UAE's property prices continue to plummet
Lalaine C. Delmendo | April 17, 2019
There was a 9.5% fall in Dubai's all-residential property price index (RPPI) during the year to February 2019, the biggest y-o-y decline since February 2016, according to Reidin.com. When adjusted for inflation, Dubai house prices fell by 8%.
- Dubai's apartment prices fell by 9.65% (-8.1% inflation-adjusted) during the year to February 2019.
- Villa prices fell 8.97% (-7.5% inflation-adjusted) y-o-y during the same period.
Abu Dhabi's housing market is also depressed. There was a 7.12% y-o-y decline in Abu Dhabi's all-residential property price index in February 2019.
- Apartment sales prices in Abu Dhabi suffered a price decline of 7.42% (-5.9% inflation-adjusted).
- Villa sales prices fell 6.16% (-4.6% inflation-adjusted).
In the first three quarters of 2018, the total value of property transactions in Dubai plunged more than 20% y-o-y to AED 162 billion (US$44.1 billion), according to Dubai Land Department (DLD). The number of transactions also fell by 23.7%.
The supply glut is considerable. In 2018, about 43,000 units were added to Dubai's total residential stock (which stood at around 491,000 units at end of 2017), and about 8,000 to the Abu Dhabi market (251,000 units at end of 2017), according to JLL MENA.
- the Federal Mortgage Cap, introduced in 2013, slowed residential price rises in Abu Dhabi and Dubai.
- the market was hit also by the implementation of the value added tax (VAT) in January 2018. The 5% VAT only applies to home sales after three years of the project's completion. Sales within three years of completion have 0% VAT rate.
- the Dubai Land Department recently doubled property registration fees from 2% to 4% to dampen property demand.
The UAE's economy grew by 1.7% in 2018, after the prior year's meagre growth of 0.8% - sharply down from an average annual growth rate of 4.8% from 2011 to 2016. Economic growth is expected to accelerate to 3.5% this year, buoyed by strong non-oil sector activity.
Gross rental yields in Dubai are now moderate.
Apartments in Dubai now sell for around USD 4,400 to USD 6,000 per square metre (sq m):
- 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.
Tax on rental income is low in Dubai
Rental Income: There is no income tax, but that is slightly misleading, as there is a 5% tax on residential leases, assessed on the rental income.
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.
Total transaction costs are very low in Dubai
Total round-trip costs are around 5% to 9%. There are no property-related taxes in Dubai, which accounts for the low transaction costs. The buyer and the seller each pay registration fee at 2% of the property value. Real estate agent’s fee ranges from 1% to 5% of the property value.
UAE’s rental law is pro-tenant
The government introduced a rent cap of 15% in 2006, which was slashed to 7% in 2007. The rent cap was further reduced to 5% in 2008, in an effort to curb inflationary pressures.
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.
Economic growth improvingThe UAE’s economy grew by 1.7% in 2018, up from the prior year’s meagre growth of 0.8%, but still sharply down from an average annual growth rate of 4.8% from 2011 to 2016.
Higher oil and gas income was one of the main drivers of overall growth, contributing about 25.9% of the country’s GDP last year, according to Minister of Economy Sultan bin Saeed Al Mansouri.
Brent oil prices surged by more than 30% to an average of US$71.34 per barrel in 2018 from US$54.71 per barrel a year earlier, after OPEC members and other oil producers cut production to address a supply glut.
Dubai’s economy expanded by 1.94% in 2018, down from the prior year’s 3.1% growth and its slowest pace in eight years, according to Dubai Statistics Center. Abu Dhabi’s oil-rich economy was estimated to have grown by about 1.5% last year.
To offset the slowdown in economic growth, the Dubai government introduced new measures to cut costs for key industries including real estate, aviation, and education.
In addition, the Abu Dhabi government has recently unveiled a US$13.6 billion economic stimulus package, as well as several initiatives to attract investment.
The UAE’s economy is expected to grow by 3.5% this year, buoyed by strong non-oil sector activity.
“We expect the UAE economy to gradually pick up in 2019,” said Parth Kikani of Emirates NBD Asset Management. “We also expect Expo 2020 Dubai to be a catalyst for growth as corporate sector set up a presence in the Emirates.”
Inflation was -2.39% in January 2019, sharply down from inflation of 4.76% a year earlier, amidst a persistent decline in housing and fuel prices and an oversupply in the retail and hospitality sectors, according to the Federal Competitiveness and Statistics Authority (FCSA). Abu Dhabi and Dubai registered deflation of 0.9% and 3.6%, respectively.
The non-oil sector is strong and growing rapidly
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.
Non-oil sectors already account for around three-fourths of the country’s GDP. More specifically, the retail and whole trade sector contributed about 11.2% of GDP in 2018; the financial sector, 9.2%; manufacturing, 8.9%; and building and construction sectors, 8.3%, among others.
Recently, Minister of Economy Sultan bin Saeed Al Mansouri assured that UAE is on track to deliver the UAE Vision 2021, which will develop the country’s non-oil sector and reduce its dependency on oil revenues.
The non-oil sector grew by 2.9% y-o-y in 2018 to US$1.13 billion, according to the FCSA, and is projected to grow by 3.4% in 2019 while the oil sector will expand by 3.7%.
“The UAE economy has been adapting well to a prolonged decline in oil prices since 2014,” said Michael Armstrong, FCA and ICAEW regional director for the Middle East, Africa and South Asia. “For instance, the introduction of VAT in 2018 has been a historic milestone and is expected to substantially strengthen and diversify government revenues in the coming years.”