Dubai's real estate market is reducing its speed of development

Less than nine months after buying their first property in Dubai, Dina Habib and Karim Yusuf are already planning their next move inside the city. An Egyptian couple who have been renting property in the emirate for eight years are selling their one-bedroom apartment in the Jumeirah Village Circle neighborhood on the outskirts of Dubai at a 26% discount from the 1.7 million dirhams ($460,000) they paid for the property in March. Habib hopes to buy a larger home for his three-member family for the same price or cheaper.

"For many years we have been paying other people's rent because we were afraid to buy in a market that rises and falls," said the 39-year-old researcher. "Right now we think the market may have peaked, so we plan to sell and buy a garden home next year, when hopefully prices will come down a bit. "

Habib and Yusuf are among hundreds of thousands of residential property owners struggling to cope with a hot real estate market in Dubai that has outperformed most others around the world this year. They join tenants, real estate analysts and developers in trying to predict whether the market is starting to take off as a slew of new properties arrive and global economic uncertainty catches up with the emirate.

The rise so far has been driven by an influx of wealthy investors such as Russians looking to protect their assets, cryptocurrency millionaires and rich Indians looking for a second home. The government's anti-pandemic policy and its liberal visa policy have also attracted more foreign buyers.

Dubai's real estate market: boom or bust?

Since January 2020, rentals in the emirate have risen by about 42%, while home prices have increased by about 33%, according to real estate advisory firm CBRE Group Inc. The villa's rent has risen markedly and now averages $88,400 a year.

The rise has prompted many tenants like Habib to decide to buy a property to avoid a permanent rent increase or further distance from the city. After her landlord increased the rental value of her one-bedroom apartment by 16% over three years, Habib bought the apartment, which she is now trying to sell.

The Dubai real estate market has long been known for its sharp ups and downs, with one of the biggest downturns occurring in 2009 after years of debt-fueled growth. The collapse brought major real estate developers to the brink of bankruptcy. Prices recovered in 2011 and then fell again in 2014 after the collapse in oil prices hit the region's economies. Since then, the government has introduced a series of reforms for buyers and developers to limit volatility, including raising down payments on mortgages to 20 percent.

Till then, selling a property "in the hope of buying a similar home at a lower price next year is a risky bet," said Taimur Khan, head of research at CBRE, who expects moderate price growth of between 5% and 10% next year but sees "no compelling case for lower prices when the population continues to increase and the economy is growing. "

Market outlook

At least for now, there is no evidence throughout the city that the market is starting to slow down. Even on weekends, long traffic jams are building on the emirate's main highways, waiting lists for membership clubs are becoming impossibly long and school enrollment is up 12% this year - the biggest increase since 2007.

Some analysts are beginning to warn that 2024 could be the tipping point. Earlier this month, Morgan Stanley said it sees "continued winds of success" for the market and expects next year to be "less of a boom than 2023".

Rent rents are rising from January 2020, and price growth is slowing in some popular areas of the city.

Pratyusha Gurrapu, head of research and consulting at real estate firm Cushman & Wakefield Core, also expects moderate price increases next year, but not declines. She says population growth will support the market, and "if the Federal Reserve lowers interest rates, it will encourage mortgage buyers." Mortgages now account for only about a quarter of all real estate transactions in Dubai, according to Morgan Stanley.

Standard & Poor's said last month that it expects house prices to rise 5-7% next year and then decline 5-10% over the next 12-18 months due to global economic uncertainty and an increased supply of new homes on the market.

"There are no clear signs of a cycle change at the moment, but we know that buyers are shrinking the size of properties a little bit, so the average property size is shrinking," said Tatiana Leskova, a senior analyst at S&P. "Much of the market has come to its limit in terms of purchasing power. "

After a record year for new sales and new project launches, real estate developers are also beginning to adjust. S&P expects about 40,000 properties to be built in Dubai next year, with the same number expected in 2025. This is much more than in previous years when between 15,000 and 30,000 homes were built. As a result, Morgan Stanley expects the focus of real estate developers to shift to revenue growth when executing such big-ticket items, although companies typically build fewer properties than anticipated.

For Mohamed Alabbar, founder of Emaar Properties PJSC, a construction company that built the world's tallest building and accounts for about 30% of Dubai's real estate market, records of up and down periods are worrisome. Reservations of revenue from the sale of real estate by Emaar Development, the construction arm, in its home market rose 60% year-on-year to 59.6 billion dirhams as of Sept. 30.

Emaar, which is set to record its highest annual profit since 2012, is using the city's booming economy as an opportunity to manage its finances, but Alabbar is cautious. Project execution and the financial health of contractors' balance sheets are his biggest concerns.

"Dubai is flying. UAE flies. But now is the time to think about what can go wrong," Alabbar said in a recent interview.

The founder of Damac Properties PJSC, one of Dubai's largest private developers, Hussain Sajwani, said he does not yet consider the emirate's real estate market overheated and expects prices to stabilize. But Rich also finds it difficult to predict what might happen next year.

Prices could fluctuate "about 10 percent up or down," he said in an interview with Bloomberg TV earlier this month.