1 February 2015

Dubai: Boom-Bust-ology

Historically, since the advent of the freehold phenomena, Dubai’s population has grown by approximately 7% per annum (75% of the growth from net influx of people). During this time, the supply of homes in Dubai has tripled (from 156,000 units to 465,000 units), and the city has enjoyed a boom in asset prices, for a number of reasons, principal amongst them being the investor phenomena (single investors buying multiple properties either for rental yields and/or for holiday home purposes) and the expansion of the city’s population as it became a magnet for the MENASA region in terms of employment opportunities.

Historically, since the advent of the freehold phenomena, Dubai’s population has grown by approximately 7% per annum (75% of the growth from net influx of people). During this time, the supply of homes in Dubai has tripled (from 156,000 units to 465,000 units), and the city has enjoyed a boom in asset prices, for a number of reasons, principal amongst them being the investor phenomena (single investors buying multiple properties either for rental yields and/or for holiday home purposes) and the expansion of the city’s population as it became a magnet for the MENASA region in terms of employment opportunities.

The structure of Dubai’s real estate market is analogous to that of an hourglass. There is a preponderance of supply at the top and the bottom end of the spectrum, with paucity in between. If Dubai is going to move towards a dynamic where demand going forward will be indigenously derived (from end users), as is the case in most mature economies, and not emulate the Spanish model (holiday-home phenomena), then it serves to reason that the mid income space is what needs to be catered to.

The market remains well (if not over) supplied at the top end of the spectrum (both in the villa and the apartment space) and the impact of lower oil prices and stronger dollar will undoubtedly dampen the demand from overseas investors; however domestic demand at the mid end remain inelastic to these macro trends, and developers and investors that capitalize on this will be amply rewarded in the years ahead.

Overall, supply and population growth rates have a moderately strong correlation on price trends. The increase in units being injected into the housing stock will have adverse effect on prices, whereas a rise in population growth rates has the opposite. A boom-bust scenario shows that if Dubai’s population grows at 3%, the overhang of supply will lead to subdued prices; however if it grows at 6%, prices are expected to rise.

Note: Unitas is the author for these research reports and REIDIN is the sole data provider for these research reports.

To read the full report click here: http://blog.reidin.com/PublicReports/unitas150303.pdf

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