Dubai real estate may well be the next asset class bubble to be created by inappropriate interest rate levels set by the US, alongside Hong Kong property. But there are at least 10 good reasons to think the present realty boom in Dubai will continue for rather longer than many outside observers believe possible.
1. Dubai mortgage rates are around 8.5 per cent and have yet to acclimate to the recent US rate cuts, which they have to do because of the dollar tie to the dirham. Just a couple of years ago local mortgage rates of seven per cent were available. Thus the downward pressure on the cost of home finance is clear, and if the local mortgage market follows Hong Kong and becomes more rival, then interest rates could go much lower, making it notably cheaper to buy than rent. Real interest rates are already negative due to high local inflation.
2. Rental revenues in the Dubai market of 7-10 per cent are abnormally high according to international standards. Rents are scarcely to fall in a booming market, so it is more probably that rising capital values will gradually pressure yields down towards global levels. There is no reason why rental yields should be higher in a booming city like Dubai than in a city where the economic outlook is poorer.
3. The hype about Dubai development projects has confessedly duped even this skeptical correspondent over the years. The fact is that far less supply is coming on stream than promised by overenthusiastic developers, due partly to limited supplies of manpower and materials. Dubai Properties is one of the biggest and has just said it will deliver 5,000 units to the freehold market in 2008 which is not nearly enough to meet surging demand.
4. Dubai house prices are still low in absolute terms compared with other global cities with similar salary levels. In a survey of HSBC home prices compared with the per capita GDP is Dubai and Abu Dhabi in the bottom. This is a historical anomaly that will be eliminated in higher prices.
5. Six years ago, when Dubai has started a free, it is a market without any formal legislation and regulatory infrastructure. Now it is a world-class laws, a state-of-the-art land registry and firmly under the regulatory authority. Hope has been replaced by experience.
6. In Dubai Financial Market crashed in 2006 pushing local investors in the property as an alternative. It found at the end of 2007, but now once again downward trend of global stocks, and it became very volatile, changing by more than 10 percent a day. Wait for the stock market participants to again seek a more stable alternative.
7. Indeed, the lack of investment alternatives is one of the main themes for 2008. Global stock markets had their worst January in history. Recent U.S. interest rate reductions leave deposits paying 2.8 per cent. This makes Dubai real estate looks attractive as an alternative. Where else offers such a return?
8. At the same time that the local stock market crash hunters attracted foreign investment transactions in the past year, foreign investors in search of yield as all investments in Dubai real estate. Problems in the UK housing market may induce some buyers, but also a large number of oil-rich Russian, for example, now buy in Dubai.
9. Dubai still has some weak market niche in real estate, such as a holiday, and allows fractional ownership, which are major, even dominant market phenomena in many beach resorts the world. This source of higher profitability lease on the property, therefore, yet to be fully realized.
10. The Dubai Government has been the most proactive developer in the emirate, and its recent legislation and regulatory initiatives suggest that this support is not only likely to continue, but will respond appropriately to any adverse market developments.
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