22 June 2015
Standard & Poor's expects a 10%-20% correction in Dubai residential real estate prices
The United Arab Emirates property market is likely to soften over the next year after reaching a peak in 2014 as economic growth slows due to the drop in oil prices, but there is no fear of a repeat of the 2009 crisis, according to Standard & Poor's.
S&P said in a report published on Monday that it expected a "moderate" 10% correction in Dubai residential real estate prices as more units come online and demand from non-residents falls.
"We generally believe that our rated issuers could absorb a 10%-20% drop in residential sales prices in Dubai because they are better armed than they were in 2009 in terms of revenue predictability and mix, product mix, and solid capital balance sheets."
"Stronger capital structures and good revenue mixes should allow issuers to withstand headwinds over the next 12-24 months," according to the report "Inside Credit: The UAE's Property Market Is Prepared For The Current Correction".
The UAE's diversified economy, population growth, new tourism projects and the introduction of protective measures, such as the loan-to-value cap on mortgages and developers' mandatory usage of escrow accounts, should help prevent a real estate crash such as that of 2009, when property prices plunged more than 50% from their peaks.
According to the S&P report, non-UAE investors dominate real estate investment in the UAE and in many cases, their spending power is unaffected by the decline in oil prices; Indian and Pakistani investors accounted for more than 18% of investment transactions in the UAE in the first quarter of 2015.
In Abu Dhabi, a shortage of quality housing will mean that rents will continue to climb, especially if rental caps are not introduced, but at a much slower pace than the 11% of 2014.
"The only dampener we foresee for Abu Dhabi is the currently softer economic conditions driven by lower oil prices, which could keep rent growth in the single digits," S&P said.
The report said that retail and office commercial real estate should prove more resilient than hospitality given the sizable supply of hotel room expected in the next few years ahead of Expo 2020, for which 50% more hotel rooms may be needed to host the expected 20 million visitors.
© Zawya 2015