We have heard many opinions regarding the buzzing talk of the real estate industry – “Why property prices are falling?” Nobody is missing a chance to express a personal point of view about “price formation” in the real estate industry. In most of the cases, personal opinions are deformed by the outside influences of other people’s expressions and opinions. The most frequent expressions we hear are:
- Because of the oversupply;
- Because of the economic situation in the UAE;
- Because the government wants so;
- Because people leaving the country.
What is your opinion?
In this research, I’m going to illustratively analyze 2016 and 2017 years, since in this period started the dramatic price fall which effected next years.
Because of the Oversupply?
Do you know that the population in Dubai is increasing more than the delivered properties? Let’s have a look at the numbers in Table 1.
What could be the reason for the price fall? Does it mean that a lot of expatriates living with their families in the property had left the country, while people staying in the shared accommodations have arrived? This would be right if the number of households hasn’t increased significantly.
Because of the Economic Situation in the UAE?
Do you know that most of the basic economic indicators of Dubai’s economy have increased for the last years? Let’s have a look at the numbers in Table 2.
We see that new licenses issued in 2017 are 4% less than in 2016. While at the same time, Renewed licenses are more than the previous year. Nonetheless, we see licenses have been canceled 2 times more in 2017 than in 2016. Other minor negative changes are related to the general import and export in foreign trade, which should have no major effect on the property price market.
Because the Government Wants so?
Why would the government want to reduce the prices in the real estate market? In order to let people save more from salaries and make Dubai affordable? Can be! But how are they doing it? There is no cap for rent and the rental price is not determined by the government. With the help of RERA Rental Index Calculator, the government only makes sure that the landlord will not be unfair with the rental pricing.
From the government’s side, there is no direct interference in the real estate to regulate the prices, except the permissions granted to Developers to build more.
Because People Leaving the Country?
Table 1 shows, that the population in Dubai is growing. The number of households is growing. Some of the people are leaving the country, while at the same time, new people are coming. “People leaving the country” can be the truth. But it has another side – “People are coming to the country” as well.
So What Can be the Actual Reason?
The reason is not related DIRECTLY to the oversupply. The reason is also related to the buyers, investors, building sub-leasers or other real estate participants, who are unable to fully afford properties or having a constant cost (liabilities) which requires to be covered in order to stay profitable or “survive”. Let’s have a look at the illustration which will help us to understand the concept.
Gray square shapes are the properties which are mortgaged, subleased or can’t be afforded with one payment. In general, these are the properties the landlords must lease in order to pay the liabilities related to the property mainly.
Black square shapes are the properties which are entirely owned by the investors. Let’s say properties purchased with the cash payment and with no liabilities.
Yellow circle shapes are the tenants occupying the property.
Doubled yellow circle shapes are the properties leased for the shared accommodation.
As per the illustration above on the Picture 1 and Picture 2, in Dubai, there are a total of 20 properties and 20 people to occupy these properties, which are creating 15 households.
The gray group of landlords is more keen to lease their properties to 15 households since they have liabilities to be settled. The main way they attract tenants is by slightly reducing the price, until unless they have a minor profit, they’re fine. Not furniture, no additional service, or anything else. Just reducing prices!
The black group of landlords is the ones who are not in a hurry to lease their properties by reducing the prices. We can call them: “Stubborn landlords going against the market.”
On Picture 3, we see that in Dubai 10 new properties were delivered to the market which are now available for lease. These properties were purchased via a mortgage or with a post-handover payment plan. Now, in Dubai total 15 vacant properties.
As per Picture 4, 15 people came to live in Dubai and created 9 households. We have left 6 properties unoccupied, where 4 of them are mortgaged or with a post-handover payment plan – with liabilities to be covered, where the landlords are liable for the monthly payments.
Now, ask yourself questions: “How many people are buying properties with the mortgage? How many developers are offering post-handover payment plans? Where mainly can people get the funds to cover the post-handover payment plan? Is every buyer purchased a property in Dubai residing the Emirate?”
Domino Chain Reaction is Initiated
In this case, 4 “gray” landlords from Picture 4 must attract 4 households. In order to be able to manage their liabilities. In this example, the gray group of landlords will start slightly reducing the rent.
Another group of landlords (mainly gray group of landlords) will react back following the trend to keep the properties occupied and do not lose the monthly income.
“Black” landlords after a year or even less, finally, start to follow the market by reducing the prices, as they have no choice left…
By Akhmed Idigov