There is no doubt that the last few months have been terrible for many property investors in Dubai with the economy and the Dubai property market suffering significant falls. While there are many suggestions that the fall in the economy and the property market has only just begun, and will get significantly worse, there are signs of activity behind the scenes with many property developers being proactive rather than reactive.
So what exactly is going on in the Dubai property market, it is falling apart or are we seeing a new level forming?
The general market
Anybody who has looked at the Dubai property market over the last 12 months we have seen a significant downturn in property prices, a significant lack of funding and various moves and changes by the authorities. So far these have yet to have a major impact although there was a short-term bounce after the announcement of a $20 billion refinancing package, which involved the United Arab Emirates government. However, despite earlier hopes that this would kick-start the economy and the property market it would appear there are more widespread concerns and investors are still avoiding Dubai property at the moment.
Proactive moves by Dubai property developers
It has been announced that one of the largest property players in the United Arab Emirates real estate market, Deyaar, has announced an ambitious programme of price cuts and potential property swaps for those involved in their various developments.
The property development company is offering price reductions of up to 30% for those involved in ongoing developments, even though they have signed contracts at much higher levels. As part of a new push for 2009 the company has also announced that investors in real estate developments which have been postponed will get the opportunity to swap their investment for properties in developments which are about to be completed.
This is quite a clever way of catching the headlines, catching the eye of many property investors around the world as well as retaining investment interest in the Dubai property market from those already locked in and possibly struggling. While a 30% cut in ongoing prices will obviously hit Deyaar very hard in the short to medium term it is better than significant numbers of investors defaulting, leaving the company with substantial property exposure which they may find difficult to sell in the current economic climate.
The following quote from Deyaar just about says it all “The transfer option would be exercised purely on a voluntary basis and will give customers the option to transfer their ownership of premium projects in prime locations. It will also allow customers to consolidate their total outstanding payments.“.
With regards to the potential reduction in investment costs the company has confirmed that developments such as the Bristol Residential Tower and Fairview Residency, both located in the business bay in Dubai, will attract 25% reductions for those who have already made investments in the developments.
What impact will the price reduction and swap option have on the overall market?
The obvious short-term impact of price reductions by Deyaar will be similar moves by the vast majority of developers in the region. In effect the possible 30% reduction in investment costs will downgrade the Dubai property market as a whole although there are hopes it will spur on significant interest from investors waiting on the sidelines. The swap option is also very interesting as it will, if successful, allow major Dubai property companies to transfer investors from projects which have been postponed to projects which are nearing completion where there are unsold units.
Positive aspects
As we have outlined above, the potential reduction in investment costs will spur some competition in the sector and hopefully attract the attention of domestic and overseas investors. A potential 30% reduction by any standards is significant although whether it is enough to attract property investors in great numbers at this moment in time remains to be seen.
The need to get the property market fluid again is vital as interest breeds interest and should enable investors and property companies to put a floor on the Dubai property market.
Negative aspects
The effect of overnight reductions in new development costs of up to 30% could push many of the weaker property developers in the region over the edge. It could also instigate significant competition between developers and could push prices lower and lower and place more and more pressure on property companies in the region. Either way, we could see a flood of cheap property hit the market and the potential for prices to fall further and further, until investors show significant interest and prices bottom out.
As property development companies encounter more and more financial distress, not forgetting the potential knock-on effect to the wider market, we could see a significant increase in distressed sales from an array of different parties which could push prices lower and lower.
The immediate prospects
It is obviously too soon to comment upon any impact the move by Deyaar will have on the market but there is no doubt at the very worst it will attract more interest from the media and potentially more interest from investors. In the short to medium term it would be interesting to gauge both interest levels and further price reductions because these will be vital when finding the bottom to the Dubai property market. Whether the sudden reduction of up to 30% on new developments will prompt domestic and overseas investors to jump back into the market remains to be seen.
Conclusion
The move by Deyaar, one of Dubai’s leading property development companies, is both brave and could well lead the market in the short term. The need for property developers to give something back to investors has been prevalent for some time and will no doubt be well received by many waiting on the sidelines looking for “bargains of a lifetime”. Whether the move will spur longer-term interest in the Dubai property market remains to be seen as there is also the risk that some investors will wait for further price reductions before jumping in.
The problem for the Dubai authorities and Dubai property developers is the fact that on one hand the Dubai property market is still very immature and on the other the worldwide economic crisis is like nothing seen before in recent times. Nobody quite knows what to do and nobody quite knows what to expect but one thing is for sure, investors are still waiting on the sidelines looking for property markets such as Dubai to bottom out before they take the plunge and acquire properties at potentially distressed levels.