|08 July, 2019

Dubai property looks to Fed, not Expo for signs of recovery

Mortgage holders in the UAE have had to contend with nine interest rate rises since 2015 as the UAE Central Bank has matched Federal Reserve policies

Dubai skyline on a cloudy evening. Image used for illustrative purpose.

Dubai skyline on a cloudy evening. Image used for illustrative purpose.

Getty Images/Umar Shariff Photography

Dubai property investors once looked to Expo 2020 for a long-awaited rebound. But as prices continue to decline in the emirate, the expected fall in US interest rates may bring more near-term cheer to a market that has been in retreat for five years.

Most UAE lenders peg their mortgage rates to the Emirates Interbank Offered Rate, known as Eibor, which usually moves in tandem with the Fed funds rate because the country’s currency is pegged to the U.S. dollar.

The pause in the Fed tightening cycle is welcome news for thousands of homeowners in the emirate whose mortgages have been hiked numerous times since US interest rates started to tick up in 2015.

“For non-fixed residential mortgages in the UAE, this is likely to reduce the cost of interest payments and provide some relief to an already under pressure property market,” said Taimur Khan, the Dubai-based heard of research at Knight Frank, the international property consultancy.

“This would also be the case for the wider region where currencies are also pegged to the dollar. More so, if the U.S. Federal Reserve decides to cut rates, we may see increased levels of demand as investors or owner-occupiers look to secure more favourable rates,” Khan said in an emailed response to questions from Zawya.

UAE homeowners with Eibor-based mortgages have absorbed as many as nine rate hikes since Dec.16, 2015 when the Fed Funds Rate increased by 0.25 percent to 1 percent. It continued to rise until Dec. 19, 2018, with the latest rise bringing the rate to 3 percent.

For a homeowner with a 2 million dirham ($540,000) mortgage, that translates to a difference of about 2,000 dirhams in monthly repayments.

While higher interest rates have helped to support the net interest income of the banking sector in the UAE, companies and residents tapping loans have been hit in the pocket.

Expectations are growing that the Fed will make its first rate cut in a decade as early as its next policy meeting this month.

Bond traders see such a move as all but guaranteed.

“Any reduction in interest rates will be positive for corporates and individuals in the UAE, providing some reduction the cost of financing debt,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank in an emailed response to questions.

“Eibor rates have moderated from mid-April, in line with U.S. Libor (the London Interbank Offer Rate), with markets expecting a cut in the Fed Funds Target Rate. However, we continue to see further downward pressure in real estate prices in 2019, especially given the outlook for new supply entering the market.”

While successive U.S. interest rate hikes have helped to keep the dollar strong, they have also had the same effect on the dirham, punishing the tourism and retail sectors and making the luxurious holiday resorts and shopping malls of Dubai an expensive option for tourists from Europe who are spending with euros and pounds.

A trip to the top of the Burj Khalifa, the world’s tallest tower, costs about 525 dirhams during peak hours — which equates to more than 126 euros or 114 pounds.

A fillet steak at the Seafire restaurant in the Atlantis resort on Palm-Jumeirah meanwhile costs about 287 dirhams, which is the equivalent of 69 euros or 62 pounds.

With many of Dubai’s big developers, including Nakheel and Emaar diversifying into the retail and hospitality sectors in search of recurring revenues to reduce their reliance on boom and bust property cycles, rising U.S. interest rates have been doubly damaging.

A weaker dollar could help to ease some of those pressures, say analysts.

“There should be an increase in disposable income that comes through from the fall in interest rates. It’s well known that the retail sector has been under a fair amount of pressure, so as soon as people feel they have a little more cash in their pocket, that could benefit that sector,” said Matthew Palmer, a Dubai-based managing director with turnaround specialist Alvarez & Marsal.

He sees the current UAE property market downturn as more enduring and supply-driven than the previous collapse of prices in late-2008, which coincided with the global financial crisis and which continued through 2011.

“This one certainly hasn’t been as drastic as the previous one, but it is its sustained nature that has made for a more challenging environment for the housing market in Dubai, and hence developers,” he said in a phone interview.

The property market malaise coincides with an extended period of oil price weakness and more recent geopolitical tensions with Iran.

Such factors have combined to sap overall business confidence in the UAE.

Real estate developers had hoped the Dubai 2020 Expo would help to lift the property market out of the doldrums, but as the pipeline of new homes increases, such hopes are fading.

The UAE Emirates NBD Purchasing Managers Index (PMI) published last week slipped from 59.4 in May to 57.7 in June.

Despite the decline, private sector businesses remained upbeat, in part due to the expected economic windfall from the Expo.

“Nearly three-quarters of firms surveyed expected their output to be higher in June 2020, with many citing Expo 2020 as a reason for their optimism,” Emirates NBD said in its report.

Yet while some of Dubai’s big developers have cited the Expo as a key property market positive in recent years, few are now linking the event to an increase in expected sales.

Damac Properties, one of Dubai’s largest developers, in March offered discounts of 50 percent on its Celestia development located alongside the Expo 2020 site.

It offered two-bedroom furnished apartments from 689,000 dirhams.

Alvarez & Marsal’s Palmer still sees demand for properties in some locations in Dubai, despite the huge pipeline of homes under construction.

“If we assume a delivery rate of about 50 percent [of announced units] we have got unit supply growing at 5.5 percent from 2018 into 2020 against a forecast population growth a little less than 2 percent. That said, we have seen that the right developments are still performing and it always comes down to the location, quality and reputation of the developer,” he said.

“It may be more challenging for some of the more esoteric developments being built on the fringes of Dubai.”

(Reporting by Sean Cronin; Editing by Michael Fahy)

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