The UAE'S economy improving
Lalaine C. Delmendo | August 02, 2021
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.
- 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.
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 improvingThe 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.
“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.