BuyAssociation.co.uk property editor Paul Collins looks into the property market in Dubai, and what might be in store for investors in the near future.

Introduction

Some of the most extraordinary growth in the property market overseas for UK buyers has occurred in Dubai. Prices have risen at almost the same rate as the skyscrapers that are now the norm in this new desert paradise of tourism, business and internationalism. Yet at the same time, taxes on income are non-existent, and the concept of capital gains tax alien, making it a tax-free earning paradise for investors and expats alike.

This growth in the market, which in the first 11 months of 2007 was reported to be 18.7 per cent in both villas and apartments, has sustained at a high rate for some years now, prompting some investors to buy without ever having been to Dubai before. Commentators are split as to whether this growth can be sustained.

Here, we examine the facts that could have an influence on the market, and see reasons to be optimistic, as well as some factors to keep an eye on over the next 12 months.

Supply & demand
As with all property markets, in fact in most of the world of commerce, prices are governed by the continual flux of supply and demand. One of the biggest contributory factors in the growth of the property market in Dubai has been the fact that, even considering the vast amounts and speed at which properties have been constructed; demand has always managed to outstrip supply.

Added to this is the fact that there are regularly shortfalls in supply due to late-running projects and the immense speed of the influx of new workers and residents who all need somewhere to live.

The investment bank EFG-Hermes has reported that the market will be subjected to its biggest shortfall in supply in the second half of 2008, which means prices will hit a peak of sorts this year. After that, the report suggests, the market will begin to swing in the favour of buyers. It says there will be 64,000 units to come onto the market as available for occupation in 2008, and a further 68,000 in 2009.

Even so, a leading developer has suggested that the demand-supply gap at present is around 20,000 units for properties to buy.

Tourism

Alongside the growth in the business community (more of which later), tourism is the most important industry to the future of Dubai, and its success as a global leisure hub. The introduction of huge new attractions for all ages from across the world will fuel the growth in tourist numbers, who will be serviced by the huge new Dubai International Airport.

Tourism is also the fastest-growing industry in Dubai, with over 11 per cent of the GDP coming from holidaymakers, and generating $1.9 billion of economic activity. The expansion of the facilities available to visitors to Dubai is set to continue as more than $1 billion per year is allocated to be spent on new facilities for the next ten years. This expansion of the attractions and infrastructure for tourism will fuel further demand in the property industry as buyers see apartments as an alternative to hotels for the visitors.

On the other hand, the number of hotel rooms in the Emirate available to tourists is set to rise by around 33 per cent per year until 2011, which has led industry watchers to suggest that hotel occupancy rates may fall as low as 60 per cent, compared to the current levels of more than 80 per cent.

Immigration

The lenient tax regime in Dubai has been one of the major attractions for a large number of businesses, many of which are multinational companies, and some of which have made their headquarters in Dubai.

This is set to continue for some time to come, and alongside the media and internet industries which blazed a trail to Dubai to some extent, 2008 is predicted to be the year when there is huge growth in the investment banking sector in Dubai. This brings with it an influx of people with large salaries who are looking for somewhere to live, and should also employ a proportion of the local population in well-paid positions.

The resulting upwards pressure on the markets may also prompt some local residents into buying in order to avoid the increased costs, once again adding onto the demand for property and pressuring the supply that is there.

Foreign Direct Investment

In 2005, the last year for which figures are available, Dubai attracted over $12 billion in Foreign Direct Investment (FDI), ranking it 15th in the world over the three years previous. Investment in the real estate sector has been significant in this period, and over the next five years the sector is predicted to provide 35 per cent of Dubai's GDP.

Rentals

Letting a property out to either tourists or expatriate workers will be one of the most important parts of the property market in the future for Dubai. Not only will a successful rental market continue to attract buyers, but the state and price of renting a property in Dubai will also have an effect on the demand for property within the country among the local population.

Since November 2005, there has been a government-imposed rental cap at seven per cent of the property value in order to protect the tenant market from potentially astronomical rises in rental costs due to the gap between supply and demand. This cap is unlikely to be renewed towards the end of this year, allowing landlords to set their own prices in a completely free market. This will push many locals to consider buying their own property instead of renting to protect themselves from the potential rises.

This could also benefit the short-term tourist tenant in some ways, as it will lead to competition in the marketplace and allow them to demand better services and even discounts.

The economy

There are two things currently happening in the economy in Dubai that encourage the property-buying public, as well as the market in general. Firstly, the current weakness of the Dirham is boosting the attractiveness of the local market to foreigners. The other factor that is predicted to bring a boost to the Dubai property market this year is the current downward trend of the mortgage market, which should help to defy the rumours of a slowdown in property in the area.

Conclusion

Dubai has had its detractors for some time now, people who seem to be keen to see the property boom there come crashing to a halt, and the immense development of property and attractions as some kind of faddish flash in the pan. However, Dubai keeps on fighting back, keeping resolutely to its free, tax-efficient methods. The result has been a highly modern centre of business excellence, leisure activities and innovative development. With freehold property now widely available and the creation of 19 free trade zones, the bricks are in place for the growth of Dubai to continue.

The article Dubai: Prospects for 2008 originally appeared on 999 Today