The prices of off-plan real estate properties in Dubai keep appreciating at a moderate pace, especially when compared to previous years. This phenomenon has driven many to see the off-plan market as one with great potential and rightly so. A glance through the growing figures recorded annually in the off-plan real estate market, both in pre-sales and resales show a great turnover, favoring most investors who embraced this method of milking the Dubai real estate sector as early as the 2000s.
Of course, this sector has seen its fair share of economic plummet, from the 2008-2009 financial crisis which rocked several emirates, paralyzing their various sectors, to the seasonal dip experienced in the real estate market at the start of the 20s.
Even at that, the market gained popularity in the first eight years of the 00s, as many speculative investors tapped into opportunities of turning in profit amid the financial doom. Investing in a property at its early stages with a 10% down payment and flipping it at a premium to end-users upon completion seemed like the perfect deal.
Local property analysts and real estate experts project a further increase in the off-plan real estate market. This moderated appreciation indicates growing confidence in the market and Dubai’s potential of steadily becoming the first-choice destination for real estate investors. Here is why this prediction is likely to come to fruition, plus reasons experts believe are responsible for Dubai’s real estate market’s continuous appreciation at a moderate rate.
One of the most profitable eras in Dubai’s off-plan real estate market rocked the planet in 2017. The surge in the sales of off-plan properties made the emirate’s residential real estate market take an upswing spiking over 45% quarter-on-quarter at the start of the year. This figure further increased to 86% q-o-q during the last quarter, instilling confidence in potential investors.
The exponential rise in off-plan real estate values continued for years, eventually bottoming out in November 2020. Fast-forward to about two years later, the market is in a promising recovery phase, recording steady growth in the last four quarters. A monthly Market Report prepared by Property Monitor ranks the April 2022 sales as the highest performing April on record since 2009, with 6963 transactions.
This trend is set to improve further considering the launch of several new development projects across the emirate and the scarcity of affordable properties for resale in many sectors. At this pace, the off-plan real estate market is set to achieve an all-time high of approximately 99000 sales transactions by the end of 2022.
With this increased number of transactions comes a moderated appreciation in off-plan real estate prices. The 0.76% rise in property prices recorded in April puts the price of off-plan properties at AED 1014 per square foot according to the Property Monitor Dynamic Price Index.
The economic condition of any state determines the price of real estate properties in that region and the off-plan sector in Dubai is no exception. Those with a more developed, stable and powerful economy stand better chances of attaining higher property values than the underdeveloped economies. Being one of the most stable economies in the world, it is a no brainer that the properties in Dubai would be of higher value. Hence, the wealthy would topple over to acquire as much as they could.
Meanwhile, the rest of the population hoping to invest would inadvertently settle for off-plan properties in hopes of flipping them sometime in the future for greater ROI. This cycle is continuous, leading to the skyrocketing of the prices of off-plan townhouses, villas and apartments in the emirate.
Irrespective of the sector, market headwinds remain highly dependent on inflation and monetary policy, even in the global market. Interestingly, real estate is not immune to this trend. Given the dirham-dollar peg, inflation in any economy would surely result in a fall in the price of the US dollar. This is so because a country’s central bank controls its currency’s value to rise and fall along with the dollar.
Hence, the prevailing rate of inflation in most global markets not only takes a toll on the cost of living and disposable income but also threatens to disrupt the real estate market. To check this inflationary era, major central banks impose structures to normalize their monetary policy, resulting in higher interest rates. Ultimately, the mortgage market would take a huge hit, further creating a disparity between the pace of rental rates and sales price appreciation.
In April alone, mortgage volumes fell nearly 20% owing to the increasing interest rates. This shift in the Dubai property market value due to a decrease in the U.S dollar has also been observed in previous years.
A common trend noticed is the increase in the Dubai off-plan real estate demand and invariably, a price hike within that period of inflation or weakened dollar rate. Data collated from 2014 to 2017 showed an appreciation in the value of the U.S dollar by 29%. Incidentally, during that period, the values of residential properties in Dubai experienced a massive decline, which was corrected only after the 2017 price shift.
The global real estate market is highly influenced by the demand and supply curve, much like any other sector. In recent years, the Dubai real estate market has experienced a decline in the available townhouses and villas, creating a high demand for them. The lack of these property classes became prevalent following the coronavirus pandemic which made people more inclined to guarantee their safety by residing in spacious, remote, gated properties.
Due to the growing need for these specific asset classes, more investors are looking into developing off-plan villas and townhouses to balance the demand and supply. By implication, the off-plan sector is overflowing with more projects by the day and would most likely keep up the pace for a prolonged period, especially in the popular areas.
An April 2022 report from Property Monitor showed a record 293 total transactions conducted in off-plan townhouses at DAMAC Lagoons in Dubai. This was more than thrice the number of transactions recorded in sales of completed town-houses in the same region, which saw 68 transactions.
Overall, the real estate sector recorded a 5.98% gross rental yield in April, with AED 96 million being the highest recorded sale obtained from the sale of a Villa on Dubai Hills Views, Dubai Hills Estate. Meanwhile, the lowest recorded sale came from a 1 bedroom apartment in Jumeirah Village Circle attracting AED 165k.
Several government policies have become major players in the real estate sector, determining not only prices but also allocation, procurement and availability of certain assets. The biggest player in this segment is the mortgage market which accounts for a great percentage of off-plan purchases. Notably, the rapid growth of the emirate’s real estate market is also thanks to the availability of mortgages and loan facilities. While it undoubtedly favors many, the mortgage market leaves room for speculative activities which could result in a financial crisis.
As a way around this, most UAE banks refrain from offering mortgages on off-plan properties. Those that do place sometimes crippling conditions like seeing the off-plan property to at least 50% completion before applying for mortgage. Others require buyers to make at least 50% payment on properties before the mortgage could be granted. These sometimes unrealistic practices make it near-impossible for some potential investors to purchase off-plan properties.
Hence, several developers and real estate companies have introduced more convenient payment plans for buyers. One strategy is offering a 70/30 payment plan to make it easier for investors to acquire desired assets right off the bat. Thus, more people are turning up to milk the off-plan real estate market in Dubai, with the expectation of higher ROI even with a minimal down payment.
Additionally, with the government encouraging transparency in the real estate market through various buyer protection laws, tax-free policies and economic stability, Dubai has gradually become the world capital of tourist attractions and a safe haven for speculative investment.
All of these factors translate to increased demand for affordable properties in Dubai and ultimately, moderate appreciation of the off-plan real estate market.
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Author: Nick Hyland