Secondary market activity up despite falling rental yields
Given the surge in off-plan transactional activity in 2017, the recurring theme now that has caught the zeitgeist has been that pricing power for investors in the secondary market has been lost, given the nature of post-handover payment plans.
That, plus the fact that rents (and rental yields) have fallen, given the sluggish pace of job creation as well as the increasing supply in certain areas has spelt the perfect storm for secondary market investors, which in turn has led to a slow but steady price decline with lower transactional volumes.
It remains astonishing how negative sentiment feeds on itself; yet in an age of instant information, how the phenomena of real analysis continues to elude the not only the average investor, but the expert as well.
Transactional activity in the ready space has risen by a modest five per cent on a city wise basis, and by double digits in certain communities; this has been despite (or perhaps partly even due to) the rise in post-handover payment plans.
This suggests that a number of factors are taking place beneath the surface; (1) there is some level of arbitrage going on between the primary and secondary markets as sophisticated investors come in and capitalise on price differentials and (2) the buying that is taking place in the secondary market is being done by endusers (as the data suggests, there is very little bulk buying going on in the ready space) which is part of the home ownership variable juggernaut that takes place over decades rather than a few years.
Data from banks indicate unequivocally that there is a rise in mortgage demand (which for the most part is being met). Furthermore, the price points for this demand is between the Dh1 million to Dh2.5 million category, indicating a broadening of the enduser set (albeit still from a small base). This is not to suggest that off-plan has dominated the transactional space this year (accounting for nearly 70 per cent of overall freehold transactions); however what is critical here is that not only has secondary market activity risen, it has risen despite the falling rental yields.
This suggests that not only are investors still perceiving value, but that on a structural basis, there is a re-rating of risk going on where Dubai’s yields will trend systematically lower as it gets increasingly mature. In point of fact, market maturity by definition implies lower cash on cash yields.
Index providers remain notoriously suspect in their methodology for the most part; these issues have been long highlighted, yet it appears as if little has been done, causing sophisticated investors to rely on increasingly bespoke advisors to help navigate their way through the market. The obvious question that remains unanswered is if there is so much gloom and doom among investors, then it is curious that it happens to coincide around the same time as construction activity continues to scale new heights.
In an age where communication has become instantaneous, it speaks volumes that investors alike continue to fall for the latest fads (a la Bitcoin and cryptocurrency) and choose to systematically ignore the data that suggests a nuanced outlook in other markets. Instead, it appears as if painting broad brush strokes is the order of the day. The old adage of plus ça change, plus c’est la meme chose (the more it changes, the more it’s the same thing) continues to echo throughout the ages and remains particularly (if not more) relevant in today’s day and age.