Can Dubai’s real estate overcome the pandemic?

By Rhona Wells

17 May 2021: Prime Dubai properties have been snapped up in the past few months by buyers taking advantage of decade-low prices, easy financing and an economy open for business despite the pandemic.

Sales of luxury villas, sea-view apartments and second-hand family houses have jumped, re-energising a property market that saw a sharp fall in activity at the height of the pandemic and had been in a five-year slump prior to that. But with rents still falling and oversupply weighing, the road to recovery will be long for one of the emirate’s main economic engines.

Dubai’s economy – reliant on trade, tourism and its international reputation as a regional hub for business services – was hard hit by the COVID-19 pandemic in 2020 as firms slashed jobs. Many foreign workers, needed to support demand in a real estate sector that contributed 7.2% of GDP in 2019, left.

Market activity has picked up in the last six months, after lockdowns and curfews were lifted, estate agents say, helping to stabilise prices for family villas and high-end beach and golf course properties.

Realtor Matthew Bate, whose agency Nest deals mainly in high-end villas, says business has become much busier in the past few months as nationals, residents and foreign visitors took the opportunity to buy. “We did have some distressed assets coming out of the COVID-19 lockdown. Now I would say we are back up into early 2020, 2019 prices”.

While much of the world re-imposed coronavirus restrictions winter tourist season 2020, Dubai welcomed visitors and the UAE started one of the world’s fastest vaccination campaigns.

“We had a huge influx of tourists… it exposed a lot of people to Dubai … The last 2-3 clients we had, dealing with properties over 15m AED ($4.08m) have properties in New York, London and are now looking at Dubai”.

While prices of high-end villas have stabilised, apartment prices as a whole in the emirate were mostly still falling in February according to a price index by ValuStrat.

S&P credit analyst Sapna Jagtiani does not expect Dubai’s real estate market to recover to pre-pandemic levels until some time next in 2022.

“Prices are down by 40%-50% from the last peak (2014) … this is why we think a recovery in prices to similar levels will be slow and long.”

According to Jagtiani, rents at the end of 2020 were about 5-10% lower than the market’s last trough a decade ago.

Christopher Payne, chief economist at Peninsula Real Estate, a UAE-based investment and research company says that even “pre-pandemic, the long-term economic trend in the UAE had been sluggish since the 2014-2015 oil price crash. Looking at the larger picture, lower oil prices feed through to population numbers; Companies have to cut costs, people get laid off and people leave the country.”

Villa Rush

Low prices, relaxed mortgage conditions and a desire for more spacious properties as the pandemic jump-started working from home, have driven secondary market sales transactions in Dubai to record highs every month since September, according to Lynette Abad of Property Finder Group, a real estate search portal.

The dominance of secondary transactions marks a fundamental market shift for Dubai. Off-plan sales from new projects used to dominate, but several developers slowed or halted new projects last year. They included Emaar Properties’ Dubai Creek Harbour, a luxury development of waterfront apartments designed to house 200,000 people.

Dubai’s hosting of the Expo 2020 world fair, due to take place in October after being postponed because of the pandemic, as well as a recent series of measures to relax long-term visa and citizenship rules, should hopefully boost market sentiment in the medium- to long-term.The recent normalisation of the UAE’s ties with Israel and a thawing of relations with Qatar are also seen as positives that could boost investment in Dubai and its property market.

But despite optimism over rising demand for certain sectors of the market, oversupply remains a key problem.

For years supply has outpaced demand for new houses and apartments in a market where most of the population are foreigners.

According to Asteco, a real estate services company, the supply-demand imbalance is likely to worsen over the course of 2021. This will result from rising levels of supply, particularly over the next 12-18 months, and increasingly curtailed demand as businesses and employees navigate through downsizing and ultimately repatriation of unemployed workers.

New supply forecasts for 2021vary. Real estate consultancy Knight Frank sees “historic levels” of new supply coming online this year, at around 83,000 residential units in Dubai, up from 35,808 last year, while Asteco expects around 41,500 this year, up from its estimate of around 34,050 in 2020.

Cutbacks to new projects have hurt developers’ bottom lines. Emaar, Dubai’s largest listed developer, reported a 58% fall in net profit last year and rival DAMAC Properties made a net loss of 1.04bn dirhams ($283.16m).

There are multiple stresses on developers, mainly to manage liquidity and cash flow while making timely deliveries. Additionally pre-sales may not be very encouraging in 2021 and there will be reduced profit and higher leverage.

Mohamad Haidar of Arqaam Capital feels that developers with stronger balance sheets will have higher chances of survival than smaller ones as market share will shift to developers offering the most flexible payment plans. It is difficult for small developers to address affordability concerns.

A wave of restructurings swept the industry and some developers went bust in the years following the 2008 financial crisis.

Signs of further restructuring and consolidation are emerging, including Emaar planning a takeover and delisting of its malls unit, and state-linked Meraas Holding being brought under the investment vehicle of the emirate’s ruler, Dubai Holding.

Maturing market

The residential property market in the UAE has now matured significantly and can be better defined as a ‘frontier market’. According to Chris Speller, group director of Cityscape at Informa Markets, the value of a property is purely based on how much somebody is willing to pay for it.

“A frontier market is where residential property becomes more of a byproduct of a successful economy:”

“We are privileged within the UAE to be residents here – based on the fact that we are employed. Now the country’s starting to change that opportunity. We’re seeing the opportunity for people to start to retire here. That percentage is still small, but that’s a growing opportunity. And that’s why it’s a frontier sort of position.

“So what we are seeing now is that if the economy is strong, if the jobs are strong, if there is a continued opportunity, then that will feed all the rest of the elements – your retail, your commercial, and your residential – as a successive byproduct of everything else,” Speller says.

He also stresses that every residential real estate market – globally – will always witness fluctuations in prices. However, the depth of fluctuation is expected to settle in the Dubai market following a disparity between the supply and demand in recent years.

Bigger players with links to the emirate or its rulers will likely be able to weather the storm, with access to cheap land and prime locations.

For 2021, Cityscape has gone one step further and is introducing a new hybrid model – a physical event, live and in-person, will take place within a 25,000 square metre space at the Dubai Exhibition Centre (DEC) within the Dubai Expo 2020 site from November 7-11. It will be combined with a month-long digital networking and seminar platform that will be hosted prior, during and post the event to enable exhibitors and visitors to identify new leads and contacts based on their investment interests, business type and projects.

Cityscape participants will also be able to use AI-powered tech to link with government bodies, potential buyers, investors, industry suppliers such as architects, designer and financial services as well as new partners before, during, and after the live event.