Dubai's overheated real estate sector is facing a slowdown, according to industry insiders, amid moves by the government to strengthen regulation in the market and concerns over the weakening global economy.
According to a report by Morgan Stanley, issued in late August, real estate prices in Dubai have surged 79% since the beginning of 2007. While the report said the sector was unlikely to crash, it projected a series of price declines in 2009, brought about by an oversupply in the market. Property prices could fall by 10% in 2010, the study said.
The results of a poll conducted by Reuters surveying the opinions of Dubai real estate experts, released on August 26, suggested the correction could be more severe. The survey said real estate prices in the emirate would probably peak next year, though growth will slow to around 8.5%, before dropping by at least 15% in 2010.
Shehab Gargash, chief executive officer of Daman Investments, a Dubai-based fund, said it was inevitable that property prices had to stop rising at what he called "this maddening scale".
"Will it be a crash? I don't think so. I doubt we will see a significant long-term bust. But we will see corrections," he told Reuters on August 31.
He went on to say that Dubai's property market was now in a consolidation phase."We've begun to see consolidation that is not necessarily price-related as the market broadens and deepens," he said. "Dubai is no longer a straightforward build-and-sell proposition," he added.
Uncertainty over Dubai's real estate sector is not limited to speculation over a possible slowdown in response to overheated prices. A newly ratified mortgage law, enacted by the Real Estate Regulatory Authority (RERA) in late August and due to come into effect in October, is one of the key planks in the state's plans to regulate Dubai's property market.
The law requires all mortgage contracts to be registered with the authorities, specifying the amount of the loan obtained, the repayment term and the full value of the property being bought.
Mortgages must now be insured and issued only by registered financial institutions, with the mortgage process being fully documented and a 20% deposit paid.
Another step taken by the government is to place limits on off-plan sales, where investors sign up to buy properties long before construction work begins. Under new regulations, these properties cannot be resold until at least 30% of the original buying price has been paid to the developer. The move is designed to stop speculative sales, where buyers would pay the minimum deposit and then put the property back on the market to take advantage of rising prices.
Under the new law, which came into force at the end of August, all off plan property sales must now be registered with the RERA before they can be resold.
Another measure that could reduce demand for properties in Dubai is a proposal by the state, under which foreigners who buy residential units would no longer be guaranteed residency permits.
Though the new regulation has yet to be officially ratified, the Dubai Naturalisation and Residency Department (DNRD) has issued instructions to leading developers to stop accepting residence visa applications from sub-developers, as has been the past practice.
The DNRD has still to clarify whether overseas investors will continue to be automatically granted residency permits after acquiring property by applying direct to the department.
Though the new regulations may not completely put an end to speculation in the Dubai property market, an August 25 report by Standard Chartered Bank said they were an indication that regulators are looking at ways of improving the overall business environment in the market.
While the expected downturn could be bad news for speculators it could also have an upside, according to Ahmed Badr, a Dubai-based equity research analyst with Credit Suisse.
"When the correction happens, a lot of existing potential buyers will start entering the market on more attractive prices and thus balancing the market going forward," Badr said in an interview carried by local media.
However, the spectre of a potential correction is not the only black cloud on the horizon for Dubai's property sector. An ongoing probe into allegations of widespread corruption and mismanagement targeting some of the emirate's biggest developers has also prompted unease.
Since April, when news of the investigations broke, the value of the property and construction sector on the Dubai Financial Market has fallen by more than 14%.
Mohammed Ali Yasin, the managing director of Shuaa Securities in Dubai, said the investigation, and the rumours it had spawned, had affected property investments.
"Until investors see an outcome or a light at the end of the tunnel, they will be holding their cash and waiting," he told the Bloomberg news agency on August 25.
Investors may be wary at the moment, and the overall property market in Dubai may be cooling off. However, efforts to boost regulation of the market and remove any taint of alleged corruption are a step in the right direction. The heady days of quick returns of property in Dubai may be drawing to a close but the sector as a whole is being given sounder foundations on which to build for the future.