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UAE's property prices subdued
- Dubai's apartment sales prices fell by 3.82% (-6.37% inflation-adjusted) during the year to December 2017.
- Villa sales prices in Dubai also dropped by 3.83% (-6.39% inflation-adjusted) y-o-y during the same period.
In Abu Dhabi, the all-residential property price index has fallen even further, posting a 9.02% y-o-y decline in December 2017.
- Apartment sales prices in Abu Dhabi suffered a sharp price decline of about 10.23% (-12.61% inflation-adjusted) in 2017.
- In contrast, villa sales prices increased by 3.24% (0.5% inflation-adjusted).
Sales prices of both apartments and villas in Abu Dhabi fell slightly during the last quarter of 2017 as investor sentiment remains negative, according to JLL MENA.
But there are signs of a revival. Political tensions in the region are making Dubai and UAE more attractive to regional investors. Price declines in Dubai slowed during the latest quarter, notes JLL Mena. And property transactions in Dubai were up by 14% y-o-y in terms of number, while transaction value was up by 6% y-o-y in 2017, according to the Dubai Land Department (DLD).
What has changed in the market? Strong off-plan sales. "2017 is set to record the highest level of off-plan sales in Dubai since 2008," said JLL MENA. Cluttons attributes higher off plan sales to the "persistence of favourable payment plans, stretching well beyond handover".
Abu Dhabi has strengthened the protection of off-plan buyers. It´s recent real estate law (No. (3) of 2015) appoints Abu Dhabi’s Department of Municipal Affairs (DMA) as real estate regulator, performing the same functions as Dubai´s RERA. The reforms, as outlined by The National, include:
- A central government database/register for all property projects in Abu Dhabi, including off-plan sales;
- Developers are only allowed to charge DMA-approved administrative fees, and are barred from collecting registration fees from investors;
- Rules are laid down for the creation of owners´ associations;
- Developers are allowed to sell off-plan units as long as they own a real estate right over the project land. A "disclosure statement" is also required, providing information on the development to home buyers.
- Developers marketing off-plan units are required to open an escrow account.
- In case of "substantial prejudice", off-plan buyers can terminate their purchase.
- Developers will be fined by the DMA if their projects are delayed by more than six months. If there is a significant delay, the new law allows for cancellation of projects or the appointment of anew developer.
- A 10-year liability period for developers regarding structural building defects.
Meanwhile prices are expected to remain subdued in Dubai due to the projected amount of supply in 2018, according to Asteco. In 2018, about 43,000 units are expected to be added to Dubai's total residential stock (around 491,000 units at end of 2017), but only 8,000 new housing units will be added to the Abu Dhabi market (251,000 units at end of 2017), according to JLL MENA.
Several other factors have affected the 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.
Finally the implementation of the value added tax (VAT), which became effective in January 2018, is another factor. 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.
However Knight Frank's outlook for Dubai's real estate market remains positive, noting that the anticipated acceleration of GDP growth in 2018 would provide support to the residential market. "Overall the risks may be outweighed by the expectations of stronger global economic and trade growth in 2018 than previously forecast, which Dubai would certainly benefit from given its standing as a regional trading hub and safe haven," according to Knight Frank.
Foreign ownership rules are quite liberal:
- 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.
Most residential property buyers in Dubai are UAE nationals, followed by Indians, Saudis, British, and Pakistanis.
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 economic growth to accelerate in 2018The UAE's economy is expected to recover this year with growth of 3.9%, according to the Ministry of Economy. The IMF meanwhile forecasts 3.5% growth. "We see a gradual recovery for the UAE over the next few years on the back of firming oil prices, a pick-up in global trade, investment for Expo 2020 and easing fiscal consolidation," says IMF mission chief to the UAE Natalia Tamirisa.
Abu Dhabi's oil-rich economy is predicted to grow by 3.2% in 2018, from meagre 0.3% growth in 2017, mainly due to the expected recovery in oil exports.
Oil prices are crucial
2017 was a disappointing year. The UAE's economy grew by only 1.6% in 2017, its slowest pace of growth since 2010, according to the UAE Central Bank. This slower growth, following a 3% GDP growth in 2016, was partly due to the reduction of oil output as part of the agreement among the Organization of the Petroleum Exporting Countries (OPEC) member countries in November 2016.
Brent oil prices posted a 13.8% y-o-y increase in Q3 2017, and an 8.8% price hike from the previous quarter, after the implementation of the OPEC agreement. Oil prices are expected to continue rising during 2018, according to the central bank.
The non-oil sector is growing too
Driving the country’s economic diversification is the Abu Dhabi’s Economic Vision 2030, and Dubai’s Strategic Plan 2015, which aim 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 non-oil sector both in Dubai and Abu Dhabi is almost growing at the same speed, around 3%," according to IMF’s Middle East and Central Asia Department head Jihad Azour. Non-oil sectors account for around 83.2% of the country’s GDP in 2016.
The UAE’s annual inflation rate rose to 2.73% in December 2017, according to Federal Competitiveness and Statistics Authority.