U.A.E. Regulator Flags Dubai, Abu Dhabi Property Overheating

The United Arab Emirates’ real estate market may be “overheating” and rental yields in its two richest sheikhdoms indicate “growing imbalances,” according to the central bank.

Average sale prices in Abu Dhabi and Dubai have risen faster than rents, and such deviations can be “used to identify imbalances in the housing market,” the central bank said in its 2013 financial stability report. The average rental yield in Dubai is about 70 basis points below the historical average and those in Abu Dhabi 130 basis points lower.

While “recovery of rental prices started at least a few months before the sale prices had bottomed, growth rate of rents was significantly lower than the increase in prices,” according to the central bank. The discrepancies could indicate an “overheating real estate market,” it said,

Home prices in Dubai rose the most in the world last year, according to Knight Frank LLP, raising concern a bubble may be forming five years after the market crashed. Residential property prices rose an average 24 percent in Dubai and 21 percent in Abu Dhabi, the central bank said. The International Monetary Fund in May urged the U.A.E. to enact stronger measures to curb real-estate speculation in Dubai to prevent an “unsustainable” surge in prices.

To avoid another bubble, the central bank last year issued regulations restricting mortgage lending, and Dubai’s government doubled transaction fees.

While lending for home purchases rose 12 percent or 12.7 billion dirhams ($3.5 billion) last year, less than 30 percent of residential property purchases were funded through bank lending, the central bank said. U.A.E. bank exposure to the real estate sector is less than 23 percent of total loans.

“Bank lending cannot be considered a significant driver of real estate prices,” according to the report. “Analysis of banking data support the hypothesis that the current market recovery is mostly driven by equity buyers and or reliance on external funding sources.”

Price growth for villas and apartments in Dubai have slowed in the first five months of this year, according to data from property broker Cluttons LLC.

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