In a dramatic year for real estate, we have ended with the reintroduction of zero down payments on Dubai offplan buys, and a flurry of new launches that have made the supply pipeline exceed 350,000 units. And rising by the hour.
‘No money down’ has been an invitation for everyone to take capital market types of risk, since everyone can afford zero down payments. 2024 will be remembered for the significant tilt towards offplan in Dubai, now accounting for more than 77% of transactional activity, even as ready prices have started to fall.
It has ended the year with developers on a treadmill that just refuses to slow down in terms of incentives offered. Behind this logic has been the rationale that buying old houses is simply not worth it, because they are antiquated, and require a substantial amount of retrofitting to bring it up to par.
This trade started in earnest in 2021, but the frequency of upgrades has reduced and focused on the higher end of the luxury market.
But if buying old houses is a wrong decision, the same has been said of buying new houses, simply because of shrinkage. The median sizes of apartments and houses have fallen by more than 25% since the start of the freehold phenomena in 2002.
Mortgage affordability
Last but not least, there has been no reason to get a mortgage because the affordability factor is simply out of reach for most of the populace. And so, with a snap of the fingers, developers have offered flexible payment plans, with expressions of interest allowing buyers to ‘buy’ what they can whenever they can.
If this sounds somewhat discombobulated, it is, because the long awaited reversion to the mean has only now started to come as developers start to struggle to attract buyers who do not resort to cancellations.
Of course, these cancellations cause project delays and so the idea that has taken root is to buy and sell with increasing frequency, with end users increasing at the top end of the market and make headlines.
There has been some effect on rents already stabilizing, and, in some cases, even showing marginal declines. But for the most part, the headlines of a softening in prices have had to do with the rate of increase slowing down. Even as we continue to have a new launch roughly once every 15 hours, with a flurry of new developers almost on a daily basis.
If this sounds a bit like Groundhog Day, it probably is because whenever prices overshoot their replacement value by a margin, there can only be a period of subdued performance ahead.
If the idea is to enjoy capital gains, there has been the signal from the capital markets where even real estate stocks have substantially outperformed real estate assets. Emaar’s decision to payout its share capital in the form of dividends this year was met with euphoria, and now is on the cusp of being the best performing stock for the year.
Better than S&P 500 returns?
Behind this announcement is the tacit assumption that the management is signalling that shareholders are better off with money in their own hands rather than reinvestment opportunities, which is indicative of the rising prices of land making new projects less viable than in the past.
Investors clearly see the greater value in valuations regarding real estate stocks, and even the capital markets as a whole. (An equal weighting of investment in UAE IPOs would have yielded a greater return than the S&P 500 over the past 3 years).
It also signals that investors are focusing more on cash flow rather than capital gains, as the structure of the market changes with lingering worries about inflation and the cost of living.
The biggest boon has been the relentless bullishness of the markets, whether domestic or international, from real estate to capital markets. In such times, the yawning gaps between ready and offplan prices, and valuations seem to be shrugged off. Until they can’t.
Profitability has gone through the roof, and with the influx of capital and enterprise, the stage is presumably set for more of the same.
Such ebullience, sometimes leads to careless bahavior as everyone starts to get carried away. And the volatility in pricing, as well as developer offers, paints a picture of frothiness. Average investors have shown that they have been more patient in their behavior thus far.
Fortunately, that patience has thus far not been tested. Whether that continues to be the paradigm remains to be seen.
