Is Dubai’s real estate sector poised for a slowdown?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Dubai! This word itself bridges the way to a world of imagination that’s full of luxurious homes, beautiful skylines, and extravagant lifestyles that possess unparalleled grandeur. Perhaps such a wish to live in this man made paradise resulted in investors flocking to the city of skyscrapers.

Despite the global slowdown and spiking interest rates, Dubai witnessed a sharp increase in the value of home mortgage approvals, property prices, and residential rents. But has the real estate market reached its peak? Will there be a downturn?

Considering the spiking inflation, the US Federal Reserve started increasing interest rates on March 17, 2022, by 25 bps. In July 2023, federal fund rates reached 5.25% to 5.50% levels, which were the highest since the 1980s. The Emirates effectively mirrors the Fed’s monetary policy because of its currency peg to the US dollar. Considering interest rates had never shot up so drastically in 22 years, a slowdown was expected in Dubai’s real estate market. 

But despite this uptrend, last year the value of home mortgage approvals in the city witnessed a 40% increase. In this same period, the UAE’s mortgage rates climbed to 5% at the end of 2023 from below 2% in early 2022. The property prices in the Emirates continued a sharp ascent. In fact, in the first half of 2023, the country recorded a 16.9% YoY spike, which was the fastest increase in nearly a decade.

“Dubai is presently one of the most affordable luxury destinations in the world in comparison to many of its counterparts, including Hong Kong, Singapore, etc., said Morgan Owen, Managing Director – Middle East & North Africa, ANAROCK Group. He added that ever since the pandemic, there has been an uptick in interest in the Dubai residential market by the wealthy, including not just businessmen but also top professionals in banking and financial services and even crypto millionaires.

Residential rents in Dubai also outpaced sales price growth and soared by 21.7% in the first half of 2022. This trend continued into 2023. According to Betterhomes research, Russians topped the chart of non-resident buyers of homes in the first quarter of 2023 but slipped to third place by the end of the year. 

Investors from India and the United Kingdom also flocked to the city and accounted for most of the transactions during the twelve months. The number of buyers from Egypt, Lebanon, Pakistan, and Turkey too saw a notable rise.

Owen enumerates the reasons behind Indian investors’ interest in Dubai’s market. “Besides lowered prices and its proximity to India, another reason why Indians are investing in Dubai is due to favouring government measures. The UAE is issuing long-term visas, between five and 10 years, to entrepreneurs, professionals, investors, and specialists in the medical, scientific, research, and technical fields,” he mentioned.

While Indian high-net-worth individuals (HNIs) remain among the top investors in Dubai, changing buyer preferences post-COVID-19 and declining property prices have attracted interest from a diverse range of businessmen and professionals.

According to Reuters, in 2023, a record 431 homes were sold for more than 10 million dollars in Dubai, making it the largest such market in the world. But what factors led to this boom?

Following the 2008 financial crisis, Dubai underwent a significant transformation, emerging as one of the world’s leading financial hubs. Real estate, constituting 8.9% of the economy, became a pivotal indicator of this shift. Secondly, the city’s handling of the pandemic was considered a textbook case, which further attracted investors. 

The UAE’s banks continue to provide additional mortgage offers to secure the top spot. Under schemes like ‘Ramadan Specials’, banks rolled out 5-year fixed rate mortgage plans. This provided relative stability for the borrowers. Also, if rates fell in the future, there was a liberty to refinance the deal. Cherry on the cake! 

 So what’s next for Dubai’s real estate market?

“It is unlikely that there will be a major slowdown anytime soon because the UAE government’s open door policy for foreign investors has helped them tide through the tough and tumultuous times post-pandemic,”  believes Owen. He adds that the luxury segment in Dubai is likely to continue to grow as demand remains upbeat. Also, the right product at the right location with world-class amenities will continue to garner attention.

Even though Chinese and Russian inflows tapered off, increased interest among Indian investors could keep any downturn mild. According to Knight Frank’s Dubai Market Review, Dubai is set to deliver just 13,000 homes annually over the next six years.  This figure is well below the run-rate of 30,000 units over the last 15 years. The exposure of the UAE’s 10 largest banks to the real estate sector has also seen a decline. In 2008, during the financial crisis, this exposure stood at approximately 30%, decreasing to 16.2% by the third quarter of 2023.

Uncontrollable inflation and a dynamic global interest rate policy had already hampered market growth. Now, geopolitical factors like the tensions in West Asia and the unabated Russia-Ukraine war are also causing uncertainty.

All these factors indicate a high chance of a slowdown in Dubai’s real estate sector. But the city’s historic resilience needs to be considered before jumping to any conclusion.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow