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At the end of the COVID-19 pandemic and the post-COVID market recovery, analysts noted a new tendency in demand for residential properties in the United Arab Emirates. It is about a shift in the buyer's interest towards ready-made houses instead of off-plan units, and especially towards apartments.
This shift has been predicted for a long time. The number of new projects on the market is small. Most of the new properties will go on sale no sooner than one year from now. And the villas, barely exceeding 13% of the market supply, were sold out during the rally in 2021.
The lack of an affordable and large supply makes the cost of purchasing or investing rather unattractive. Growing interest rates and inflation only narrow down the options for customers.
Content:
- Transaction volume and key market trends
- Shift in consumer demand and market supply
- The role of the real estate rental sector
Transaction volume and key market trends
The shift in demand was reflected in property sales data on the market. According to the information provided by the Dubai Land Department (DLD), real estate transactions involving finished property accounted for 70% of the total number of all transactions.
Also, for example, other changes are noticeable in Dubai. As of April 2022, more than 3,500,000 people lived in the city. The population is planned to increase to 5,800,000 people by 2040. It does not include the growth in the number of foreign migrants, investors, and businessmen, nor the rising number of tourists.
New property offers are limited on the market. The focus on ready-made homes leads to growing prices. Because of this, more and more people prefer to rent accommodation as the main means of accessing housing. This is already reflected in the considerable growth of rental rates throughout the country.
As of May of this year, the annual growth of rental rates reached 19.1%. Particularly, apartments grew by 18.3% and villas by 24.3% on this indicator.
In general, more consumers try to purchase property "here and now" as long as interest rates allow them to acquire buy-to-let housing. However, this will not last long. As of June, rates increased by 75 basis points. Currently, only 18% of purchases are funded by mortgage loans.
Buyers continue to look for properties with large living spaces and in low-populated areas. The pandemic shift in preferences shows no signs of weakening so far.
Prices are growing quickly. Only during the first quarter of 2022, the average house sales price rose by 11%. Although this figure was mainly calculated on the basis of villas’ sales, especially premium ones. Oligarchs from Russia who fled to Dubai might potentially be involved in this.
Areas and communities with well-developed infrastructure, close to the suburbs, are also highly appreciated. Central areas, such as in Dubai, are losing their undeniable high positions in customer demand.
Shift in consumer demand and market supply
At the end of the first quarter of 2022, most of the new units on the market were apartments. They also dominate the secondary market. Approximately 87% of the available offers come from apartments.
On the other hand, the supply of villas has been very limited this year. In Dubai, only 3.6% of the planned new villas will be put on the market by the end of 2022. About 30% of the villas were elite properties in the following districts:
- Dubai South;
- Dubai Hills;
- Arabian Ranches 3.
Only 5% of the villas were in the most popular and populated parts of the emirate. Prices there will thus continue to grow constantly.
What to expect from the villa segment
As mentioned earlier, a huge inflow of new properties on the market should not be expected until at least mid-2023. In May 2022, development has started on more than 10,000 townhouse and villa projects. They also will not hit the market until the second half of 2023.
According to realistic forecasts, the projects that were introduced this year won't be available for purchase until the end of 2024 or as early as 2025. However, it is expected that when the new offer hits the market, villa prices may decline below $1,360,000.
Problems in the off-plan sector
One of the growing problems in the off-plan sector is a decrease in the inflow of investment funds. Low pricing compared to finished properties, flexible pre- and post-completion payment arrangements, and affordable mortgages have traditionally kept these projects afloat.
Today, very few people are ready to invest in projects that will enter the market in half a decade. Especially since the world is entering extremely uncertain times that promise a significant rise in the risks of any investment.
Mortgage lending is also on the wrong side of off-plan real estate. Currently, this method of financing purchases is no longer profitable for the majority of buyers.
Flexible payment plans remain one of the useful features of off-plan real estate. But this is of no use to real estate developers themselves. As market experts point out, today, most construction companies in the UAE do not offer these plans, which imply payments after the owner has their apartment. Other developers move a larger percentage of payments to the construction phase. If the previous plan “50% before commission, 50% after” was normal, today paying 30% after commission is an extremely good option.
This approach makes off-plan completely unprofitable for end-users and for a broad range of buyers. With everything stated above, sales of ready-made properties got a great deal to discourage over units that are under construction.
The role of the real estate rental sector
Overall activity in the residential market continues to grow in the UAE. Both sales and rentals are increasing. Since 2009, sales showed the best results by May 2022. The rental segment showed the best results since 2014.
Rental rates have been rising year by year, even month by month. As of April 2022, annual rental growth rose by 16.2%. As of May, as mentioned above, annual growth has already reached 19.1%.
By the fifth month of this year, the average rental apartment rate had reached a high of more than $22,700 a month. The average rental rate for a villa has amounted to $68,000 a month.
The highest annual growth rate for apartments was recorded in the Palm Jumeirah. They reached the level of $58,200 a month. Al Barari saw the largest increase in villa rates, rising to $238,000 a month.
