May 11, 2017 / 5:02 AM / 7 months ago

Fitch: Dubai Real Estate Faces Mixed Near-Term Performance

(The following statement was released by the rating agency) DUBAI/LONDON, May 11 (Fitch) Dubai real estate prices and rentals are likely to remain under pressure for the rest of 2017 but performance is likely to be fragmented, with prime assets still showing some resilience while lower-tier properties outside the centre will have price and rental declines, Fitch Ratings says. The risk of a property shock is small due to strengthened market regulations, lower bank financing of residential transactions than during the 2008 crash, and robust non-oil sector growth resulting in more resilient residential and office segments. Our analysis of Dubai Land Department figures shows activity accelerated in 2H16 after a slow start to the year. The total value of deals in 2016 fell 2% and the number of transactions dropped 8% compared to 2015. Mortgage transaction volumes exceeded cash transactions for the first time since 2012, accounting for 50% of transaction values, but this is still below the post-crisis peak of 65% in 2011. We believe many of Dubai's master developers have significantly reduced their debt compared to pre-crisis levels, giving them more flexibility to weather market cyclicality, and the authorities have taken action to reduce risk. This includes increasing the real estate registration tax to limit speculation, making developers deposit a portion of construction costs in escrow, and reducing the maximum loan-to-value ratio on residential property purchases. <iframe allowfullscreen src="//" title="Dubai Real Estate Transactions" width="550" height="680" scrolling="no" frameborder="0"> Market transparency and regulations have improved in recent years and are more advanced than other GCC members', but still lag behind developed markets. Residential property prices decreased by 8.8% during 2016 and 0.9% in 1Q17, according to data from Cluttons, while average residential property rents dropped 9.9% in 2016 and 4.7% in 1Q17. This reflects factors including the depreciation of other major currencies against the dollar, diminished purchasing power in neighbouring Gulf countries, and redundancies in the oil and gas and finance sectors, which has also reduced demand for office space. However, this has not resulted in blanket price declines, with limited impact on prices and yields on prime assets in prime locations. We expect this fragmented performance to continue in 2017. Office rentals will also remain under pressure, although they are still below the pre-crisis peak and little new space will become available in the near term. Residential and commercial real estate supply is likely to accelerate after 2017 in preparation for Dubai Expo 2020 and the ability of the market to absorb this new supply will be a key challenge. More than 56,000 residential units are due to be completed in the next 24 months, but projects could be delayed or cancelled, reducing the pipeline. We expect retail property to face similar pressures to residential and office space from currency depreciation, which makes Dubai a more expensive shopping destination, and from the reduced purchasing power of visitors from neighbouring countries due to low oil prices. The potential introduction of VAT in 2018 could create a further challenge for large retailers in Dubai. Fitch-rated Dubai property companies Majid Al Futtaim Holding and Jebel Ali Free Zone have Stable Outlooks on their 'BBB' ratings, reflecting our expectation that credit metrics will remain strong despite the challenging market conditions. Both companies have loan-to-value levels below 60% combined with active balance-sheet management and an average debt profile of more than four years. Contact: Samer Haydar Associate Director Corporates +971 442 41200 Fitch Ratings Ltd Al Thuraya Tower 1 Office 1805 Dubai Media City Bashar Al Natoor Global Head of Islamic Finance +971 4 424 1242 Simon Kennedy Senior Analyst Fitch Wire +44 20 3530 1387 Media Relations: Rose Connolly, London, Tel: +44 203 530 1741, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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