In May 2016, Dubai's all-residential property price index (RPPI) fell by 5.35% y-o-y, according to Reidin.com. When adjusted for inflation, house prices in Dubai fell by 6.86%.
- Apartment sales prices in Dubai fell by 5.15% (-6.67% in real terms) during the year to May 2016.
- Villa sales prices fell by 6.05% (-7.55% in real terms) over the same period.
Dubai’s RPPI is calculated monthly and covers 7 cities, 8 main districts and 4 major projects.
The continued sales price decline, according to JLL MENA, is due to:
- the stronger US dollar, which hit the purchasing power of overseas investors from non-US denominated countries;
- lower oil prices similarly cut the purchasing power of investors from nearby oil-producing nations.
Dubai's property transactions dropped by 25% y-o-y in terms of value in the first quarter of 2016, while transaction numbers were down by 17% y-o-y. The total value of transactions was AED 267 billion (US$ 72.7 billion), 49% of which were sales, while 44% were mortgages. Dubai's residential price declines were slower than in the previous months, suggesting that the market may be close to bottoming out.
Most residential housing demand in Dubai has recently come from Indian, British, and Pakistani buyers.
In contrast, Abu Dhabi's all-residential property price index rose by 1.34% during the year to May 2016. However, when adjusted for inflation, Abu Dhabi's residential property prices were down by 0.27%.
- Abu Dhabi apartment sales prices fell by 0.61% (-2.2% in real terms) y-o-y in May 2016.
- Abu Dhabi villa sales prices rose by 3.15% (1.5% in real terms).
Abu Dhabi’s RPPI is also calculated monthly, and covers 7 cities and 4 main districts.
Abu Dhabi sales prices have been stable during the first quarter of 2016 due to a decline in completions, according to JLL MENA. Demand for high quality residential units remains strong, according to Asteco. The Saadiyat Island development project is still the most popular location, followed by Reem Island and Al Raha Beach.
The softening of property values in Dubai is expected to continue this year, according to Cluttons. Due to factors such as global economic conditions and higher costs of buying properties (partly due to the Federal Mortgage Caps), a recovery in the housing market seems unlikely at this point in time.
Deloitte also predicts further declines in the average sales prices in 2016, stating that this reflects " a transition to a more mature market as well as an increase in more affordable stock and discounting in emerging locations".
“The prospects for 2016 suggest a further soft landing in the real estate sector. Although demand continues to grow, the rate of growth is slowing as the overall economy adjusts to a sustained period of lower oil prices.
"While there are significant levels of new development in the pipeline, most of this supply is being phased over many years and the supply pipeline for 2016 does not look to be excessive. The prospects for 2016 will therefore be determined more by changes on the demand side rather than any great threat of oversupply. With the economy continuing to grow (latest IMF forecast is for a 3.1 per cent growth in real GDP in 2016) most sectors of the real estate market are likely to see a soft landing, with either stable or relatively minor falls in prices and rentals,” says JLL MENA's Head of Research Craig Plumb.
In the first quarter of 2016, Dubai's total residential stock was about 458,500, while the total residential stock in Abu Dhabi was about 246,000, according to JLL MENA. In September 2016 around 27,000 new housing units were expected to have entered the Dubai market, and around 4,000 new housing units in the Abu Dhabi market.
The Federal Mortgage Cap, introduced in 2013, has slowed the pace of residential value appreciation in Abu Dhabi and Dubai. In addition, the Dubai Land Department recently doubled property registration fees from 2% to 4% to dampen property demand.
Foreign ownership has been significantly liberalized:
- Foreign nationals are now allowed to buy freehold properties in designated areas in Dubai.
- Gulf Cooperation Council (GCC) nationals are allowed freehold ownership anywhere in the Emirates.
- Abu Dhabi's government introduced new regulations in 2014 allowing foreigners to own property in designated investment zones on a freehold basis. Previously, foreign investors were generally limited to leasehold arrangements with 99-year leases. This followed Abu Dhabi´s previous market-boosting measures. In 2012, the government compelled public sector employees living outside Abu Dhabi to relocate within the emirate’s borders. Then in November 2013, the government cancelled a 5% cap on annual rent increases.
Analysis of United Arab Emirates Residential Property Market »
- Medium-sized apartments (120 sq. m.) sell for an average of USD 5,900 per square metre (sq. m.)
- Smaller apartments (90 sq. m.) are cheaper, selling for around USD 4,400 per sq. m..
- Based on previous years' research, we imagine that significantly smaller apartments of, say 70 sq. m. and under, could earn rental yields of up to 7%. That is where the real profits lie.
Gross rental yields, i.e., the gross returns on investment if the apartment is fully rented out, are moderate to good, range from 5.2% on medium sized apartments, to 5.9% on somewhat smaller apartments, the difference stemming from the lower cost of the smaller apartments in per sq. n. terms. This is an unusual pattern - smaller apartments usually are more expensive than larger apartments (per sq. m.) in the other major world cities.
How much will you earn? Rents from medium-sized apartments average USD 25.6 per sq. m. per month, while smaller apartments rent for a little less, at USD 22 per sq. m. per month. From the landlord´s point of view, these rental levels mean that a 90 sq. m. apartment can earn rental income of around USD 2,000 per month, while 120 sq. m. apartment can earn a rental income of around USD 3,100 per month.
Conclusion: yields in Dubai are OK-ish, but the days when Dubai generated stratospheric yields are gone. Also this is a volatile market. Home prices swing up and down.
Round trip transaction costs are reasonable in Dubai. See our Dubai transaction costs analysis and our UAE transaction costs compared with other Middle Eastern countries.
Capital Gains: There is no capital gains taxation in Dubai.
Inheritance: The thorny issue of inheritance has caused a lot of debate. It is hoped that the position will be clearer once the new Land Law is enacted.
Residents: The Residents' visa renewal fee is AED1,360 (US$370) every three years per person.
In January 2009, Dubai’s Real Estate Regulating Agency (RERA) unveiled a new rental index to replace rent caps. Following this a new rental law was released, establishing the rental index as a benchmark for rent increases.
NEW RENTAL LAW
|CURRENT RENTAL RATES|| |
|Equal to or 25% below the rental index|
|26% to 35% below the rental index|
|36% to 45% below the rental index|
|46% to 55% below the rental index|
|More than 55% below the rental index|
However, RERA has come under criticism because the new rent figures were much higher than current rental rates in the market. The rental index, compiled during mid-2008 (at the height of the property boom and before the fallout from the global financial crisis), gives an inflated view of rents in Dubai. The discrepancy caused uproar and confusion among tenants who were left watching their landlords hike their rents to unwarranted levels.
This prompted RERA to update the new rental index earlier than planned. The revised index is due to be released in April 2009. Those tenants who have not yet renewed their contracts are likely to hold on to their old contracts until the new index is released.
The UAE's economy grew by 4.6% in 2014 and 4.3% in 2013, despite the collapse of oil prices during these years.
According to the central bank, Brent oil prices were down by 36% during the year to Q1 2016, and down by 21% from the previous quarter. Continued oil price falls pose a challenge to the UAE's target of more than 3% growth in 2016.
“It’s a challenge, not only for us but for everyone around the world, so it will all depend on the prices of oil as we move on,” said Al Mansouri. However with oil-related businesses currently accounting for only 30% of UAE's economy, the UAE is "much more prepared to handle these kinds of challenges".
In response the UAE's Cabinet approved a slightly tighter federal budget, with cuts to subsidies of AED 3.5 billion (US$ 953 million).
The IMF revised down UAE's 2016 growth forecast to 2.4% in April 2016. Dubai's GDP is expected to expand by 3.7%, while Abu Dhabi's will expand by 1.7%. “While there are clear divergence in growth trends in Abu Dhabi and Dubai, we expect to see higher growth in Dubai because of the diversified nature of the Emirates economy," said Masood Ahmed, IMF’s Middle East and Central Asia Department director.
Non-oil sectors account for around 69% of the country’s GDP, while the remaining share is oil. Driving the country’s economic diversification is the Abu Dhabi’s Economic Vision 2030, and Dubai’s Strategic Plan 2015, which aims to increase investment in industrial and export-oriented sectors. At the federal level, the UAE's "2021 Vision" positions science and technology, research, and innovation at the centre of a knowledge-based and highly competitive economy by 2021.
The government expects to cut oil's contribution to GDP from 30% to 20% by 2021, according to Al Mansoori. “Our strategy at present is focused on building a knowledge based economy."
The UAE’s inflation rate rose to 3.2% in May 2016, according to National Bureau of Statistics. The substantial price hikes observed in May was in transportation, while significant price drops were seen in food and soft drinks.
The UAE government will implement a 5% value added tax (VAT) on January 1, 2018, says Minister of State for Financial Affairs Obaid Humaid Al Tayer, as part of efforts to diversify revenues. The move is expected to bring higher inflation, at least temporarily.
"The short-term impact will be offset by the long-term benefit VAT will bring to the regional economies. There is an urgent requirement to diversify government revenues...VAT is a measure that will allow more stability, given that the outlook for crude prices remains volatile," said Amer Khansaheb, President of the Emirates CFA Society.