UAE’s housing market on the cusp of recovery?

Lalaine C. Delmendo | July 17, 2021

The UAE’s property market seems poised to recover.  At least, that’s the message of a very strong rebound in demand, driven by rising oil prices, improving economic conditions, and strong foreign interest.

Dubai’s all-residential property price index (RPPI) fell by 2.1% (2% inflation-adjusted) during the year to May 2021, up on the previous year’s 6.1% y-o-y fall and the lowest decline since September 2017, according to Reidin.com.

UAE house prices
  • Dubai’s apartment prices fell by 3.8% (-3.7% inflation-adjusted) during the year to May 2021.
  • Villa prices rose strongly by 10.3% (10.5% inflation-adjusted) y-o-y during the same period.

Abu Dhabi’s housing market seems to have finally recovered, with the all-residential property price index rising by 1.5% (1.6% inflation-adjusted) in May 2021.

  • Apartment sales prices in Abu Dhabi increased slightly by 0.6% (0.7% inflation-adjusted).
  • Villa sales prices rose by 5.5% (5.6% inflation-adjusted).

Demand is now rising strongly. In June 2021, Dubai’s property sales transactions surged a whopping 173.5% y-o-y to 6,388 units – the highest monthly volume in eight years, according to Property Finder. Likewise, the total value of transactions more than tripled to AED 14.79 billion (US$4 billion) over the same period.

“The dynamics in the residential real estate market in 2021 have been interesting thus far,” said Lynnette Abad Sacchetto, director of research and data at Property Finder. “Developers are attracting foreign investors with attractive pricing schemes and capitalising on the new visa regulations to attract foreign direct investment.”

The UAE economy contracted by 5.9% during 2020, in contrast to a 1.7% growth in 2019 and the biggest fall in 34 years amidst the COVID-19 pandemic, according to the International Monetary Fund (IMF). The country’s hydrocarbon sector plunged by 8% last year while the non-hydrocarbon sector contracted by 5.7%.

As things get back to normal, the UAE economy is expected to grow by 3.1% this year and by another 2.6% in 2022. The country’s non-oil GDP is projected to expand by 3.6% this year while oil GDP will likely remain flat because of production cuts agreed by OPEC and its allies, according to the Central Bank of the UAE.

Dubai’s property prices have been falling since 2014

From 2002 to 2008, Dubai’s property prices almost quadrupled, as Dubai became one of the world’s fastest growing cities. After March 2006, a deluge of foreign money boosted Dubai’s ambitions following the passage of the long-awaited foreign property ownership law.

Billions of dollars were spent on mega-projects including Jumeirah Garden City (estimated cost: US$95 billion), Dubailand (US$64 billion), The Lagoons (US$25 billion), Palm Jumeirah (US$14 billion), and The World (US$14 billion).

Europeans, including Russians, accounted for 20% of the buyers of all property categories. GCC, Arab nationals and UAE nationals made up 28%, Asians 40%, and Iranians 12%, according to figures from Global Realty Partners.

Then the global credit crunch hit at the end of 2008.

Transaction volumes plummeted. Almost half construction projects in the UAE, worth around AED1.1 trillion (US$582 billion), were either put on hold or cancelled.

As the economy returned to growth, halted construction projects were resumed. From January 2012 to end-2014 Dubai experienced skyrocketing house prices, averaging 21.5% annually. However, house price growth in Dubai slowed by end of 2014.

UAE residential property price indices

The housing market has been depressed since.

  • In 2015, Dubai’s all-residential property price index (RPPI) fell by 11%, and Abu Dhabi’s RPPI fell by 0.8%, according to Reidin.com.
  • In 2016, house prices fell by 0.4% in Dubai and by 3.7% in Abu Dhabi
  • In 2017, house prices fell by 3.9% in Dubai and by 9% in Abu Dhabi
  • In 2018, Dubai house prices dropped 8.6% while Abu Dhabi prices fell by 6.9%
  • In 2019, Dubai house prices fell 6% while Abu Dhabi prices dropped 7.5%
  • In 2020, Dubai house prices fell 7.1% while Abu Dhabi prices were down by 2%.

The enormous excess supply of apartments is still pulling the market down. Other factors that contributed to the decline of the housing market in recent years:

  • 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.

Sales transactions surge to eight-year high

During 2020, the total number of real estate transactions in Dubai, which included first sale, resale, mortgage, and gift, fell by 8.8% to 51,330 units, in contrast to a y-o-y rise of 8.2% in 2019, due to the adverse impact of the global health crisis, according to Dubai Land Department. Likewise, transaction value also dropped 27.5% y-o-y to AED175.61 billion (US$47.81 billion) last year.

Demand has gradually returned since. In fact in June 2021, Dubai’s property sales transactions surged a whopping 173.5% y-o-y to 6,388 units – the highest monthly volume in eight years, according to Property Finder. Likewise, the total value of transactions more than tripled to AED 14.79 billion (US$4 billion) over the same period.

“The trends this year have certainly kept us on our toes, with month-on-month increases and record breaking months for sales transactions, high investment demand from residents and foreign investment and property prices increasing across prime, popular communities,” said Sacchetto of Property Finder. “It has been a dynamic market to say the least.”

UAE residential transactions

The secondary market accounted for more than 62% of all transactions while the off-plan market represented the remaining 38%. In June 2021, about 2,418 off-plan properties worth AED3.5 billion (US$950 million) and 3,970 existing properties worth AED11.29 billion (US$3.1 billion) were sold in the emirate.

Meydan is the top choice for apartments, representing 15% of total apartment sales, followed by Jumeirah Lakes Towers and Dubai Marina. On the other hand, Green Community is the favorite location for villas and townhouses, accounting for a 18.2% market share, followed by Mohammed Bin Rashid City and Dubai Hills Estate.

Off-plan property demand remains strong

Off-plan property sales transactions volume in Dubai rose by 74% in May 2021 compared to last year, according to Property Finder. But even before the pandemic, there was already a large demand for off-plan properties.

“Over the years, investors have increasingly chosen to ‘flip’ their properties and participate in secondary off-plan sales where they sell their unit while it is still under construction,” said Property Finder.

Prices of off-plan properties are also increasing. “When looking at total values alone, the average off-plan value has increased by 6.59 per cent…when compared to May 2019,” said Sacchetto.

Off-plan properties account for about 38% of all sales transactions in Dubai, buoyed improving economic conditions, the introduction of new government policies, such as the long-term residence visas for investors and professionals, and improved buyer protection.

Abu Dhabi has also strengthened the protection of off-plan buyers. Its 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 only allowed to sell off-plan units if 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.

Better terms for expats have been introduced

In 2019, a new system for long-term residence visas for foreign investors and professionals was put in place. It allows expats to live, work and study in the country without needing a national sponsor. They can also enjoy 100% ownership of their business. These visas will be issued for 5 or 10 years and will be renewed automatically.

Eligibility for a 10-year visa:

  • Investors with public investments of at least AED 10 million (US$2.72 million)
  • Persons with specialized talents, such as doctors, scientists, specialists, inventors, as well as creative individuals in the field of culture and art
  • Outstanding students

Eligibility for a 5-year visa:

  • Investors in a property in the UAE of a gross value of not less than AED 5 million (US$1.36 million). The amount invested in real estate must not be on loan basis and the property must be retained for at least 3 years.
  • Entrepreneurs with an existing project with a minimum capital of AED 500,000 (US$136,000)

In June 2021, a new 24x7 residency visa service was launched, allowing customers to connect with a service team and follow up on the status of their transactions at any time.

“We in the United Arab Emirates in general, and Dubai in particular, seek to be at the forefront and aim to achieve customers’ requirements through services that distinguish Dubai from the rest of the world,” said Major General Mohammed Ahmed Al Marri, head of the General Directorate of Residency and Foreign Affairs (GDRFA).

Foreign ownership rules are now very liberal

Foreign ownership rules:

  • 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 allows foreigners to own property in designated investment zones on a freehold basis. This followed other 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.

Housing supply continues to rise

In Dubai, there were about 40,000 residential completions in 2020, up from 36,000 completions in 2019 despite the pandemic, according to figures released by JLL MENA. This brought the total housing stock in Dubai to 595,000 units by end-2020.

In preparation for Expo 2020, more than 80,000 units were scheduled for completion last year but actual completions were less,  due to coronavirus,  but still the highest ever recorded.

UAE residential supply

In Abu Dhabi, around 4,000 units were added to the market last year, bringing the total stock to 265,000 units.

About 53,000 units are scheduled to enter the Dubai market this year while around 15,000 units are expected to be completed in Abu Dhabi, according to JLL MENA.

There’s money to be made - rental yields in Dubai are moderate to good

Gross rental yields in Dubai are good, averaging 6.21% in May 2021, according to Reidin.com. Yields for apartments were higher at 6.47% as compared to villa yields, at 5.34%.

A study conducted by the Global Property Guide showed lower, but still good, gross rental yields for Dubai, at around 5.2% to 5.9%. Smaller apartments (90 sq. m.) have higher yields, averaging 5.91%, while medium-sized apartments (120 sq. m.) have yields averaging around 5.19%.

The difference in yields stems 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.

Rents continue to fall, however

Rental rates of residential properties continue to fall in both Dubai and Abu Dhabi, mainly due to a plunge in rents for apartments, according to Reidin.com.

  • In Dubai, rental rates for all residential units were down 7.6% in May 2021 from a year earlier. Rental rates for apartments fell by 9.6% y-o-y, while rents for villas increased 7.2% y-o-y over the same period.
  • In Abu Dhabi, the average rental rate for all residential units declined by 5.9% y-o-y in May 2021. Over the same period, rental rates for apartments dropped 7.6%, while it increased by 2.8% for villas.

This is in line with Asteco’s Q1 2021 report, which showed that average apartment rents in Dubai fell by 10% in Q1 2021 from a year earlier.

UAE residential price index

Rents in specific high-end developments in Dubai in Q1 2021:

  • At the DIFC, a special economic zone in Dubai, rents ranged from AED 78,000 (US$21,235) per annum for one-bedroom apartments to AED 153,000 (US$41,653) for three-bedroom apartments.
  • In Downtown Dubai, home to the towering Burj Khalifa skyscraper, rents for one-bedroom apartments averaged AED 68,000 (US$18,512) per annum, while rents for three-bedroom apartments stood at AED 148,000 (US$40,292).
  • In Palm Jumeirah, the world’s largest man-made island, rents ranged from AED90,000 (US$24,502) per annum for one-bedroom apartments to AED155,000 (US$42,198) for three-bedroom apartments.
  • In Sheikh Zayed Road, home to most of Dubai’s skyscrapers including the Emirates Towers, rents ranged from AED 70,000 (US$19,057) to AED 118,000 (US$32,125) per annum.

In Abu Dhabi, apartment rents fell by 8% in Q1 2021 from a year earlier.

Rents for high-end properties in Abu Dhabi over the same period:

  • In Central Abu Dhabi, annual rents for one-bedroom apartments averaged AED 58,000 (US$15,790); two-bedroom apartments for AED 90,000 (US$24,502); and three-bedroom apartments for AED 133,000 (US$36,208).
  • In Corniche, annual rents ranged from AED 70,000 (US$19,057) for one-bedroom apartments to AED 140,000 (US$38,114) for three-bedroom apartments.
  • In Khalidya/Bateen, annual rents ranged from AED 73,000 (US$19,874) for one-bedroom apartments to AED 143,000 (US$38,931) for three-bedroom apartments.
  • In Al Raha Beach, annual rents were from AED 75,000 (US$20,418) for one-bedroom apartments to AED 158,000 (US$43,014) for a three-bedroom apartments.
  • At the Marina Square, one-bedroom apartments were rented for AED 61,000 (US$16,607) per year, and three-bedroom apartments for AED 125,000 (US$34,030).

Proposed law to freeze rents in Dubai for three years

Since December 2013 rent caps have been imposed by Dubai Decree No. 43/2013 (the "New Decree"). The rent cap also applies to special development areas and free zones, including the Dubai International Financial Centre (DIFC).

CURRENT RENTAL LAW
Rental rates Rent increase allowed
If existing rent is:  
Equal to or 10% below the average rental rate Nil
11% to 20% below the average market rental rate 5%
21% to 30% below the average market rental rate 10%
31% to 40% below the average market rental rate 15%
More than 40% below the average market rental rate 20%

Recently, a new draft law set to freeze rents in Dubai for three years won support from both renters and landlords. According to the Dubai Land Department, the new law, if approved, will reduce disputes between renters and property owners, and reduce market volatility.

“Fixing rent values for three years will reduce the number of disputes between landlords and tenants by painting a clearer and more consistent picture for both parties,” said Dubai Land Department. “The new law will help stabilise the market and boost trust in it, leading to a continuously dynamic real estate industry that Dubai is renowned for.”

Yet it is still unclear if the rent freeze would apply to both new rental leases and existing contracts.

“There could be some adverse impact to landlords if the proposed new law applies to existing contracts rather than new rental contracts, and this is the area that needs to be clarified,” said Alexis Waller, head of real estate at Clyde & Co in Dubai.

In Abu Dhabi, the annual 5% rent cap remains in force, which has been reinstated on December 2016 after it had been abolished in 2013. Further in October 2018, the Abu Dhabi Judicial Department issued new rules that will make it easier for landlords to evict tenants. The new rules allow landlords with lease contracts registered with Abu Dhabi Municipality to approach the Enforcement Department directly to claim outstanding rent and repossess their property. Previously, landlords had to go through a legal process to evict a tenant, which typically takes up to 6 months.

Key interest rate raised

In June 2021, the Central Bank of the UAE raised its key overnight interest rate by 5 basis points, following a similar move by the US Federal Reserve.

The UAE’s base rate for overnight deposits is linked to the US Fed’s interest on excess reserves (IOER), which was recently raised by 5 basis points to 0.15%.

UAE interest rates

Mortgage interest rates in Dubai have, in the past, followed key US Fed rates, because the dirham (AED) is pegged to the US dollar at AED3.67 = US$1. Some banks offer mortgage loans to both nationals and expatriates, with flat rates ranging from 1.55% to 4.25%.

Mortgage rules eased temporarily

New mortgage regulations were introduced to cool the market in October 2013, and strongly affected sales. The rules involved lower Loan-to-value (LTV) rates, as follows:

UAE Federal Mortgage Caps (Maximum Loan-To-Value Ratio)

  First home (Owner-occupier) Second home or investment property Off-plan purchase
NATIONALS      
Property valued under AED5 million (US$1.36 million) 80% 65% 50%
Property valued over AED5 million (US$1.36 million) 70% 65% 50%
EXPARIATES      
Property valued under AED5 million (US$1.36 million) 75% 60% 50%
Property valued over AED5 million (US$1.36 million) 65% 60% 50%
Source: UAE Central Bank, Cluttons


However in March 2020, LTV ratios on mortgages for first-time homebuyers were raised by 5%, to alleviate the economic conditions caused by the COVID-19 pandemic.

“This gives buyers who are saving for a deposit a helping hand to make their first UAE property purchase,” said Lewis Allsopp of Allsopp & Allsopp Mortgage Services.

More fixed-rate mortgage products have been introduced in the last decade, and “Fee free” products have allowed borrowers to switch to a new lender at a lower cost since the last quarter of 2010.

Tamweel, one of the largest Islamic mortgage lenders, is back in the market, having given up mortgages in November 2008 due to the global credit crunch.

Crude oil prices rising again, but Saudi-UAE spat clouds outlook

Brent oil prices surged by 83% to an average of US$73.1 per barrel in June 2021 from less than US$40 per barrel a year earlier, according to the World Bank.

With increasing oil prices, the UAE has recently pushed for increased oil production within the OPEC+, so that it can invest in its diversification plan before oil demand dries up. The country is upset about the low baseline from which its production is calculated.

Abu Dhabi has invested billions of dollars in recent years to increase its production capacity.

“This is the time to maximize the value of the country’s hydrocarbon resources, while they have value,” said a person briefed on the UAE’s strategy. “The aim of the investment is to generate revenue for the diversification of the economy, both for investment in new energy and, as importantly, in new revenue streams.”

Uae crude oil

However Saudi Arabia, OPEC’s de facto leader, has refused the said concession, causing a rare public clash between the two allies. Neither side appears ready to budge, clouding the outlook for oil prices. Some market analysts predict that a continuous spat between Saudi Arabia and UAE could lead cartel members to abandon the system altogether and produce whatever they want.

UAE economy improving

The UAE economy contracted by 5.9% during 2020, in contrast to a 1.7% growth in 2019 and the biggest fall in 34 years, amidst a crude oil price crash last year caused by the COVID-19 pandemic, according to the International Monetary Fund (IMF).

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.

The country’s hydrocarbon sector plunged by 8% last year while the non-hydrocarbon sector contracted by 5.7%.

But with the situation slowly improving, the UAE economy is expected to grow by 3.1% this year and by another 2.6% in 2022.

UAE gdp inflation

“Real non-oil GDP growth is expected to be driven by increasing fiscal spending, pick up in credit and employment, relative stabilization of the real estate market, boosted by recovery in confidence and the Dubai EXPO in 2021,” said the central bank.

Nationwide unemployment surged to 5% in 2020, from just 2.64% in 2019, according to the Central Bank of the UAE.

Inflation was -0.39% in May 2021, the lowest decline in consumer prices since January 2019, amidst a surge in transportation costs as well as smaller decreases in food and beverages prices, according to the Federal Competitiveness and Statistics Centre.


Sources:

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