Dubai: 'Nothing is standing still here'

If you are looking for the Dubai version of the Nationwide house price index, think again - this is one of the world's most active but youngest property markets, and conventional measurements of capital appreciation are difficult to apply.

Dubai's property market is supply-led; literally tens of thousands of apartments and villas are being constructed in the expectation that general economic growth in Dubai will encourage inward migration, generate demand and take up the stock.

With only 8.5 per cent of its income from oil revenues, Dubai has used property and tourism to generate its wealth. But with international sales starting only in 2002 there have as yet been no year-on-year property inflation figures. Even so, several major British estate agents have set up office in Dubai and reported high levels of appreciation on certain developments.

Ironically the supply-led strategy has encouraged so many to Dubai that, for the moment at least, there is a temporary shortage of completed properties.

For example Colliers CRE - which has been involved in commercial property in Dubai for some years - has reported 10 per cent to 20 per cent appreciation within a year on homes at Emirate Hills, one of the earliest developments marketed to British buyers.

It has also reported 20 per cent increases within the first year on sales of properties at Dubai Marina, while at The Palm - the most high-profile building project in the area - "premiums of 20 per cent to 100 per cent have been achieved on resales," says the firm.

Dubai at last seems to be moving away from its reputation as a home to speculators, many of whom sold and re-sold apartments several times during their construction, leading to concerns of a price bubble.

"We were a little worried because of the speculative buying. But now the market is maturing, end users are here," says Jeremy Rollason of Savills, another major British estate agent active in Dubai.

He says more owner-occupiers are moving in, as are genuine investment buyers who keep the properties in order to let them out. They have been profiting handsomely from the long periods of construction.

"There have been many people who live and work in Dubai who've bought new properties that are still being built - as a result they have had to rent and the lettings market has boomed in the past 18 months. Some yields have risen by 300 per cent," explains Rollason.

"In any new development the first properties to sell out are the studios and one-bedrooms; they go to investors who make sure they are the first to be rented out and produce the best yields. Britons who live and work out there tend to buy three-bedroom larger properties for themselves. The seriously wealthy, with homes around the world, now include Dubai in their portfolio and they buy the big penthouses."

Cluttons, another major British estate agent in Dubai, says the real test of the region's property market is still to come.

"A lot of people have made a lot of money and the rentals market is particularly strong. But there is a lot of construction underway and it will take some years for it to be clear whether supply and demand are roughly in line," says Alex Upson of Cluttons.

"A major factor to remember is the demographics. Roughly 140,000 homes a year are required if Dubai is to meet its population growth targets," says Upson. The ruling Royal family says it wants Dubai's population to rise from its current 1.4 million residents to 2.2 million by 2010.

Upson says: "But we have to remember that a lot of that population growth will be demanding affordable housing, not the luxury units bought by Britons. The long-term future of the luxury market is still evolving."

Observers say that in the absence of a housing market history, the broader Dubai economic statistics offer the only indicators to how prices will move.

Economic growth has been startling to date mainly because Dubai has two economic advantages over its rivals. Firstly its location between Europe, Asia and Africa gives it a catchment area of 1.5 billion people within 120 minutes by air; secondly it levies no major VAT, property tax, wealth tax, inheritance tax, corporation tax or income tax. As a result of both advantages, business has prospered.

The national income of Dubai is 26 per cent of the gross domestic product of the UAE and grew by 16.7 per cent last year; in 2004, 372 hotels in Dubai generated over $1.5bn (£849m) - up 49.4 per cent on 2003; over €230bn (£165bn) are scheduled to be invested in Dubai between now and 2010, mainly from Iran, Saudi Arabia, Russia, the United Kingdom and elsewhere in the UAE. Dubai is one of the world's biggest container ports and 96 airlines fly from Dubai to more than 135 destinations.

This all points to likely growth in the long term, but Dubai's market has not been without some hiccups.

In addition to concern over high levels of speculation in off-plan properties, there have been worries over the late delivery of some units, exacerbating the shortage of rental properties for buyers. In September the business press reported that while villas and homes in many developments had risen in price by up to 20 per cent in the preceding four months, the off-plan prices of some apartments had fallen because of an apparent over-supply.

There have also been rumbles of bureaucratic paperwork putting off some buyers - although thousands of Britons have clearly not been deterred, and as most are landlords they are now getting high returns.

For the future, Dubai is anticipating the growth of a holiday lettings market.

"We're marketing properties there more as winter sun and lifestyle purchases than as strong investments. Dubai is easy to get to, has excellent links and is a perfect place for holidays. If the corporate rental market declines, so landlords should switch their properties to holiday lets," advises Cluttons' Alex Upson.

There are signs that British buyers are already thinking ahead. "They're wanting prime locations, with sea or water views and most likely to get tenants. These are corporate tenants now but will increasingly be holidaymakers over the next few years," Upson says.

"And of course there's that population growth to house - nothing is standing still in Dubai".