Dubai Property-Bubble Concerns Overdone, Goldman Sachs Says

Concerns that Dubai’s property market is a bubble are exaggerated as new regulations focused on curbing speculation and an increasing supply helps keep values down, according to a Goldman Sachs Group Inc. report.

Property prices are 36 percent below their 2008 peak even after rising by about a third from a low in the second quarter of 2011, analysts including Eyad Faraj, Matija Gergolet and Harsh Mehta wrote in a report published today.

Dubai home values climbed at the fastest pace in the world in the second quarter, a survey by broker Knight Frank LLP showed, stoking concern that the market may be overheating. The increases will slow down over the next 12 months after the return of speculators sparked “unsustainable” gains, Jones Lang LaSalle Inc. said in an Oct. 3 report.

The surge prompted the sheikhdom’s Land Department to double property registration fees to 4 percent starting Oct. 6. The real estate regulator is requiring developers to set aside a portion of a project’s costs to limit the effect of advance sales in financing construction. Restrictions on mortgage lending, expected from the United Arab Emirates central bank this year, will also help cool the market, Goldman said.

Political Stability

Dubai’s relative political stability and high rental yields of 5 percent to 6 percent will maintain its attractiveness to investors, according to Goldman. That compares with global yields of 2 percent to 3 percent, the analysts wrote. Last year, approximately 34 percent of Dubai’s property investors were from South Asia, followed by 15 percent from Arab countries.

In neighboring Abu Dhabi, residential prices have stabilized and rents are increasing in the best areas, helped by the relocation of around 10,000 state employees from Dubai in the past eight months, the analysts estimated.

Abu Dhabi’s government in Sept. 2012 required all its employees and those of state-related companies to live in the capital to receive housing allowances. The law sparked the relocation of workers who for years had commuted from Dubai where they enjoyed lower rents and better infrastructure.

Aldar Properties PJSC (ALDAR) had its rating raised two levels to BB at Standard & Poor’s with a stable outlook, the ratings company said in a statement today. The rating is two levels below investment grade.

Aldar, Abu Dhabi’s largest developer, is taking a more cautious approach to new projects, aims to increase sources of recurring income and is reducing its debt, S&P said.

To contact the reporter on this story: Zainab Fattah in Dubai at zfattah@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net

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