Have real estate supply fears been exaggerated in Dubai?
The shift towards a secondary market will continue
As we get to the halfway stage of the year, what is clear is that the real estate (and the equity markets as well) market thus far remains sluggish. While the recent suite of initiatives announced have evinced excitement among investment stakeholders, it is apparent that at this stage, despite the broad-based recovery in oil prices, real estate prices have not yet for the most part followed suit. In point of fact, it is worthwhile to look at the trends that are shaping up thus far:
> Transactions this year are running at an approximately 25 per cent lower rate on a year-over-year basis. Developer launches in turn have also been reduced by a similar amount, indicating that as off-plan demand slows (partly because the generous developer incentives offered have "maxed out"), the projected supply pipeline that analysts were so worried about has started to take care of itself through market signals.
> Despite interest rate rises, Central Bank data shows that liquidity continues to flow through to the real estate and construction sector, indicating that for developers and end-users alike, "deal" access remains, which was unlike the first boom-bust scenario in 2008-10, where credit for awhile had frozen. While many analysts had expected the level of mortgage demand to drop, data indicates that in the first half of the year, mortgage activity has remained broadly unchanged from last year, indicating that credit is flowing smoothly and that demand remains stable.
> Data shows that at the luxury end of the segment, more than 65 per cent of the transactions are occurring in the secondary market; for the most part, this is in line with international norms and indicates that the speculative froth that had built up in this segment is mostly over. A replacement value analysis indicates that at this end of the spectrum, the price correction that has taken place makes it unlikely for developers to add stock at current levels.
> Reduced rents have meant that there has been a fair bit of "migratory" moves as families have taken advantage of the new supply to move up the real estate chain (in terms of moving into larger spaces). For the most part, this has happened in suburban areas, indicating higher levels of absorption rates than normal.
Of the above, supply remains the dynamic that is most on the minds of investors, analysts and end-users alike. It is clear that on the luxury end, the rate of projects launched has diminished significantly, and even on an overall basis, the reduction in launches (which while peaking in 2017, still remained more than 40 per cent below 2007-8 levels), indicates that the supply fears that have been built into pricing levels have been exaggerated. Moreover, developers presently don't have much of an incentive to step up the pace of construction; there is less competition as smaller developers have either consolidated or wound down. And rising material and labour costs have been a further disincentive for boosting production.
This makes it likely that the shift towards a secondary market (already seen in the luxury segment) will continue as the market heads towards balance and inventory clearing mechanisms move forward in developer portfolios. A segmented analysis indicates that there has been greater price resilience (as we have been indicating for awhile) in certain communities of the market; it is these communities that will likely lead the charge as a recovery starts to take root. For investors, the incentives and the stimulus that have been announced by the government indicates that an upward shift of the demand curve is in the offing in the second half of the year.
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