Last week, news emerged that the Dubai Land Department (DLD) was doubling transfer fees to 4%. However, the rise didn’t come as much of a surprise.
After all, there has been increasing concern recently that the emirate’s residential market is overheating. Our Global House Price Index shows that Dubai prices rose by nearly 22% year-on-year in the second quarter of 2013.
Such “cooling” measures have also been introduced in other markets in recent years. Indeed, both Singapore and Hong Kong have implemented a number of policies since 2009, albeit with varying degrees of success. This is reflected in the fact that, in annual terms, in Q2 2013, prices continued to see double-digit rises in Hong Kong, while Singapore saw a relatively modest increase of 4.5% – a sharp slowdown compared to mid-2010 levels.
In context, however, we are unconvinced that the rise in the transfer fee will act as a significant brake on residential property demand, and price growth. First, Dubai’s new (and market-wide) transfer fee is still much lower than the 15% property tax being imposed on foreigners in the two Asian-Pacific markets, for example. That is important given that about 90% of residential transactions in the emirate are accounted for by foreign buyers.
Second, despite the doubling in the transfer fee, the total costs associated with buying residential property – especially in the prime bracket – remain much lower in Dubai than some other popular locations around the globe.
Third, with prices currently rising at an annual rate of more than 20% in the emirate, the 2% rise in the transfer fee – while a bitter pill to swallow – is unlikely to be much of a deterrent for property investors with a positive outlook on Dubai’s residential market.
That said, in the short-term, we wouldn’t rule out a slowdown in the residential price growth rate. However, we anticipate that once the market adjusts to the new development, it will likely be business as usual.
All in all then, we think that some other “cooling” measures could also have been implemented to achieve the desired effect. For example, any seller transferring a property a short while after the initial purchase could have incurred higher costs. Moreover, the hike in the transfer fee perhaps should’ve excluded end-users. And finally the DLD would have done well to provide the market with a grace period of 2-3 months on agreed sales to prevent potential disarray among those involved in a transaction process.
Further information on Dubai’s prime residential market is here.