Dubai Real Estate Market: Risks and rewards

PWMartin Cooper

Dubai’s residential real estate market continues to face a number of headwinds. These headwinds include oil prices well below recent trend levels and a resultant squeeze on domestic liquidity. A strong US dollar, and by default a strong dirham, is making residential property in Dubai relatively more expensive for international investors and ongoing regional instability is creating risk and uncertainty. Recent declines in residential sales prices are, in some instances, leading to deferred investment activity as investors hold out for anticipated lower prices.

Despite these headwinds, the fundamental drivers of Dubai’s residential market remain strong and opportunities exist for medium and long-term investors.

The Economist Intelligence Unit (EIU) forecasts that global oil prices will average $41 (Dh150.59) per barrel this year and $50 per barrel next year. Given the important role that hydrocarbons play in the UAE economy, real Gross Domestic Product (GDP) growth is forecast to be subdued over the same period, at 1.1 per cent in 2016 and 1.7 per cent in 2017. It is important to note that Dubai is relatively well insulated from this challenging UAE macroeconomic environment. This is because Dubai has made strong progress diversifying its economy away from an over-reliance on hydrocarbons, with the development of sectors as diverse as construction, financial and business services, logistics, manufacturing, real estate, retail and tourism.

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Dubai has also consolidated its position as a regional hub in the Middle East North Africa (Mena) region through investments in transport infrastructure, such as airports, ports, the Dubai Metro and the Dubai Tram, as well as in soft infrastructure, such as education, healthcare, entertainment and leisure.

Economic diversification, and subsequent job creation, has stimulated strong levels of in-migration to Dubai, helping to drive the emirate’s population from 1.9 million in 2011 to 2.5 million in 2016, an increase of 32 per cent. Ongoing investment in infrastructure, both hard and soft, should enable Dubai’s growing population and labour force to work more productively than regional peers, further consolidating its position as a regional hub.

Dubai’s residential sales market peaked in October 2014 at city-wide average sales prices of Dh1,455 per sq ft for villas and Dh1,495 for apartments. As of last month, residential sales prices in Dubai were Dh1,288 per sq ft for villas and Dh1,297 for apartments, representing a decline of 12 per cent and 13 per cent respectively compared with October 2014.

It is important to note that residential sales prices in Dubai experienced exceptional year-on-year growth of 24 per cent in 2013 and 14 per cent in 2014 and that the current decline in residential sales prices in Dubai represents a rebalancing of the market towards a more sustainable medium to long-term growth trajectory. A medium to long-term view shows that since the bottom of the last cycle in January 2011, residential sales prices in Dubai have grown by over 55 per cent, a rate that has outperformed a number of other global cities.

A key driver of Dubai’s residential sales market is an ongoing “flight to affordability” where end users are demanding product in more affordable price ranges. Developers are meeting this demand with a range of developments, such as Emaar’s Reem and Nshama’s Town Square projects. The flight to affordability is reflected in average transaction prices in Dubai, which declined from Dh2 million in 2014 to Dh1.7 million last year.

International demand for residential real estate in Dubai (in developments open to foreign buyers) is estimated to represent approximately 80 per cent of the market, with the vast majority of these transactions funded through cash payments as opposed to mortgage/debt financing. The leading external investors in Dubai’s real estate market, by value, include India, the UK, Pakistan, the Kingdom of Saudi Arabia, Jordan and Lebanon.

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Despite headwinds that include a squeeze on domestic liquidity, a relatively expensive AED and ongoing regional instability, the fundamental drivers of Dubai’s residential real estate market remain strong. Investment appetite remains in Dubai, as the emirate represents a “safe haven” investment opportunity for regional investors. Furthermore, investment yields in Dubai’s residential market have increased, as residential rental rates have not declined at the same rate as residential capital values in the past 18 months.

A medium to long-term investment view demonstrates that since the bottom of the last cycle in January 2011, residential sales prices in Dubai have grown by over 55 per cent. As such, opportunities exist for medium and long-term investors in Dubai’s residential real estate market. The challenge is to identify these opportunities which vary by location, proximity to demand generators, market segment and investor preference.

Source: Martin Cooper, Special to Property WeeklyPW
Director and leads the real estate consulting for Deloitte’s Financial Advisory Services team across the Mena region.

Al Nisr Publishing accepts no liability for the views or opinions expressed in this column, or for the consequences of any actions taken on the basis of the information provided.



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