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Dubai, Abu Dhabi and Doha Markets are most flexible in the face of market fluctuations

 

Al Mazaya Report: Gradual correction of real estate prices reflects market flexibility and fair pricing

Real estate market trends in the region’s countries have revealed that not every price rise is a positive indicator and not every reduction is negative. The economic cycles of the region’s economies are directly linked to what is going on within the global economic system and, therefore, they do not present any unique challenges. While the fiscal and economic cycle has undoubtedly become shorter and often does not exceed six years, the situation must become part of an accepted series of regular trends – between growth and recession.

Rental and purchase prices are considered among the most important measurements for fiscal and economic cycles in the region’s real estate market. This is particularly the case in economies of countries that are open to foreign investment and, therefore, they must increasingly anticipate these cycles within the core part of their middle to long-term plans.

 

UAE

By tracking the region’s markets, it has become noticeable that the UAE real estate market now enjoys high flexibility towards the supply and demand cycles. The Emirati market has become capable of reflecting the demand indicators on the offered real estate products in a more efficient way than neighbouring countries, in spite of some challenges still being in place. The key challenges are the price reduction indicators, which are often associated with economic and financial pressures that affect the pace of economic activity as a whole. Therefore, a decline in demand rates in terms of sales and leasings means more risks and fluctuations for both direct and indirect investment.

In this context, Al Mazaya Holding’s Weekly Real Estate Report points out that the UAE real estate market has succeeded in evading predicted real estate bubbles ever since the global financial crisis. From 2012 up to the end of 2014, the UAE has also succeeded in avoiding a collapse in prices, despite the recession of the past couple of years. Due to steady demand indicators from the end user, in addition to an improvement in the attractiveness of real estate products and prices – across all categories – the UAE has witnessed a consistent level of demand, at healthy supply rates.

The state of correction reported in the UAE real estate market has evidently proven the authenticity of the reports and indicators, which expected the market to undergo a state of gradual decline in pricing. This carries several positive aspects for investors, the real estate market and the local economy, given that investments have increased in terms of quality and feasibility.

An improvement in the investor’s ability to determine the best investment opportunities at the right levels of risk, return and market resilience, means the UAE market remains an attraction proposition – both locally and externally. These factors have been collectively reflected in the country’s economic performance and continuation of development projects, in spite of the prevailing financial and economic pressures at the regional and global level.

Ostensibly, the prevailing prices are still appropriate for both real estate developers and owners, with the rises reported in the recovery period being high – reaching pre-2008 levels. Therefore, any market corrections will not render these real estate units unfeasible and, importantly, will not cause owners and developers to sustain losses.

Al Mazaya’s Report further points out that real estate investment is a long-term game and so market exposure to fluctuations and price disparities is expected. The fact that the market’s stakeholders are accustomed to market price fluctuations means they often set out a range of positive and negative outcomes – before initiating a real estate investment.

Irrespective of the severity of fluctuations and their length of time; active markets like Dubai, Abu Dhabi and Doha, will be able to overcome economic fluctuations and return to their previous levels following each recession. This makes them an attractive investment in the long run. Real estate markets in the region are starting to strike a balance between supply and demand – a situation that presents buyers with fairer prices and contributes to further investment.

It is worth mentioning that real estate prices in Dubai marked a recession ratio of 12 per cent, over the past year, while market indicators showed that rental prices will undergo a decline of 10 per cent, with real estate prices set to decline by five per cent, during the current year.

 

Qatar

Al Mazaya’s Report considers it highly probable that luxury real estate in Qatar and neighbouring real estate markets will see a further decline in price levels. This is based on the assumption that luxury real estate products, particularly villas, are largely affected by the developments in oil markets as well as the package of amendments currently being introduced to spending tools and mechanisms, at both the government and private sector level.

Real estate indicators point out that rentals of offices and housing apartments are undergoing a state of anticipation, which is reflected in indicators showing a high supply of villas and a decline in demand. This is not unexpected, in the face of government and private sector expenditure cuts, due to falling oil and gas prices, a recession in economic activity, and job cuts.

Al Mazaya’s Report adds that real estate owners are holding fast to the prevailing rental rates – rejecting prices being dictated by supply and demand forces – which has had a direct impact in increasing the fallback rates in rentals, which ranged between five and 10 per cent, over last year’s figures.

It is noteworthy that sales in Qatar’s residential real estate market are heading for a decline. This is a consequence of the reluctance of investors to offer new projects while prices of undeveloped lands have seen a marked decrease of 15 per cent, in several locations in Doha. In this regard, real estate prices and rentals have marked record rises over the past few years and the current correction will be principally be more beneficial to the market and end user.

 

KSA

Al Mazaya’s Report points out that trends in the KSA real estate market are not independent from internal and external developments or supply and demand forces. The data in circulation shows a decline in real estate prices by 20–40 per cent, at the end of the first quarter of this year. The government’s application of taxes on land that has been left undeveloped has also led to a decrease in site plans on the outskirts of major cities. Adding to that, registered real estate sales marked a decrease of 20 per cent, compared to the same period last year.

Real estate transactions in April marked a decrease of 52 per cent, on a year-on-year basis, according to statistics released by the Saudi Arabian Ministry of Justice. Housing and commercial building transactions also declined by 52 per cent, while deals in the commercial sector noted a 54 per cent decrease, for the same month in 2015. These reported recessions reveal a state of hesitation in the market’s overall performance. That said, further declines in pricing will be beneficial to the real estate market, following extremely high and unjustified rises in prices over the past few years.     

 

Jordan

Al Mazaya’s Reporthas also confirmed that while Jordan’s real estate market is following a similar path to KSA, the underlying reasons are very different. The official data indicates a decline in real estate sales by four per cent, during the first quarter of this year, compared to Q1 2015. Market indicators imply that the reported recession is mainly attributable to a state of instability in the region, domestic issues related to a decline in investment liquidity, and a lack of balance between supply and demand forces. There is currently an over-supply in the Kingdom.

It is worth mentioning that liquidity in Jordan’s real estate sector is one of the most important factors determining the country’s pace of economic activity. Market indicators currently indicate a decline in market liquidity, which has led to a high rate of defaults on installment payments – a matter that is influencing financiers to put a hold on financing real estate projects. Al Mazaya’s Reportalso adds that forecasts for a further decline in real estate prices are still in place; however, rental prices are expected to maintain their current levels.

 

Conclusion

Al Mazaya’s Report asserts that the gradual decline in real estate prices will, ultimately, be beneficial to the market, over the coming period. However, real estate markets that are noting sharp and accelerating declines will face many challenges in maintaining the value of their assets and investments and will have considerable difficulties attracting more investment, in 2016.

The general trend of reported and expected declines is attributable to a decrease in demand and an increase in supply – not just a rise in supply. Economic conditions of this nature may be pointing to further recession before there is a rebound.