A walk around the glistening high-rises and villa communities in Dubai is a testimony to the immense wealth in the region. As more supply gets absorbed by the market, one is left wondering if affordability is really a factor for property investors in Dubai.
But end users are once again coming back into focus as the investor excitement in off-plan cools down. Property markets are driven by end users or the ‘middle-class’ across the world. Low down payment requirements, job security and social security provisions have created the necessary infrastructure for home ownership in the most economically developed nations. Lower down payments in particular allow end users to enter and secure long-term commitment.
There has been a significant change in the perception of developers in Dubai with respect to end users. Many are readjusting their portfolios to meet the end user demand. However, targeting the end user presents a couple of challenges for them.
Pricing is the key factor. Dubai’s real estate market has been driven by investment demand since its early days, so there is very little market information on what is considered affordable for a home owner in Dubai. Off-plan properties are snapped up by investors creating a false sense of demand.
The first step in understanding an end user market involves putting a number around the demand. Ideally, all expats would prefer to own property rather than burn their money on paying rent. However, we would all agree that it is usually impossible for expats or end users to afford property without mortgages.
Of the total population of 2.2 million residents in Dubai, approximately 35 per cent are included in the professional category and above. These are the people who can earn more than Dh15,000, which is the minimum requirement for expatriates to qualify for mortgage.
That leaves the majority of the population out of the market. High down payment requirements further filter out 50 per cent of the eligible population for mortgages.
So, we are left with merely 17 per cent of the resident population that can afford mortgages in Dubai, which is quite insignificant for long-term sustainability of the market. So clearly there is an issue with demand, which is severely hampered due to regulatory policies.
High down-payment requirement make most properties unaffordable for expats, which would otherwise be perfectly affordable.
Another key challenge with mortgages is the willingness of an expat to own a property in Dubai, which stems from uncertainties about residency status and lack of legal infrastructure in the event of genuine default.
A majority of expats work in small- and medium-sized enterprises (SME) businesses. Although they are considered to be power engines of an economy, the firms are vulnerable to economic shocks that can significantly hamper their operations and lead to panic decisions such as downsizing and other similar issues. Such events adversely impact regular earnings of salaried expats and compromise their capacity to repay loans.
At the moment, there are no provisions to settle debts or mortgage repayments through a tribunal, which also scares end users off the mortgages.
Supply of affordable units is another issue in the market. Most affordable projects have been developed by private developers who lack credibility in the market and therefore are not considered genuine by end users.
However, most large developers in Dubai shy away from catering to this segment particularly due to lower margins.
Affordable housing could be the right answer for 65 per cent of the population in Dubai currently priced out of the ownership market and can barely afford the rental market. They can be priced in the range of Dh400 — Dh600 per square foot.
This can be packed with long-term restrictions on resale to restrict speculative activity in the segment. Innovative payment schemes from developers can also help buyers surpass bank financing.
Demand of affordable housing poses its set of opportunities and challenges for the real estate industry and its stakeholders. Developers will have to understand the long-term benefits of investing in the affordable market segment and design products and prices accordingly.
Regulators need to relax rules so that prospective buyers can enter the market. Banking infrastructure should ensure proper risk assessment of prospective buyers based on their financial history.
An affordable market could be an answer to demand stagnation and thereby encourage genuine buyers to enter the market; however, it would also require strategic changes in regulatory and legal infrastructures as well.
— The writer is the Country Manager at Chestertons Mena.
