Will foreign off-plan buyers save the UAE's property market?
Lalaine C. Delmendo | April 29, 2020
Dubai's all-residential property price index (RPPI) fell by 6% during the year to February 2020, the 59th consecutive month of y-o-y declines, according to Reidin.com. When adjusted for inflation, Dubai house prices fell by 5.01%.
- Dubai's apartment prices fell by 5.39% (-4.39% inflation-adjusted) during the year to February 2020.
- Villa prices fell sharply by 10.04% (-9.09% inflation-adjusted) y-o-y during the same period.
Abu Dhabi's housing market is also depressed. There was a 7.62% y-o-y decline in Abu Dhabi's all-residential property price index in February 2020. When adjusted for inflation, Abu Dhabi house prices dropped 6.65%.
- Apartment sales prices in Abu Dhabi suffered a price decline of 7.65% (-6.67% inflation-adjusted).
- Villa sales prices fell 7.74% (-6.77% inflation-adjusted).
The enormous excess supply of apartments is pulling the market down. In Dubai, more than 35,000 units were completed in 2019 (the highest ever delivered in a year), bringing the total residential stock to about 555,000 units, according to JLL MENA. In Abu Dhabi, around 4,000 units were added to the market last year, bringing the total stock to 261,330 units.
Other factors that contributed to the decline of the housing market:
- the Federal Mortgage Cap, introduced in 2013, slowed residential price rises in Abu Dhabi and Dubai.
- the implementation of 5% value added tax (VAT) in January 2018, which 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 doubled property registration fees from 2% to 4% to dampen property demand.
UAE's overall economy grew by 2.9% in 2019 from a year earlier, an improvement from the prior year's 1.7% expansion, according to the Central Bank of UAE. The country's hydrocarbon sector expanded by 7.6% last year while the non-hydrocarbon sector grew by 1.1%.
However, the International Monetary Fund (IMF) projects the UAE economy will contract by 3.5% this year, mainly due to the crude oil price crash caused by the COVID-19 outbreak.
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.
UAE economy to contract by 3.5% in 2020, says IMFThe IMF has recently projected that the UAE economy will contract by 3.5% this year, mainly due to the adverse impact of the COVID-19 outbreak.
The country’s hydrocarbon sector expanded by 7.6% last year while the non-hydrocarbon sector grew by 1.1%. In 2019, the UAE pumped at a steady pace of about 3.1 million barrels per day, up from the prior year’s 3 million barrels per day.
Abu Dhabi’s dependence on oil revenues makes it one of the worst affected markets in the region while Dubai’s focus on trade, travel and tourism also makes it very vulnerable to the current situation, after many countries imposed lockdowns and travel restrictions. The postponement of Expo 2020 adds another blow to the country’s already ailing economy.
“This crisis is like no other. First, the shock is large. The output loss associated with this health emergency and related containment measures likely dwarfs the losses that triggered the global financial crisis,” said IMF Economic Counselor Gita Gopinath.
“This time, the crisis is to a large extent the consequence of needed containment measures. This makes stimulating activity more challenging and, at least for the most affected sectors, undesirable,” added Gopinath.
In April 2020, the Central Bank of UAE doubled the size of its stimulus package to AED 256 billion (US$69.7 billion), and announced new measures to guarantee liquidity in the banking sector. The central bank halved the reserve requirement for demand deposit of all banks from 14% to 7%.
Banks and finance companies are now allowed to extend deferrals of principal and interest payments to their customers until December 31, 2020. In March 2020, the central bank permitted banks to grant temporary relief on retail and business clients for loan payments of up to six months.
Separately, the Dubai government recently unveiled a three-month AED 1.5 billion (US$408.4 million) relief package to support businesses, particularly the commercial sector, retail, trade, tourism and the energy sector. Similarly, Abu Dhabi also announced last month a massive stimulus package under Ghadan 21 that includes electricity and water subsidies, support for SMEs, loans to local companies, fee exemptions for commercial and industrial activities, and exemption for all vehicles from road tolls until the end of 2020.
Inflation was -1.3% in February 2020, the same pace as the previous month, amidst a persistent decline in housing and fuel prices.