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 adjust to the recent US rate cuts, which they have to do because of the dollar peg to the dirham. Just a couple of years ago local mortgage rates of seven per cent were available. Therefore the downward pressure on the cost of home finance is clear, and if the local mortgage market follows Hong Kong and becomes more competitive, then interest rates could go much lower, making it significantly cheaper to buy than rent. Real interest rates are already negative due to high local inflation.
2. Rental yields in the Dubai market of 7-10 per cent are abnormally high by international standards. Rents are unlikely to fall in a booming market, so it is more likely 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 admittedly 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 in comparison to other global cities with similar salary levels. The HSBC survey of house prices in comparison to per capita GDP put Dubai and Abu Dhabi near the bottom. This is a historic anomaly that will be eliminated by price rises.
5. Six years ago, when Dubai freehold began, it was a market without any formal legislation and regulatory infrastructure. Now it has world-class laws, a state-of-the-art land registry and a strongly-led regulatory authority. Hope has been replaced by experience.
6. The Dubai Financial Market crashed in 2006 pushing local investors into property as an alternative. It recovered in late 2007, but is now again trending downwards with global stocks, and has become highly volatile, shifting over 10 per cent in a day. Expect stock market participants to again seek a more stable alternative.
7. Indeed, the absence of investment alternatives is a major theme for 2008. Global stock markets have had their worst January in history. Recent US interest rate cuts leave deposits paying 2.8 per cent. This makes Dubai real estate look attractive as an alternative. Where else offers such a return?
8. In the same way that the local stock market crash attracted foreign bargain hunters to invest last year, foreign investors in search of yield are also increasingly investing in Dubai real estate. Problems in the UK housing market might be dissuading some buyers, but large numbers of oil-rich Russians, for example, are now buying in Dubai.
9. Dubai still has some undeveloped market niches in real estate, such as holiday lets and fractional ownership, which are big and even dominant market phenomena in many beach resorts around the world. This source of higher rental yield on property has therefore yet to be fully tapped.
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.