Currently, over 700,000 residential units have been sold in the UAE. The construction sector needs to market 25,000 to 30,000 properties to accommodate a growing population every year.
And although the market has been booming recently in terms of construction volumes and increased demand, its future becomes more and more foggy because of global and local uncertainties.
- Rising interest rates
- Global inflation growth
- Emirates population growth
- Problems of the real estate market
The global level has serious geopolitical uncertainty and a growing economic crisis. The local level has the following issues:
- A lack of offers on the market;
- Lengthy growth cycle of the market, which begs the question "When will the trend change?";
- Rising interest rates on mortgage lending.
These and other questions remain unanswered. For now, the confidence of local and international property buyers in the UAE and Dubai is growing. In March 2022, about 8,000 real estate transactions were completed. So, this period comes second in terms of sales in recorded observation.
However, in order to look to the future, it is necessary to define the key factors that will affect the sector. At the end of April －May, we saw a decrease in transaction volumes, first by 17% in April compared to March, and then by 13% in May compared to April. Perhaps, the market has already turned around.
Let us consider first the issue of growing interest rates. It should be pointed out that the local Central Bank connects the rising loan rates in the UAE to the interest-rate movements in the United States, which are determined by the Federal Reserve of the country.
Since the beginning of the year, three increases in interest on loans have already happened. In June, the increase accounted for 75 basis points. According to some reports, today, due to the present situation, the most popular fixed-rate mortgage is a loan with 3.75%. This, in turn, led to the fact that the number of offers from banks was significantly reduced.
It is expected that the more expensive the loans become, the fewer buyers will be ready to enter the market, as any loans will be too expensive to cover. Today, the difference between rate changes is only tens of dollars, but soon it can be about hundreds, if not thousands of dollars. The next two years will be deeply uncertain for the Dubai property market.
The impact of inflation, especially in developed countries, has become noticeable in commodities and in such goods as cars, fuel, and real estate. The country's economy is a single organism, and rising prices in one sector will have an impact on the state of other sectors, even though it may seem that they have very little in common.
Regarding the situation in the UAE and Dubai, the government has already agreed to grant a price freeze for 11,000 main consumer goods. However, the rest of the goods and sectors are placed at the mercy of the spontaneous market. Only one thing is certain: the more people are uncertain about the prices of even the most basic commodities, the less likely they are to consider purchasing property.
On the other hand, investors may start to rush into purchasing in the next few months, considering real estate as a traditional "quiet bay" in contrast to economic turbulence, especially in comparison with the collapsing cryptocurrency market. Previously, the crypto market was promoted as an investment alternative to the traditional fiat market.
If prices rise too high, and mortgage interest rates make you think about the justification of loans, the gravity of this question is very acute — how to purchase property, especially when it comes to housing.
As previously indicated, the best option for investors is still buy-to-invest real estate, no matter how attractive prices may seem at the moment. The growth in capital costs should offset current costs.
The most profitable options for ordinary consumers are renting or renting with a future purchase option. This means that in many major property markets around the world, the rental sector is expected to grow fast, and Dubai will not be an exception.
As part of the Dubai 2040 development plan, one of the goals is to double the resident population in Dubai, and meet the projected increased demand for housing property and commercial space.
As previously mentioned, real estate developers need to market 25,000 to 30,000 properties every year to meet the current demand. This year, 37,000 properties have already entered the market, and another 35,000 are expected before the end of the year. But the geographical and price distribution of new units is uneven, and there is a significant lack of required real estate in some areas of the emirate.
The issues described above are of economic and global nature. Two factors below connect directly to Dubai's construction sector and local real estate market.
Dubai has barely survived the pandemic crisis. It cut off a huge number of export channels for the local construction sector and production chains between countries because of international restrictions. Then the city fell into a new crisis. This time it was caused by conflicts between Russia and Ukraine.
Both countries had important places in the global exports of building materials. Ukraine was a key supplier of steel, including rolled steel, to property developers in the UAE.
Because of the sustained hostilities in one country and sanctions against another country, many other countries have lost access to the necessary materials. All this was added up with the existing problems that emerged during the COVID-19 pandemic, the escalating global economic crisis, and a number of other geopolitical and economic problems.
45% of sales come from off-plan properties on the local market. This means there are extremely high chances that the total sales will actively decline in the next few years.
Buyers who decide to enter the market during this period should be especially careful in selecting investment projects and the developers responsible for implementing those projects.
Taking into account the situation described above, a significant increase in the cost of real estate construction is expected. According to available information, more than 25% of construction companies have noticeable problems organizing sufficient supplies of building materials and other resources for construction work.
Of course, the new expenses affect the final prices of available residential units. The increase in prices for off-plan units becomes more and more obvious month after month.