Dubai Property Prices To Hold Firm Until 2009

by Phillip Morton, Investors Offshore.com

28 September 2007

Ongoing supply constraints in the Dubai real estate market will push property prices in the city higher still this year and next, but the market will then peak and a much anticipated correction in prices will come in 2009, according to EFG-Hermes, Egypt's largest investment bank.

The bank highlighted in a research report that the market has witnessed a far slower pace of completed project handovers so far in 2007, with only approximately 11,000 of the expected 57,000 units coming on stream, meaning that supply continues to lag behind demand, which continues to rise commensurate with population growth.

Based on the assumption that the population of Dubai will rise to almost 1.9 million by 2010, up from 1.4 million currently, the bank calculated that an additional 45,000 to 50,000 new units need to be completed per annum to satisfy this demand.

"Supply in the residential property market is and will continue to be constrained in 2007. We predict that the peak year for supply will now be 2009 - meaning that the market is unlikely to see a price decline before this occurs," explained Sana Kapadia, Research Analyst at EFG-Hermes.

"We expect a rise in average prices of 10-15% in 2007 and a rise of 5-10% in 2008," Kapadia predicted.

The bank expects the market to peak in the second half of 2008 as more supply hits the market, following which prices will start to decline, with a cumulative decline of 15-20% by 2011. But the extent of the price correction in 2009 will depend primarily on the pace at which new units are delivered and the price elasticity of demand, the bank stated.

In terms of rental prices, EFG-Hermes expects the decline in the pace of rental rate growth observed in the first eight months of this year to be sustained into early 2008, Kapadia said.

Residential rents in Dubai have risen by 16% so far this year, but this is far slower than in 2005 and 2006, when rents increased by 40% and 30% respectively. The government has also imposed a 7% rent rise cap this year in a bid to curb rising inflation, which hit a record high of 9.3% last year.

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