Trends UAE Real Estate Market Report Issue 3

  • 15JAN
    Dubai or Not Dubai
Dubai or Not Dubai?
Looking back on the year, developers are strengthening their case to investors.

Zarah Evans, Managing Director, Exclusive Links

In September, we saw Dubai host the 16th Cityscape Exhibition, witnessed sales being transacted on the exhibition floor, and developer stands extending through the far reaches of Halls 6 and 7.  

The event was run in tandem with the Real Estate Conference, which attracted over 1,500 delegates this year. Bitcoin, Blockchain, impacts of VAT, and consideration of escrows for brokers all took center stage. The event supports Dubai as a long-term investment opportunity and builds confidence in those that are still cautious when looking at the market. I don't see Cityscape as a market-changer, but certainly, a successful Cityscape can have a positive impact on the industry. Looking back on this year's event, developers are making an exciting case for Dubai. 

Typically, I see the Dubai property market move in five-year cycles. With the last peak over 2013 and '14, we should be nearing an upturn in the market. In 2017, there was some stabilization in the market with sales prices reflecting only a 1% decrease and up to 4% decrease in rental prices, according to the third quarter 2017 report from Cavendish Maxwell. These decreases are strongly influenced by the number of units we see entering the market. 

The business coming through our doors is tracking alongside the records held by the Dubai Land Department: 75% of transactions are currently off-plan purchases. Developers are launching off-plan projects with more choice, and more competitive pricing and financing conditions. They are chasing a point of difference, and it is becoming more the norm for developers offer post-handover payment plans, and covering the costs of the buyers 4% registration fees.  Developers are also scaling down the size of the units they are releasing into the market and handing over, enticing a different segment.      

In my 17 years in the Dubai real estate market, I have witnessed many changes in all aspects of this business and I do believe that 2018 will follow 2017 as another challenging year. Controls in the market are continuing to be introduced and developed as the industry is still learning and growing. Further legislation and tightening of real estate practices is creating a platform for a healthy and respected future for all stakeholders. This drive towards long-term sustainability are all positive moves to further support investment into Dubai.  
As we head towards Expo 2020 (the world's first carbon neutral 'mega event'), I anticipate seeing more developers using the words 'green' and 'smart', and for Dubai's Smart City initiative to play a role in their plans. If anyone can build a smart city for its residents to work, live and play it's Dubai.  

An example: The Jumeirah Central mega district by Dubai Holdings on Sheikh Zayed Road, opposite the Mall of the Emirates, will be a futuristic city within a city. Schools, offices, parks, malls, housing will be connected by a smart transport system and protected by smart police services. 

There is a property being developed for every conceivable requirement, but with the white-collar workforce driving the residential market, the question is not the supply and demand, but what we are delivering and to whom. 
The question over the lack of affordable housing across all areas of Dubai is causing some concern. The growth of the population and Dubai's young age profile means there must be more lower-priced housing. Even with the decline in rental prices over the last few years, we are still seeing some emerging areas, such as Dubai Sports City, Jumeirah Village, IMPZ, and Silicon Oasis becoming unaffordable for the budget-conscious resident. 

Affordability must remain the major driver for developers as access to affordable housing is a basic human right and need. Cheaper housing options provide developers with lower returns, so they continue to compete and deliver in the high-end segment, but a large segment of the workforce is being overlooked. 

When I refer to affordable housing I am not necessarily referring to the provision of housing to a low-income bracket, but affordable housing costs in relation to a person's income. The average income for 50% of Dubai households is around AED15,000 and generally, 30% of income is spent on rent making the majority's affordability AED54,000 per year. 

Despite this, developers are typically continuing to concentrate on the higher end of the market.  Dubai is a positive real estate market leader in the region, but we need to close this gap before the residents of Dubai lose sight of what the definition of 'affordable' actually is. 

It is not only property prices but also mortgage products that are at their most competitive, which is having a positive impact on residential activity.  The DLD has recorded and reported that the value of mortgage transactions has increased to AED 60 million in the first six months of this year from AED 48 million over the same period last year.  With the dirham pegged to the US dollar, mortgage interest rates offered in Dubai follow the US market.  This offers investors a stable, well used and recognized currency that is highly traded at an international level.  

A few years back restrictions were put on the mortgage LTV and debt-service ratio which had some initial impact on the market. Since that time though, expats looking to buy and watching the market have now saved their 25% down payment and are now ready to invest.  Banks have also reduced their early settlement fees, which not only supports investor expats buying in this transient city, but also encourages refinancing and further purchasing. 

Employment packages in Dubai typically include a housing allowance which can be used towards a mortgage.  A typical case study I use when explaining the advantages of buying over renting is with an AED 1,000,000 property in Dubai, your borrowed amount will be AED 750,000 at a 2.99 interest rate over a 25-year term. The mortgage repayments would be AED 3553 per month.  If this was a one bedroom apartment and we take a conservative rental rate of AED 70,000 per year, the rent per month is AED 5833.  You lower mortgage repayment is also a more manageable monthly cost rather than paying rents over 1-4 payments through the year.  What these figures also indicate is that if you buy a property today and sell at the same price in 3 years, the money you saved in rent affords your 25% down payment required for borrowing.  

Dubai is now supporting more mid- to long-term investors who are certainly looking well beyond Expo 2020.  With a current population of approximately 2.8 million, 85% of which are expats, property investment portfolios are being built right on our own doorstep.   

Compared to 2016, the number of GCC investors increased by 16%, and overall foreign investors increased by 35% over last year. 

Dubai offers strong capital value gains, attractive yields, and is perceived as the safe haven of this region. The city is certainly a leading destination and as a major city compared to the likes of Hong Kong, New York, London, buyers get much more in Dubai per square foot and per ticket price. Dubai is also a blue chip community packed with a good caliber of potential tenants supporting the investors market. 

Dubai is one of the most dynamic and rapidly growing cities of the world.  The growth and development of this city seem to feel more and more ambitious projects unimaginable in other parts of the world. So when thinking about whether to buy or not to buy, remember this: Dubai is a market that other cities can only dream about.  

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15th January 2018