Dubai to take steps to curb property boom

After years of rampant growth and short-term speculation, it appears the authorities are going to take measures to discourage this continued growth and are looking into ways to slow things down

A recent report by Standard Chartered Bank suggested that a 50% capital gains tax would be one way to stop the short term speculators from entering the market.

Fears that a bust is on the way have prompted the authorities to consider other methods also. Industry observers, while expressing confidence that the Dubai government would not allow the real estate market to go bust, agreed that a correction in the next couple of years would indeed be healthy.

"There will of course be stabilization and slowdown in terms of the high returns seen in a very short period as the UAE market has now entered a mature stage," said Usama Kalyar, the chief operating officer of Goldcrest Properties in Dubai.

INvesting in Dubai's property market - not for the faint hearted after the government steps in

Kalyar was responding to a research report issued last week by Morgan Stanley saying supply of new housing units would surpass demand by 2009 and result in price declines by 2010. The US investment bank said that the prices could fall by as little as 10 per cent, but there was a low probability of Dubai following the pattern of Singapore in the late 1990s when property prices plunged 80 per cent.

"I believe this is a healthy sign considering that market correction is a global phenomenon - what goes up has to come down. Overall, a 10-per cent decline is a happy situation," said Samir Patni, the general manager of Aber Real Estate. Dubai kicked off the region's real estate boom in 2002 by granting foreigners ownership rights. In the first half of 2008, Dubai property prices rose by 25 per cent, mostly fueled by a growing expatriate population, speculative investments and construction costs, escalating by as much as 50 per cent in 2008 first half alone.

The chairman of JCA Real Estate, a UAE-based property broker, said a glut in the Dubai property market was unlikely as demand for new homes would soon catch up.

"Dubai is known for innovation and taking radical steps which its neighboring emirates and countries can't even dream of," he said. "I think by the time supply comes on board, Dubai would have created more demand."

Dubai's rapid population growth of 110,000 per year is the main contributor to record-high prices of residential investment properties, which according to Al Mal Capital jumped an annual 41 per cent in June, from 40 per cent in May.

Dubai's Real Estate Regulatory Agency (RERA), the emirate's top real-estate watchdog, said last Thursday that it was looking for measures to control the resale of newly built units in some properties to help ward off speculative or short-term investors and said no to a proposed capital gains tax. We don't see any other options though and expect this to be introduced at some point in the future if they are serious about ridding the market of short-term speculators.

Christina Cabading, the president of BSEL Infrastructure Realty FZE, said the property prices in Dubai would not necessarily affect those in Ajman, which is now experiencing 50-60 per cent year-on-year rise in the value of real estate.

It looks as though the likely changes will be –

• A hefty capital gains tax of between 50-100% on properties bought and sold within a 12 month period.
• An increase in the minimum deposit required from 10 to 20%.

Whether this will serve to reduce the rate of growth or merely put the Dubai government in the position of forever having to control property prices with more and more regulations remains to be seen. Our own thinking is that the market is best left to it’s own devices and attempting to “have your cake and eat it,” in this fashion is a mistake. You cannot have a boom without an inevitable bust – just look at the horrendous state of the US property market at the moment. It is unlikely that the US government will ever be able to leave the free market economy to run its course, and if we are honest, there is one word that comes to mind when governments step in and control a market to keep it afloat –

Communism !