Property market in Dubai is showing initial signs of a turnaround with prices rebounding by nine per cent after bottoming out in April, according to a new report.

HC Securities & Investment in its monthly report on the Mena property market said the recovery follows a 30 per cent peak to trough drop in agreed prices and a 65 per cent fall when compared to peak advertised prices.

According to the report, improving sentiment and risk appetite, a negative real interest environment and attractive rental yields are some of the indicators for recovery.

However, the main catalyst seems to be credit returning to the market as mortgage providers raise their loan-to-values, relax credit norms and lower rates in line with a downward trend in Eibor, down from 3.87 per cent in January 2009 to 1.95 per cent in October.

Mortgages rise

After dropping to a two-year low of seven per cent and six per cent, mortgage values and volumes as a percentage of total transactions have since steadily recovered to pre-crisis levels, reaching 24 per cent and 14 per cent in October, respectively. Mortgage volumes have also recorded a strong growth in recent months, reaching a two-year high of 374 units in August (at 191 units in October 2009), as prices drop to attractive levels.

While the Dubai property market is perhaps the most fragile among its regional peers considering the high level of speculation and leverage, HC Securities transaction data suggests it is still dominated by cash buyers, averaging 79 per cent and 85 per cent of transaction values and volumes in freehold areas, respectively, since October 2007.

"We believe this may have somewhat counteracted the deleveraging effect, resulting in a narrower than expected correction and a faster recovery. Consensus estimates, however, still call for a peak to trough drop of 40 to 60 per cent and no recovery prior to 2010/2011. But we feel street forecasts are likely to be revised upwards going forward," the report said.

Taking into account projects delays and cancellations – estimated at 30 per cent by Prolead, a market research company – HC Securities estimates just under 60,000 residential units are likely to hit the market between 2009 and 2011, against consensus estimates ranging from 90,000 to 140,000.

"We cross check our numbers by working backwards from the industry balance sheets [Nakheel, Dubai Holding, Emaar, Union Properties and Deyaar], using development properties and land receivables as a proxy for upcoming supply, covering both master and single property developers," the report said.

On the other hand, market fundamentals in Abu Dhabi are favourable with an undersupply of 75,000 units by 2011.

Rental decline

Asking rentals in Dubai have retreated for nine months in succession since the start of the year, dropping 38 per cent year-to-date. Occupancy levels have been driven down by expatriate exodus and stock additions. The pace of the decline, however, seems to be slowing (-2 per cent in September and October) as the full impact of the anticipated exodus is assessed following the summer months.

Consequently, rental yields compression persisted over the past few months – down from seven per cent in March to 5.6 per cent in October – as rental declines outpace those of prices.

Advertised rentals on agreed sale prices resulted in yields that are higher, upwards of 10 per cent in October. Considering there is a large bid/ask spread on prices, HC Securities believes rentals are no different and estimates that agreed rental yields have compressed from a high of 8.6 per cent in November 2008 to around 5.7 per cent in October 2009.

Listings down

Meanwhile, Dubai advertised listings saw a gradual decline since the start of the year despite more stock being added. Available for sale/lease stock has declined by 54 per cent from 5,862 listings at the peak in January to 2,676 in October 2009.

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