SOURCE : THE NATIONAL

ABU DHABI - AUG 06:  Property prices in Dubai will drop 10 per cent by 2010 as a major supply of new apartments floods the market, the investment bank Morgan Stanley said yesterday.

The abrupt change in price growth could eventually spill over into Abu Dhabi and other major economies of the Middle East and North Africa, the bank said in a research note.

“Dubai is the bellwether of the whole GCC property market,” the report said. “A potential oversupply or price correction here would, in our view, extend to all markets as investor confidence is shaken.”

Dubai property prices have soared 79 per cent since January last year, fuelled by a growing population of expatriates, speculative investments and rising construction costs. Next year, however, an “excess planned supply” could trigger price declines that will culminate in 2010, the report said.

In the worst case scenario, the price fall could follow the same pattern as Singapore in the 1990s, when prices declined by 80 per cent in 18 months, the report said, adding that such an event in Dubai is a “low probability”.

The bank said the more likely consequence would be consolidation of companies in the property sector – a trend that has already shown signs of emerging with the demise last month of National Bonds Corporation’s inhouse development division.

Excluding a severe correction in Dubai, Abu Dhabi, which is at an earlier phase of development than Dubai, could still see prices increase 25 per cent by 2010, the bank said. Likewise, Qatar’s property market is expected to increase by 15 per cent during the same period.

Experts said they agreed that a price correction in Dubai was on the horizon, although exactly when the decline would begin was uncertain.

Nicholas Maclean, the managing director of the regional office of CB Richard Ellis, said that the property correction would start in 2011. “There is a lot of supply coming in 2010, toward the end of the year,” he said. “The market tends to lag behind the actuality of supply. It will take some time.”

The magnitude of the price drop would depend entirely on population growth, he said. Another 1.6 million people are expected to move to Dubai by 2010, according to government data. Any change in the rate of population growth could speed up or delay a price correction.

Analysts at EFG-Hermes said in a research note earlier this year that Dubai prices would be 15 per cent to 20 per cent lower by 2011 because of an infusion of hundreds of thousands of apartments.

The latest forecasts of price declines come amid calls for new laws and restrictions to avoid the overheating of the property economy. Analysts at Standard Chartered wrote a research paper last week that concluded new laws and a capital gains tax were necessary to curb rampant speculative buying.

And major developers have started implementing their own controls to slow down the rapid resale of properties, a practice known as “flipping”. Nakheel now restricts buyers at the Trump International Hotel & Tower on Palm Jumeirah from reselling their purchases for one year. Emaar requires buyers to have paid 30 per cent of their payment plan before they can resell, and Union Properties is imposing a transfer fee as high as 10 per cent on sales that take place before a year.

A period of price declines would throw cold water on the frenzied buying that has dominated the Dubai market for the past several years, experts said. It would slow down speculative buying and make it easier for people who actually wanted to live in the buildings to acquire units.

The Morgan Stanley report said that slower growth of property prices would bring stability to the region and increase confidence in the Dubai market. Among the areas that would see the largest surge in new apartments are the Dubai Marina and Jumeirah Lake Towers.

“2009 is the year to watch, with excess planned supply and current negative sentiment,” the report said. “Both may cause a higher impact than expected.”
Morgan Stanley also announced that its analysts would begin coverage of 12 property companies in the Middle East from today.

The bank’s top picks – companies that are tipped to do well in terms of share price, for example – are Emaar, Aldar, Qatar Real Estate and Palm Hills in Egypt.