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UAE Real Estate Market Struggling, but Hope for the Future Remains

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UAE property rental and sales prices fell in the first half of 2017, but they could rise again in the near future.

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UAE Real Estate Market Struggling, but Hope for the Future Remains

  1. 1. UAE Real Estate Market Struggling, but Hope for the Future Remains DR. EHSAN BAYAT
  2. 2. UAE Real Estate Market Struggling, but Hope for the Future Remains • According to the United Arab Emirates (UAE) Real Estate Trends 2017 report released by Propertyfinder Group, real estate prices weakened in the first six months of the year across Dubai and Abu Dhabi. The drop in rental prices outpaced sales, which has produced rather depressing yields for investors who had hoped to enter the rental market. • The declines are related to a wide range of different factors. First, construction levels remain high, so the market is being flooded with new properties, as demand catches up with supply. Moreover, the global economy has had a major effect, with a historically strong dollar making UAE property rather expensive and European investors liquidating due to low Euro and British pound values. The lower price of oil has also had a strong bearing on the market.
  3. 3. State of the UAE market • The report, which examined prices from September 2016 to March 2017 in 23 Dubai neighborhoods, found that rental values fell in 21 districts and sales prices fell in 17 of those. Downtown Dubai, which is the most expensive area to buy, realized a 6.7 percent decrease in prices, the largest drop in any sector. However, even less expensive areas like IMPZ and Dubailand had serious declines. A few areas actually had some gains in value, most notably Jumeirah Village Circle, Sports City, and Al Furjan, but these areas all have seemingly little in common except perhaps the availability of new, ready-to-go apartments, which remains an undersupplied segment. • Despite the falling yields from rental properties, the returns remain fairly high by international standards, with returns on apartments at nearly 10 percent in certain areas. Perhaps because these returns are already fairly high, investors are more willing to drop prices to compete in the market, which could explain greater falls among rental prices in comparison to sales prices.
  4. 4. • In Abu Dhabi, sales prices fell in six districts out of eight with the greatest drop at nearly 12 percent. Rentals are also in retreat in the capital city. Falling oil prices have reduced government spending and employment, thereby reducing demand. A separate report by JLL showed further declines in residential and hospitality markets during the second quarter of 2017 in Abu Dhabi, although retail and office markets remained stable. The report also blamed reduced government spending and job cuts for the poor performance. Uncertainty in the job market and a reduction in housing allowances have forced individuals to seek out cheaper housing options.
  5. 5. Hope for the future • Despite the grim reports about real estate in the UAE, there is hope for the future. According to Propertyfinder, the company has had a 40 percent increase in page views for UAE real estate compared to the year before. Many individuals may be motivated to buy due to the drop in prices. Already, there is a major shift in the Dubai market, which was formerly led by investors. As a result of the cheap prices, more end users, and especially first-time homebuyers, are purchasing property. • Many of the primary investors in Dubai real estate, including Russian and British nationals, have moved out because of exchange rates, Brexit, oil prices, and other issues. Now, the major investors typically come from India, Egypt, and Saudi Arabia, as well as the UAE. The hole in the market has been filled by an increase in end-user sales that take advantage of the unique payment plans created by developers. Plus, some banks have developed creative mortgage products to help first-time buyers. The deals mean that it has become more economical to purchase than rent.
  6. 6. • While end-users are now flooding the market, there is always the possibility that the tide will shift back toward investors, especially if the value of the dollar weakens or oil prices increase, both of which experts think will happen in the near future. Neither of these factors alone would likely be enough to push investors back into the UAE real estate market, but if they occur at the same time, then investment is very likely.
  7. 7. Market direction will depend on supply • JLL also points out that the future of Duabi real estate depends largely on how much stock that developers have placed in their pipelines. Sales of completed homes increased in early 2017, which suggests an increase in prices for the second half of the year, but this largely depends on the number of new homes that enter the market. By 2020, 78,000 new homes are set to enter the market according to developers’ estimates. This amount would result in an oversupply, which would drive down prices ever further. • However, JLL suspects that the materialization rate, or the number of houses that are actually delivered rather than expected completions, will prove much lower at nearly 40 percent. The estimate would actually cause an undersupply, which could cause prices to rise sharply as market competition increases. The performance of the market will largely depend on the ability of developers to deliver on their promises. A number of concerns about oversupply have already been raised, so developers may scale back for fear of losing money if the market becomes saturated.

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