Will foreign off-plan buyers save the UAE’s property market?

Lalaine C. Delmendo | April 29, 2020

A huge supply glut both of apartments and oilis pushing residential markets in Dubai and the UAE down.

UAE house prices

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.

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%.
  • 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 by 6% while Abu Dhabi prices dropped 7.5%

Massive housing supply

The supply glut is considerable. In Dubai, there were more than 35,000 residential completions in 2019, the highest ever recorded, according to JLL MENA, bringing the housing stock to 555,000 units.

In preparation for Expo 2020, more than 80,000 units were scheduled for completion this year. But due to coronavirus actual completions are expected to be far less. 

UAE residential supply

In Abu Dhabi, around 4,000 units were added to the market last year, bringing the total stock to 261,330 units, and about 11,400 units are scheduled to enter the market this year.

Off-plan properties buoy demand

Off-plan properties accounted for 23,643 transactions last year – equivalent to 56% of all sales transactions, buoyed by the introduction of new government policies, such as the long-term residence visas for investors and professionals, and improved buyer protection, and by price discounts and incentives offered by developers. In February 2020, transactions rose strongly by 33% from a year earlier, with off-plan sales surging 76%.

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 allowed to sell off-plan units only 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 in 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

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)
  • Outstanding students

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.

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

Gross rental yields in Dubai are good, averaging 6.6% in February 2020, according to Reidin.com. Yields for apartments were higher at 6.9% as compared to villa yields, at 5.5%.

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 are falling, however

Rental rates of residential properties are declining rapidly in both Dubai and Abu Dhabi, according to Reidin.com.

  • In Dubai, rental rates for all residential units were down 8.22% in February 2020 from a year earlier. Rental rates for apartments fell by 8.32% y-o-y, and for villas by 7.49% y-o-y over the same period.
  • In Abu Dhabi, the average rental rate for all residential units declined by 4.86% y-o-y in February 2020. Over the same period, rental rates for apartments dropped 5.09%, while villa rental rates fell by 4.27%.

This is in line with Asteco’s report, which showed that annual rents for one-bedroom apartments in Dubai fell by 10% in 2019 from a year earlier, to an average of AED 58,000 (US$15,791). Average rents also declined by 9% to AED 83,000 (US$22,598) for two-bedroom apartments and by 10% to AED 114,000 (US$31,038) for three-bedroom apartments.

Rents in specific high-end developments in Dubai in 2019 (according to Asteco):

  • At the DIFC, a special economic zone in Dubai, rents ranged from AED 85,000 (US$ 23,142) per annum for one-bedroom apartments to AED 150,000 (US$ 40,839) for three-bedroom apartments.
  • In Downtown Dubai, home to the towering Burj Khalifa skyscraper, rents for one-bedroom apartments averaged AED 73,000 (US$ 19,875) per annum, while rents for three-bedroom apartments stood at AED 158,000 (US$ 43,017).
  • In Palm Jumeirah, the world’s largest man-made island, rents ranged from AED 90,000 (US$ 24,503) per annum for one-bedroom apartments to AED 158,000 (US$ 43,017) for three-bedroom apartments.
  • In Sheikh Zayed Road, home to most of Dubai’s skyscrapers including the Emirates Towers, rents ranged from AED 73,000 (US$ 19,875) to AED 115,000 (US$ 31,310) per annum.

In Abu Dhabi, rents ranged from AED 74,000 (US$ 20,147) for one-bedroom apartments to AED 140,000 (US$ 38,117) for three-bedroom apartments in 2019, down by 4% to 7% from a year earlier.

UAE residential price index

Rents for high-end properties in Abu Dhabi in 2019:

  • In Central Abu Dhabi, annual rents for one-bedroom apartments averaged AED 75,000 (US$ 20,420); two-bedroom apartments for AED 103,000 (US$ 28,043); and three-bedroom apartments for AED 140,000 (US$ 38,117).
  • In Corniche, annual rents ranged from AED 78,000 (US$ 21,236) for one-bedroom apartments to AED 143,000 (US$ 38,933) for three-bedroom apartments.
  • In Khalidya/Bateen, annual rents ranged from AED 80,000 (US$ 21,781) for one-bedroom apartments to AED 148,000 (US$ 40,295) for three-bedroom apartments.
  • In Al Raha Beach, annual rents were from AED 83,000 (US$ 22,598) for one-bedroom apartments to AED 168,000 (US$ 45,740) for a three-bedroom apartments.
  • At the Marina Square, one-bedroom apartments were rented for AED 69,000 (US$ 18,786) per year, and three-bedroom apartments for AED 135,000 (US$ 36,755).

Rent cap laws have returned, but are more pro-landlord now.

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).

NEW RENTAL LAW

Current 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%

In Abu Dhabi, the Department of Municipal Affairs and Transport (DMAT) has reinstated (on December 13, 2016) the annual 5% rent cap, which had been abolished in 2013.

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.

Interest rates are falling

In March 2020, the Central Bank of the UAE held its benchmark repo rate at 1.5% but cut its interest rate on one-week certificates of deposit (CDs) by 75 basis points, following the US Federal Reserve rate cuts to contain the economic repercussions of the COVID-19 pandemic.

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%.

Tight mortgage rules have constrained the housing market

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%
EXPATRIATES      
Property valued under AED5 million (US$1.36 million) 75% 60% 50%
Property valued over AED5 million (US$1.36 million) 65% 60% 50%
Sources: 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 plummeting

By March 2020, Brent oil prices had plunged by a whopping 50.3% from a year earlier, to an average of US$33 per barrel, according to the World Bank.

Then in April, oil prices turned briefly negative.

Uae crude oil

What comes next is anyone’s guess.

UAE economy to contract by 3.5% in 2020, says IMF

The 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.

UAE gdp inflation

“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.


Sources:

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