Robust demand and healthy economy
Lalaine C. Delmendo | April 01, 2022
Dubai's all-residential property price index (RPPI) rose strongly by 9.53% y-o-y (4.14% inflation-adjusted) during 2022, at par with the previous year's 9.25% increase, according to Reidin.com. On a quarterly basis, Dubai prices were up by 2.93% (1.69% inflation-adjusted) in Q4 2022.
By property type:
- Dubai's apartment prices rose by 8.98% (3.61% inflation-adjusted) during 2022.
- Villa prices increased sharply by 12.78% (7.22% inflation-adjusted) last year.
The average purchase price of apartments in Dubai was AED1,917,510 (US$522,127) in 2022, based on figures from Mortgage Finder. On the other hand, the average purchase price of villas stood at AED3,112,546 (US$847,528).
Abu Dhabi's housing market growth is more subdued, with the all-residential property price index rising by just 1.46% (-3.54% inflation-adjusted) in 2022 from a year earlier. Over the same period:
- Apartment sales prices in Abu Dhabi increased slightly by 0.91% (-4.06% inflation-adjusted).
- Villa sales prices rose by 4.07% (-1.05% inflation-adjusted).
Demand is surging. During 2022, Dubai's registered property sales transactions increased by a huge 44.7% y-o-y to 122,658. Likewise, the total value of transactions reached a record-high of AED 528 billion (US$143.8 billion), up by 76.5% from the prior year, according to a report released by a Dubai Media Office.
2022 also saw 80,216 investors registering 115,183 new real estate investments valued at AED 264.15 billion (US$71.93 billion) – an annual growth of 59.5% in volume and 78.4% in value.
“Dubai remains one of the world's most attractive investment destinations due to its stable economy, strong financial fundamentals and ability to constantly find new opportunities for growth,” said Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, Crown Prince of Dubai and Chairman of Dubai Executive Council.
“Moreover, global investors, institutions and businesses continue to have high confidence in Dubai's economy due to its growing profile as one of the best metropolises to live and work, its exceptional infrastructure and supportive regulations,” he added.
The UAE economy grew by around 5.9% in 2022 from a year earlier, on the back of the strong expansion of the non-oil sector, according to the World Bank. This followed a modest growth of 3.8% in 2021 and a contraction of 4.8% in 2020.
The economy will likely expand by a more moderate, but still healthy pace of 4.1% this year, amidst global economic slowdown.
Analysis of United Arab Emirates Residential Property Market »
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’s modest economic growthThe UAE economy grew by around 5.9% in 2022 from a year earlier, on the back of the strong expansion of the non-oil sector, according to the World Bank. This followed a modest growth of 3.8% in 2021 and a contraction of 4.8% in 2020.
Economic growth was estimated at a more moderate pace of 4.1% this year and 2.3% in 2024, amidst lower oil prices, lower expansion in tourism, and reduced investments.
“Looking ahead, the UAE economic outlook remains positive, supported by domestic activity. We expect non-hydrocarbon growth to be around 4 percent in 2023 and to accelerate over the medium-term with the implementation of ongoing reforms,” said Mr. Ali Al-Eyd of the International Monetary Fund (IMF). “Nevertheless, the outlook is subject to significant external uncertainties, including the impacts of global economic and financial headwinds, geopolitical developments, and the recently announced OPEC+ production cuts.”
Abu Dhabi remains very dependent on oil revenues while Dubai is more focused on trade, travel and tourism.
Inflation eased to 4.58% in Q1 2023, as compared to 6.77% in Q2 2022, according to the National Bureau of Statistics. Nationwide inflation averaged just 1.1% in 2011-2021 before rising to 5.22% in 2022, based on IMF figures.
Brent oil prices reached a decade-high of US$120.08 per barrel in June 2022, amidst the ongoing Russian invasion of Ukraine. However, the prospect is now gloomy amidst the growing rift between Saudi Arabia and UAE. In February 2023, Brent oil prices declined by 13.6% to an average of US$82.71 per barrel, from U$95.76 per barrel a year earlier, according to the World Bank.
With increasing oil prices in 2021, UAE 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.
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. Recently, the UAE is reportedly contemplating leaving the powerful cartel.