A dearth of Dubai home sales and foreclosure auctions is stalling a recovery because buyers aren’t able to gauge how far prices have fallen during the market’s two-year slump.
“There are very few transactions at the moment,” said Craig Plumb, head of Middle East research at broker Jones Lang LaSalle Inc. “We are not going to see the bottom of the market until we see transactions through the foreclosure process.”
Home prices in the sheikhdom have dropped about 50 percent from their peak two years ago and Credit Suisse estimates a further decline of as much as 20 percent. Though at least 70 foreclosure cases have been filed under Dubai’s 2008 mortgage law, none has resulted in the sheikhdom’s first auction, said Jody Waugh, a partner at law firm Al Tamimi & Co.
“People are only going to buy if they believe the price is realistic,” Plumb said. Data provided by the Dubai Land Department is too incomplete to provide a valuable guide to selling prices, he said.
The credit crunch prompted some Dubai property buyers to abandon investments and leave the country while others tried to renegotiate contracts after finding they owed more than their property was worth. Purchases fell about 80 percent in 2009 from the previous year, said Jesse Downs, director of research at Dubai-based Landmark Advisory. They increased 24 percent in the first half of 2010 from a year earlier.
A dozen banks have filed foreclosures, mostly involving residential properties, since London-based Barclays Plc won the first judgment at the end of last year, Waugh said. His firm has secured about 12 rulings under the emirate’s 2008 mortgage law and the same number involving Islamic mortgages.
The first auction is unlikely to take place before the end of the year, following a “quiet” summer and the holy month of Ramadan set to start in mid-August, according to Deepak Tolani, an analyst at Al Mal Capital.
Auctions “might help us get to the bottom faster since prices are likely to be considerably less than asking prices in the market now,” said J.P. Grobbelaar, director of research and advisory at property consultant Colliers International. “But I don’t believe prices won’t drop below what is achieved at auctions.”
Credit Suisse’s estimate of a 20 percent decline would take average prices to about 837 dirhams ($227) a square foot, based on its June estimate of 1,046 dirhams. Deutsche Bank AG analyst Nabil Ahmed predicted a price of 850 dirhams by the end of 2010. UBS AG analyst Saud Masud sees a drop to about 600 dirhams.
Colliers estimated in a May 9 report that 41,000 new homes would be put on the market by the end of this year. That will lead to “significant oversupply” and downward pressure on prices, regional director Ian Albert said in the report.
Banks that have seized real estate outside of the foreclosure process have been reluctant to put properties up for auction, said Mohammed Sultan Thani, assistant director general at the Land Department. Developers have preferred renegotiating repayment terms with customers to foreclosures.
“The majority of banks are not eager to sell properties through auctions because the prices fetched may drag the market down,” Thani said. “Many prefer to reach deals allowing them to rent the properties for a few years.”
Barclays’s foreclosure case hasn’t been implemented, Dubai-based Faisal Iqbal, head of secured lending for the bank in the United Arab Emirates, said by e-mail. The Land Department “is in control of the sales process on the instructions of the Dubai courts,” he said.
Foreclosure sales will only provide a reliable guide if prices are set at a realistic level, said Al Mal’s Tolani. In Dubai’s last auction, which didn’t involve foreclosures, only one of four properties listed was sold, according to Thani of the Land Department. Minimum prices at auctions are usually set by the courts in consultation with the land department, which conducts the sales.
If a property doesn’t sell, the court can reduce the minimum price over subsequent auctions, said Al Tamimi’s Waugh. However, by the time a new auction is scheduled, the market may have slipped further and the decreased price may still be too high to attract a buyer.
“You’re constantly trailing a market that is declining and that most likely won’t result in transactions for a while,” Landmark’s Downs said.
Dubai developers have renegotiated thousands of mortgages and extended payment schedules rather than face defaults that would cut off their cash flow. Though that slowed the decline in prices by limiting distress sales, it has prevented the market from reaching its natural bottom.
“People are holding on as much as they can, refusing to adjust to market realities,” Downs said. “It’s delaying the inevitable. If people accept the reality faster, prices will come down faster and in a way recover faster as well.”
Other property markets hurt by the global financial crisis reached bottom last year and began to recover. U.K. house prices began to slump in November 2007, falling more than 20 percent before starting to rise in March 2009, according to mortgage lender Nationwide Building Society. The S&P Case-Shiller Home Price Index, which tracks residential prices in 20 U.S. cities, began its slide at the start of 2006 and reached a bottom in January 2009.