Price fall likely to beat the bottom of the previous slump in 2010-2011 - S&P
With a massive guaranteed oversupply of properties and top developers taking losses in 2019, real estate prices this year could fall another 5 to 10 percent.
S&P Global ratings said for 2020, it could see another a potential decline of 5 to 10 percent, a stress case that the ratings agency had outlined last year for 2020.
"We are seeing prices approach a level which we saw at the bottom of the previous cycle in 2010-2011, and when you adjust for inflation and incentives that you get when you buy off-plan products, it is probably even lower," Sapna Jagtiani, Associate Director, Corporate Ratings, S&P Global Ratings said.
"The market is already struggling, and we are expecting a year of very high delivery cycle. We are still seeing launches with small deposits and long-term payment plans, which is really not helping the market, adding the burden of funding such developments on the balance sheet of the developers. So we are seeing credit weakening on the side," Jagtiani added.
S&P estimates that at least 120,000 new units are expected to enter the Dubai property market in the next couple of years. According to real estate insights platform, Property Finder, though an estimated 90,000 units are scheduled to be completed in 2020, only 40,000 to 50,000 homes will be delivered this year.
Regional consulting group ValuStrat said 133,000 residential units are known to be under construction in Dubai and expected to be completed in 3 to 5 years.
Dubai Expo 2020
Though Dubai Expo 2020 could trigger positive sentiments in the market, the global event may not significantly help the sector's recovery.
"Of course, we have Dubai Expo 2020 and it is expected to attract millions of visitors. We expect the sentiment to improve in the short term. But do not expect a very meaningful recovery in the real estate market, because it has been a gradual decline over 4 to 5 years. We think the recovery will also take a long time," Jagtiani said.
Post 2020 scenario
The Dubai Expo could bring a temporary easing of prices and improve the sentiment, but again oversupply will continue, S&P said, noting hospitality and retail sector will see an oversupply after 2020.
"What we expect of Dubai Expo 2020 is more opening up of the market, which hopefully induces more people to come to Dubai or easing up of visa regulations and so on. But yes, supply overhang means we will see weaker markets post 2020," Jagtiani said.
A delay in the recovery of real estate prices could take a hit on the banks' asset quality as well. "If the real estate correction is not followed by a stabilisation of prices in the next 24 months, we might see a bigger effect on banks' aset quality," said, Dr. Mohamed Damak, Senior Director, Financial Services, S&P Global Ratings.
Overall, we expect banks' cost of risk to increase slightly in 2020 to about 120 bps, compared with 110 bps in 2019. UAE banks are in a better position than the 2009-2010 crisis, because they have built sufficient loan-loss reserves since then, Damak said.
Can real estate committee help?
As part of its efforts to support the sector, the Dubai government has rolled out initiatives to foster sales and rein in oversupply. Notable among them was the establishment of a higher committee of real estate to balance the supply and demand in the real estate sector.
This, however, begs the question of whether the higher committee of real estate can control Dubai's housing supply.
"How exactly the committee is supposed to work is very unclear," S&P's Jagtiani said, adding, "What is evident is that we have a huge pipeline of deliveries for the next two years. Say 120,000 units are expected in the next couple of years. Presumably, most of them are pre-sold, which means any halt to supply, if at all, will come only after 2022."
Industry players are not sure about some facets of the committee, such as whether it is a long-term solution or a short-term fix, and who manages the day-to-day activities of the committee.
Last year, Hussain Sajwani, chairman of Dubai’s top developer Damac, said that the emirate’s troubled real estate market will not recover unless developers stop new residential projects for up to two years.
Commenting on the Higher Committee of Real Estate, Jagtiani said, "We haven't seen anything concrete because they wouldn't be able to manage short-term supply. We do not have clarity [about] what they are planning to do or the steps they are working on."
"One important thing that the committee announced [is] that they are monitoring and limiting the government-related entities' supply in the market. This is very important in the next three to five years,” said Hamad Buamim, President and CEO of Dubai Chamber of Commerce and Industry, as quoted in the Khaleej Times. He added that the government has decided that if an opportunity arises in the market, the private sector will lead.
"Setting up the higher committee is a step in the right direction, and it should be having a long-term plan," Jagtiani concluded.
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