DUBAI, UAE - The property market in Dubai has been sinking since 2014, and is likely to remain depressed for years.
S&P Global, the credit ratings agency, on Tuesday said the emirate's property market was destined for more gloom.
Dubai real estate prices escalated leading up to the GFC in 2008/9. When the crisis hit, Dubai property prices fell like a stone, hitting a low around 2010.
Now S&P Global says the market is sliding back towards those levels.
The agency has also expressed concern that government finances are heavily linked to the real estate sector with 70% of its revenues coming from Dubai Land Department transfer and mortgage registration fees, as well as for housing and municipality charges, and dividends from government-controlled real estate developers such as Emaar Properties and Nakheel.
The issue for Dubai is it is a property-based economy, and while construction of new residential projects and hotels is running at full steam, it is overwhelming demand.
At the Dubai International Financial Center on Tuesday, S&P analyst Sapna Jagtiani told journalists the rating agency's "base case scenario," is that the Dubai real estate prices would decline by between 5% and 10% this year, mirroring the falls seen in 2018.
This, S&P Global says, would see prices return to the 2010 level.
"On the real estate side we continue to have a very grim view of the market. While we expect prices to broadly stabilize in 2020, we don't see a meaningful recovery in 2021. Relative to the previous recovery cycle, we believe it will take a longer time for prices to display a meaningful recovery," she said.
While the Abu Dhabi's property market is also depressed, S&P does not see the outlook there as gloomy as for Dubai.
"Abu Dhabi never did ramp up as much in 2014 and 2015 as Dubai did," Jagtiani said.
She also warned that if developers such as Emaar Properties, Meraas, Dubai Properties and Nakheel continue to launch new developments the situation will worsen.
"In such a scenario, we think residential real estate prices could decline by 10 to 15% in 2019 and a further 5 to10% in 2020. In this case, we expect no upside for Dubai residential real estate prices in 2021, as we expect it will take a while for the market to absorb oversupply," she said.
One of the biggest and longest-standing Dubai developers Damac was recently downgraded by S&P Global to BB- due to the depressed property outlook.
One bright spot is that there is increasing interest from China. Chinese buyers are being discouraged from buying in countries like Canada, Australia and New Zealand because of concerns they were pushing prices higher. Since government regulations restricting ownership have been iomplemented, property prices in all those countries, particularly in the capitals, have been falling sharply. The purge on Chinese buying has helped push interest into places such as Dubai, where the government is openly encouraging and promoting sales of property to Chinese buyers.
New visa regulations allowing residency for up to 10 years are being touted as well to help shore up the ailing market.
The Dubai government too has been developing plans to diversify the economy away from the property base, particularly with its credit rating at risk.
"In our view, credit conditions deteriorated in Dubai in 2018, reducing the government's ability to provide extraordinary financial support to its government related entities (GREs) if needed," S&P said in a report.
"The negative outlook on Dubai Electricity and Water Authority (DEWA) partly reflects our concern that a real estate downturn beyond our base case could put increased pressure on government finances," the report added.
Despite the concerns about the oversupply of property in the emirate, S&P Global says the emirate's banking system is in good shape, with only about a 20% exposure to the real estate sector.
"Banks in the UAE tend to generally display a good level of profitability and capitalization, giving them a good margin to absorb a moderate increase in risks," the S&P report said.