The Case Study Analysis of Dubai Real Estate Market
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Economics Case Study Details:
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The Case of Dubai Real Estate Market
When the 2007 global financial downturn started in the US, there were talks about the “too-big-to-fail” banks that made the economy fragile. In the US context such failure was disastrous to the greater economy, and, therefore, the government stepped in to support and bail them out.Now let’s look at the “too-big-to-fail” concept in the context of the Dubai real estate market. With the low barrier to the entry of players, many developers have been attracted to launch projects in Dubai. Capitalising on the off-plan model, they managed to grow in size in a short time. Launching projects on a monthly basis became a standard feature in Dubai, especially in the last few years. The trust in Dubai real estate laws and regulations as well as great off-plan deals boosted the supply of units in the market. But this means there is a systemic risk to the real estate system.
The Dubai real estate market had continued to decline further in 2018 owing to the addition of new residential units coupled with low economic growth, strong USD, and a resultant drop in consumer spending. Since the beginning of the year, prices of sales and rent in the apartment segment have fallen by 7% and 9% respectively. In the villa segment prices of sales and rent have fallen by 7% and 5% respectively. In 2017, the Off-Plan segment had a bumper performance and was responsible for the real estate market momentum in Dubai. Last year, off-plan transactions contributed to around 64% to the total sales transactions in Dubai, fast forward one year the contribution has fallen to 55%. Even during this year’s Cityscape Global Event, we saw a limited number of new launches, as most developers were focusing on selling their existing inventories.
In term of supply, around 22,000 residential units have so far entered the Dubai Real Estate market this year. A surge of supply is expected to affect the Dubai Residential market as the city prepares for the Expo 2020. As per announcements by developers, around 50,000 units are expected to enter the market in 2019 (the actual number of units to be materialized will be lower). Earlier this year the UAE cabinet approved the largest federal budget in recent times (AED 60.3 Billion), with more than half of the total budget being allocated to education and social development. The increase in government spending coupled with various new measure and regulations such as 10-year residence visas for certain investors and specialists, retiree Visa, reduction of market fees for businesses will be a positive boost to the real estate sector (Not immediately but once market takes a rebounding route)
Apart from the abilities of developers, and their capabilities to take on these projects, there is the constant threat of oversupply. With more than 400 real estate developers in Dubai, the issue of oversupply is always there.
Dubai has been following the “supply will attract demand” model, which has attracted many short-term investors. For the city to attract end users and long-term investors, demand should create the needed supply. Keeping the market adequately supplied leads to more affordable and fair prices.
Ready-to-move-in properties in demand as prices fall
There are still challenges when it comes to loan-to-value ratios currently in place, which requires a 25 per cent down payment for expatriates, plus other fees. 2019 will follow a similar trend as in 2018 in light of regional and global economic headwinds, as well as the current and expected oversupply in the market. Developers and investors are likely to continue to adopt a wait-and-see approach until the economy recovers and market sentiment increases. The hype surrounding Expo 2020 and earmarked growth in investment/tourism leading up to it should allow for better real estate conditions in 2020 due to improved market sentiment.
Transaction volumes in the ready sales market, both for cash and mortgage transactions has seen a steady increase over the last three years. The average unit prices in the secondary sales market have also shown resilience. “This indicates strength in the secondary market where offer and demand are finding an equilibrium and more buyers are opting for ready units instead of off-plan units as they look to either transition to ownership and save on rents or look for immediate rental yields,” observed Robert Thomas, head of residential at Core.”
More Supply in 2019
While an oil price slump, fiscal austerity in Saudi Arabia and a strong dollar have driven away potential buyers, construction — much of it by state controlled developers — hasn’t slowed to meet the weaker demand. About 31,500 homes will probably be completed this year, more than twice the city’s average annual demand over the last five years
Asymmetric information concerning Units supply
Property Monitor’s data-driven analyses of the market have proven that information supply is indispensable to providing stakeholders with not just answers, but key market insights. Only when stakeholders are provided accurate, transparent information, can they make informed decisions. Recently government has started crackdown on the fake listing property portals that can also play an important role in providing accurate information and only genuinely available properties can be recorded. In this context, Government’s order to remove listings from property portals that do not come with a Trakheesi number. This number verifies a property’s availability on the market.
This will help eliminate fake listings, improve market transparency and inspire confidence among buyers, sellers and brokers. Currently, while the Trakheesi system is in place, some real estate brokers have still been able to list properties that don’t carry the Trakheesi number on property portals. This will now change as portals have been instructed that all such listings must be removed. This will ensure that only genuinely available properties are advertised.
Taking away fake or duplicate listings will provide an accurate picture of the actual property stock in Dubai. The implementation of mandatory Trakheesi numbers will help clean up the property market and build buyer confidence. Buyers and tenants will be able to work with real estate agencies that implement the correct practices and operate to legal standards.
Questions for Discussion
- Model the situation of Dubai housing market using illustrations keeping in view the oversupply condition in the housing market and outline the key points of market equilibrium. (CLO 2, Marks 1)
- According to the reports in the business press, the government controlled construction has not slowed down despite oil price slump and appreciation of dollar and 31,500 homes will probably be completed this year, more than twice the city’s average annual demand over the last five years, do you think additional supply will attract demand? Why or why not? (CLO 2, Marks 4)
- It is argued that housing market is exposed to the shocks of Asymmetric information coupled with non- realistic listing of the properties. What is the observed impact of perceived asymmetric information shocks on the housing market equilibrium, price and housing inventory? Illustration and description are required. (CLO 5, Marks 5)
- As a result of the authority crackdown on fake property listing, what do you predict will happen to the equilibrium price and quantity in terms of it magnitude? Will this be a helpful step? Illustration and description are required. (CLO 5, Marks 5)
- Can a government in any possible capacity intervene? If yes, what impact is anticipated on the market correction? If no, why not? (2)
- Will there be a Situation, where both demand and supply will work together as a housing market self-correction mechanism? Explain (CLO 2, Marks 3)