government had just signed off a restructuring of Dubai World’s $25 billion debt, largely related to its wholly-owned property development company Nakheel.

We started to look around and at a cocktail evening I bumped into some old media friends who told me about their experience in Jumeirah Park. This swathe of 2,000 villas on an L-shaped plot behind the Jumeirah Islands and Meadows was launched at the height of the last property boom six years ago. It stalled in 2009 along with most of the Dubai real estate market, and work only restarted after August 2011 when Nakheel’s debts were finally sorted out.

My old friends had been waiting all that time for their villa to be completed. However, many owners were tired of waiting or could not afford to and wanted to sell out. It took a few months to find a villa in the right location in Jumeirah Park. We could actually walk around this half-finished villa and work had restarted but it was still technically an off-plan resale.

Nakheel still managed to deliver our villa a year behind even the revised schedule, so we paid the expenses on our original villa all that time and missed out on the rental income. But buried in the small print was a clause that allowed them to keep us waiting until the last month.

Nonetheless we moved in right at the end of September and Better Homes let out our Meadows property within 48 hours for the full price. Doing a first-time rental and changing home at the same time was pretty stressful.

But we are very happy with the quality of the work in our Nakheel villa. The specification is much as advertised and the standard of workmanship and detail far above The Meadows. That said we’ve had a couple of shower trays redone at our own expense after Nakheel’s contractor point blank refused to do it. We will be sending them the bill.

Depending whom you talk to the villa was worth anything from 50-65 per cent more than we paid for it when we moved in. Keeping our old villa meant that we got that capital recovery too and the rental income.

That in a nutshell is the secret of why Dubai has been the best performing real estate market in the entire world over the past 12 months. The global hunt for rental yield discovered Dubai. Chinese investors have poured into tiny studio units in Nakheel’s International City where yields even now, at 10 per cent, are very attractive and the selling prices have also risen by the largest percentage gain in the market.

As ever in real estate the biggest yields come from the low-end of the market rather than the palaces of the Emirates Hills or high-end apartments in the Dubai Downtown, Dubai Marina or Dubai Palm Jumeirah.

So what happens next? We attended the Cityscape property show in Dubai when not required to attend to workmen fixing small issues on our own villa. Cityscape reminded us of the worst excesses of the last Dubai boom – with off-plan sales and dodgy new companies – but everything is still on a much smaller scale. We also wondered how many of the new projects will really get off the ground and how long they will take.

Right ahead of Cityscape the Dubai government doubled property transaction fees from two to four per cent. Then the UAE Central Bank followed through with a squeeze on mortgage lending last month with higher deposits.

The other obvious headwind around the corner is higher global interest rates. The past five years have seen a huge injection of liquidity into the world economy and artificially low interest rates. Whether we are talking one, three or 18 months nobody expects this to continue.

Can Dubai continue to be the world’s number one property market in this environment, or will it, having gone up the most in price in the shortest space of time also suffer a correction? We would now advise sitting out a correction in Dubai property before jumping in to buy. The best time was just over two years ago.