A property market boom in Dubai is showing signs of overheating as speculators betting on quick gains inflate prices of real estate still under construction, Standard Chartered says.
Dubai should take measures to swiftly weed out short-term investors, such as introducing a capital gains tax on properties sold within a year of purchase, or risk a correction, Standard Chartered said. « The markets will correct themselves. It is best to try to take the heat out of before it disciplines itself, » said Standard Chartered regional head of research Marios Marathefis. « There are signs of excessive short-term speculative activity which is based on leverage. This kind of mentality is destabilising and it is dangerous and inevitably it leads to a correction. »
Palm island builder Nakheel said last month prices of some units have almost tripled in two years, and Colliers International estimated property prices in Dubai rose 42 per cent in the first three months of this year alone. Home to man-made palm-shaped islands and a ski slope in the desert, Dubai kicked off a regional property boom in 2002 when it first invited foreigners to invest in properties. Since then, regional economic growth supported by a more than six-fold rise in oil prices has attracted streams of investors into real estate in the business and trade hub whose population is growing more than 7pc a year.
In well-regulated property markets, completed properties should trade at a premium to unfinished properties because they pose less risk and the owner can derive rental income from them. In Dubai there is « no evidence » that finished properties trade at a premium to off-plan properties – units that are still under construction, Standard Chartered said.
Since developers allow investors to pay about 10pc of the cost of an unfinished property upfront, a speculator with no intention of living in the unit can buy the property and resell it shortly afterward for a substantial gain. « It is very common to see investors taking positions in the market with the intention to flip it before further payments are due, » Standard Chartered said.
The dirham’s peg to the weak dollar, which has forced the UAE to keep interest rates low despite high inflation, « has encouraged risk-taking behaviour », Maratheftis said. The state should step in with a 50pc capital gains tax to deter speculators, while requiring developers to ask for higher initial payments and proof of a buyer’s ability to pay the full sum, he said.
Source: Gulf Daily News