Dubai’s red-hot property market is bracing for a slowdown

Habib and Yusuf are among hundreds of thousands of homeowners attempting to navigate Dubai’s red-hot housing market, which has outperformed most others around the world this year. They join tenants, property analysts and developers in trying to predict whether the market is finally starting to turn as a slew of new properties are delivered and global economic uncertainty catches up with the emirate.

So far, the boom has been underpinned by an influx of wealthy investors such as Russians seeking to shield their assets, crypto millionaires and rich Indians seeking second homes. The government’s handling of the pandemic and its liberal visa policies also attracted more foreign buyers.

Since January 2020, rentals in the emirate have surged about 42%, while home prices have jumped roughly 33%, according to property advisory firm CBRE Group Inc. Villa rentals have seen some of the biggest increases and now go for an average of $88,400 a year.

The surge has pushed many tenants like Habib to take the plunge and buy a property to avoid repeated rent hikes or being pushed even further out of the city. After her landlord increased the rent on her two-bedroom property by 16% over three years, Habib bought the apartment she’s now trying to sell.

Dubai’s property market has long been known for sharp booms and busts, with one of its most dramatic downturns coming in 2009, following years of debt-fueled growth. The crash left some of its largest developers on the brink of bankruptcy. Prices rebounded in 2011 before slumping again in 2014 after an oil price collapse hurt regional economies. Since then, the government has introduced a series of reforms for buyers and developers to limit volatility including raising required down payments for mortgages to 20%.

Still, selling a property “in the hope of picking up a similar property next year at a lower price is a risky bet,” said Taimur Khan, CBRE’s head of research who expects price increases to moderate at between 5% and 10% next year, but doesn’t see “a compelling argument for why prices will fall when the population continues to increase and the economy is growing.”

For now at least, there’s little evidence across the city that the market is starting to slow. Long traffic jams block the emirate’s major highways even on weekends, waiting lists for member clubs run impossibly long and student enrollments at schools have surged 12% this year, their biggest increase since 2007.

‘Less of a Boom’

But some analysts are starting to warn that 2024 could mark a turning point. Earlier this month, Morgan Stanley said that it sees “continued tailwinds” for the market and expects next year to be “less of a boom than 2023.”

And while rents continue to increase to eye-popping levels, the rate of the surge is cooling in some of the city’s most popular neighborhoods. In November, the average rent rose 19.2%, slightly lower than the 19.7% growth registered in October, according to CBRE.

At the same time, the number of property transactions fell 13% in November from a year earlier mainly due to a 26.4% slump in off-plan sales as new projects sold out and developers ran out of inventory. Still, sales of existing homes rose 5.1% that month.

Prathyusha Gurrapu, head of research and advisory at the property firm Cushman & Wakefield Core, also expects prices to moderate — but not fall — next year. She says population growth will support the market and “if the Fed cuts interest rates, that will encourage mortgage buyers.” Mortgages currently account for only about a quarter of all property transactions in Dubai, according to Morgan Stanley.

S&P last month said it expects home prices to rise 5% to 7% next year before declining 5% to 10% over the following 12 to 18 months as global economic uncertainty and an uptick in the supply of new homes impact the market.

“There are no big signs of the cycle turning already but we know that buyers are downsizing a bit so average property size is shrinking,” said Tatjana Lescova, S&P’s associate director of corporate ratings. “The bulk of the market is coming to a certain limit in terms of purchasing power.”

Developer Shift

After a record year for new sales and launches, developers are also starting to adapt.

S&P expects about 40,000 properties to be delivered in Dubai next year and the same number in 2025. That’s a lot compared to previous years at between 15,000 to 30,000 homes. As a result, Morgan Stanley expects developers’ focus to shift to earnings growth as such large backlogs are executed, although companies usually deliver fewer properties than estimated.

Dubai’s track record of boom-bust cycles is unsettling for Mohamed Alabbar, founder of Emaar Properties PJSC, which built the world’s tallest skyscraper and accounts for about 30% of Dubai’s property market. Emaar Development, the construction unit, has seen revenue backlog from property sales in its home market surge 60% from a year earlier 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 remains cautious.  Project execution and the health of the balance sheet of contractors are among his biggest concerns.

“Dubai is flying. The UAE is flying. But this is the time to think what can go wrong,” Alabbar said in a recent interview.

Hussain Sajwani, the founder of Damac Properties PJSC, one of Dubai’s largest privately-owned developers, said he doesn’t think the emirate’s real estate market is overheating just yet and expects the increase in prices to stabilize. Still, the billionaire is also finding it difficult to predict what may happen next year.

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