This has resulted in increased discussion on how sustainable are such increases and whether we are in danger of creating another bubble similar to that which burst so spectacularly as a result of the Global Financial Crisis in 2008/9
Jones Lang LaSalle is of the view that the rate of increases seen over the past year is indeed unsustainable and that while residential prices and rents will continue to increase over the next 12 months, the rate of increase will decline somewhat. An extended period of slower and more subdued growth would be far more beneficial for the overall market, than a continuation of the current rates of increase, followed by another severe correction
While 2012 was a period of selective recovery, with prices rising in selected projects (especially those more established developments benefiting from completed supporting infrastructure) 2013 has seen a broader recovery, with prices (and rentals) growing across most areas of the city. The extent of the increase clearly varies between different projects and different locations, but there is little doubt that both prices and rentals are increasing at a growing rate. Data from REIDIN, based on information provided by the Dubai Land Department (DLD) illustrates the pickup in the rate of growth over the past few months
There are two underlying drivers of the recent price increases in the Dubai residential market: an improvement in market fundamentals; and a return of confidence and sentiment that has resulted in renewed speculative activity.
The Dubai economy is recovering on the back of the 3T’s of trade, transport and tourism, with the Dubai Statistics Centre releasing new figures that show real GDP growth of 4.1% over the first half of 2013 (the fastest growth rate since early 2008). Dubai continues to benefit from its status as a relative safe haven in a volatile and unstable region and this is resulting in strong demand for second homes from investors based elsewhere in the region. Demand for residential units for sale is also being fuelled by increased interest from expatriates seeking to switch from the rental market. Based on anecdotal information, the Dubai population is currently increasing at around 5% per annum. Given a population of around 2.1 million (as at the end of 2012), this would indicate a growth in the order of 100,000 persons per annum. Assuming an average household size of three persons, this would result in demand for around 35,000 new households per annum.
Jones Lang LaSalle data suggests there are around 45,000 new dwellings in the supply pipeline in the freehold areas of Dubai before the end of 2015, representing an annual increase of around 16,000.
While there will undoubtedly be additional supply from within the non freehold areas of the city, this will be relatively limited as many of these areas are already heavily built up, hence supply will lag demand over the next 12-18 months the future supply pipeline is not expanded too quickly, these improvements would suggest the residential market is likely to see continued pressure for increases in rents and prices over the next 12 to 24 months.
While the economic and demographic fundamentals have undoubtedly improved, residential prices have increased at a far higher rate, suggesting that speculative activity continues to influence the Dubai residential market. In broad terms, population and employment growth is running at around 5% per annum, while residential prices have increased by almost 20% during the past 12 months. Such rates of increase cannot be supported by the fundamentals alone, and suggest that speculative activity has increased. It is however important to note that this activity is less significant than in the previous boom and the market is currently based on stronger supply/demand fundamentals
Given the improvement in market fundamentals and the relative balance of the future supply and demand equation, it is unlikely that the Dubai residential market will reach its next cyclical peak within the next 12 months, unless there is a ‘black swan event’ (an unpredictable external shock).