Dubai property prices rise as other markets suffer

With the International Property Show Dubai 2008 = running for=20 the next three days, here is an international case study. Both the = Western=20 Australian capital Perth and Dubai have overheated, commodity price = fuelled=20 economies. And yet property prices stalled in Perth last year after a 40 = per=20 cent rise in 2006, while in Dubai real estate prices continue to rocket = upwards.=20 Why?

United Arab Emirates: Sunday, February 17 - 2008 at = 10:04

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While other markets slow down, Dubai prices = continue=20 upwards

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This case study provides an interesting insight into = the=20 economic forces at work currently in the UAE, and helps to explain why = the Dubai=20 boom is more durable than it appears to somebody stepping off a plane = for the=20 first time.

In the case of Perth, house prices are higher per = square=20 metre than in Dubai, and even more critically the rental yield on = property, or=20 rents as a percentage of house prices, is only 3.8 per cent, the lowest = for a=20 major Australian city.

In Dubai, landlords obtain rental yields = of 7-10=20 per cent. You can see the attraction of Dubai. It gets better. The cost = of money=20 in the UAE is linked = to the US=20 Federal Reserve base rate, which has just fallen to three per cent, = whereas in=20 Australia the Reserve Bank has just increased rates to a 11-year high of = seven=20 per cent, and two more rises are expected by the summer.

Economic forces

Economic forces are therefore exerting downward = pressure=20 on house prices in Perth and upward pressures in Dubai.

Yet it = is=20 interesting to note similarities in the cities beyond having their = fortunes=20 linked to the respective commodity wealth of their countries. Both = cities have a=20 very tight labour market and a shortage of completed property. It is on = history=20 and economics that the two part company, and this explains the = divergence in the=20 outlook for house prices.

Dubai only opened its property market = to=20 foreigners in May 2002 and its prices have risen very sharply since = then, but=20 are still well below the absolute levels seen in other cities of = comparable GDP,=20 as a recent study from HSBC concluded.

Perth's residential = property=20 market is actually still closed to foreigners. But it has always been = open to=20 all its residents - unlike Dubai which had closed its market to the 80 = per cent=20 of residents who are expatriate up until 2002. Therefore, the property = value to=20 income and debt matrix in Perth has always been aligned with Australian, = if not=20 exactly to global levels.

One final point: it costs some 25 per = cent=20 more to build a housing unit in Australia than they will sell for, = except in low=20 land cost locations. Dubai developers clearly think they are going to = make a=20 profit on their projects while Perth realtors presently do not. This is = partly=20 down to lower labour costs, and also reflects the lower population = growth=20 forecasts for Perth which has a stricter immigration regime.

Buy Dubai

Does that mean that houses in Perth are a sell and = real estate=20 in Dubai a buy? With the Reserve Bank of Australia presently raising = interest=20 rates to control inflation that looks an inescapable conclusion. House = prices=20 will cool despite the booming local economy, and they need to go up to = bring=20 back the developers.

But Perth is investing in its future like = Dubai.=20 Last week saw the announcement of the A$300m (US$272m) Perth Waterfront = Project=20 which follows the recent announcements that the government is to build a = A$1.1bn=20 outdoor stadium at Subiaco and a A$506m museum at the East Perth Power = Station=20 site.

However, Perth property investors might argue that their=20 government's tough approach to inflation may make the local economy less = prone=20 to a boom-to-bust cycle. Yet that is unlikely to compensate them in the = short=20 term where the advantage lies with Dubai.

See = also:=20
Booming Arab = construction=20 market brings opportunities, challenges
True cost of living a rising = concern=20 in Gulf

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Peter J. = Cooper,=20 Consultant Editor
Sunday, February 17 - 2008 at 10:04 UAE local = time=20 (GMT+4)

Replication or redistribution in whole or in part is = expressly=20 prohibited without the prior written consent of AME Info FZ LLC / Emap=20 Communications.

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