Where investors see challenges and opportunities amid Dubai’s falling real estate prices

Real estate prices in Dubai have continued to fall on the back of oversupply and ongoing development, with the trends posing both challenges and opportunities to the emirate’s economy moving forward.

Residential property prices decreased by 7.4% year-on-year (y-o-y) in the third quarter of last year, according to data released by the Central Bank of the UAE, the eighth consecutive quarter to record a contraction.

It was a similar picture in the residential segment, where rental rates dropped by 9.6% y-o-y in the quarter, with the quarterly figure falling consecutively since the third quarter of 2015. Rental yields, which measure the profit from an investment property, have also consistently eased over the past three years, dropping from 7.5% in the third quarter of 2015 to 6.8% at the same period in 2018. The central bank cited oversupply in the market as a main contributor to this trend.

Figures from property services firm Chestertons are more stark, showing that apartment and villa prices dropped by 16% and 13% y-o-y, respectively, in the fourth quarter of 2018.

On the rental front, the report, released in early January, found that apartment prices had fallen by 12% and villas by 8%.

While one bright spot was the value of transactions for completed units, which rose 9% y-o-y, this was largely offset by a 14% contraction in off-plan unit transactions.

See also: The Report – Dubai 2018

Oversupply driving down real estate prices

The fall in prices has been primarily caused by a continued strong flow of new housing.

Last year some 22,000 new units were completed in the emirate, according to a report from property consultancy JLL. This was the highest number of new properties to enter the market in the past five years, taking Dubai’s housing stock to 520,000 units as of end-2018.

These figures, and indeed the excess in supply, are set to accelerate in the next couple of years. JLL forecasts that up to 117,000 units could be added to Dubai’s housing pool by 2020, representing a compound annual growth rate of nearly 11%.

While not all of these units will be fully completed and ready for occupancy, JLL has warned oversupply in the market will result in further downward pressure on sales prices and rental returns. This should see the rental market trend in the advantage of tenants, while the sales segment would favour buyers.

Market correction to see silver linings for buyers and expats

However, this correction in prices could also lead to a series of benefits for buyers and the economy more broadly, especially given that construct costs are increasing.

The Construction Cost Index rose 5.9% year-on-year (y-o-y) in the third quarter of 2018, according to data issued by the Dubai Statistics Centre (DSC) in January, driven by a strong demand for materials amid ongoing infrastructure development in the lead up to Expo 2020.

Should costing pressure continue this year and next, it could further erode developers’ profit margins in an already tight market, potentially prompting companies to offer incentives to buyers in order to generate liquidity and move property off their books.

Among the incentives that some developers are already offering are direct finance to clients, meaning they do not have to seek bank loans to fund purchases; developers covering the cost of state registration and transfer fees; and extended repayment terms.

Any such development would offer a reprieve to homebuyers and renters in Dubai, and could offer an opportunity for investors to enter high-end segments previously out of reach.

This dynamic could also help support Dubai’s attractiveness as a business and living destination for expats in an increasingly competitive regional market.

Following the 2014 fall in oil prices, a number of regional governments have doubled down on efforts to develop their respective non-oil economies as part of diversification processes.

The increased regional competition may put greater pressure on Dubai’s expatriate workforce, particularly given that Dubai was ranked the 26th most expensive place in the world for expats to live, according to the “2018 Annual Cost of Living Survey” from US consultancy Mercer, second behind only Tel Aviv in the Middle East. In 2013 Dubai ranked 90th on that same survey.

The higher cost of living has led to some people who work in Dubai moving to neighbouring Sharjah in recent years, despite the long commute. However, as rent and property prices fall in Dubai, this trend may begin to shift, according to Zuhour Majeed, content executive of PropertyFinder, a Dubai-based digital real estate platform.

With non-Emiratis accounting for 81.2% of real estate investment in the first three quarters of 2018, incentivising activity from foreigners is key to sustaining the real estate market, along with driving broader economic growth.

In 2017 real estate accounted for 7.1% of GDP while the closely related construction sector accounted for 6.3%, according to data from the DSC, highlighting the importance of the sector and related industries to the overall economy.

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