The COVID-19 pandemic has been causing disruption across most industries and the UAE’s real estate market is expected to face strong headwinds in the near term. Given the uncertainty around the current situation, market stakeholders are finding it hard to predict when property investment activity will return to Dubai. If the pandemic has a sustained and long-drawn impact on the broader UAE economy, it will have a cascading effect on the property market as well. The current lockdown has caused most activity to come to a halt in the short term, but property transactions are expected to gain momentum once restrictions are lifted.
If you are a prospective house buyer in the market, all things are going in your favour now. Low mortgage interest rates, higher LTVs (loan to value), reduced service charges and attractive valuations make for a win-win situation. But with the UAE seeing rampant job losses, salary cuts, uncertainty about job prospects and tightening of credit standards, it could adversely affect demand for property. So, you should only think of investing in a property if you are sure about your cash flow in the near to mid-term future.
Why is it a buyer's market
- Low mortgage interest rates
- Higher loan to value ratio available
- Affordable property sales prices
- Reduced service charges
- Attractive price valuations
- Developer incentives such as service fee waivers, free gadgets, kitchen appliances, etc.
Sales market performance
Both the rental and sales market in Dubai are expected to remain under downward pressure due to the market uncertainty. A potential contraction in income levels will make some buyers delay their decision making. Besides a drastic drop in demand, the limitations to physically view properties and conduct business are also leading to extended transaction timelines.
However, lower entry price points, attractive interest rates and the favourable loan-to-value ratio due to the increase of five percentage points for first-time buyers have improved affordability in the secondary sales mortgage market. Moreover, several developers are also offering service charge waivers for up to two years after handover, free kitchen appliances and gadgets as incentives to attract buyers in a down market. This presents an opportunity for cash-rich purchasers to take advantage of the current subdued market conditions.
Investing during a time of uncertainty is exactly the sort of time where opportunity can reveal itself
“There will be certain investors and/or potential owner occupiers that may prolong their decision to buy until they feel more comfortable with the current environment. In which case, the option to continue to rent and renew terms with landlords might be the best option for some. For others however, investing during a time of uncertainty is exactly the sort of time where opportunity can reveal itself,” said Richard Paul, head of professional services and strategic consultancy at Savills Middle East.
Once normalcy is restored in the UAE, the industry expects banks to step up their exposure to real estate and the construction sectors, a spike in re-mortgage activity due to attractive borrowing rates and other promotional discounts being offered.
Banks are still quite competitive with their lending rates and have historically reduced pricing to attract potential buyers in the market
“Owing to the current turmoil in the global economy as a result of COVID-19, UAE banks have tightened their lending appetite based on client profiles and industry segments. As we are all aware, we can expect sluggishness in the SME sector. Banks are getting a lot of requests from their existing customers for deferment of current monthly obligations. This has further caused a reduction in banks’ earnings. However, they are still quite competitive with their lending rates and have historically reduced pricing to attract potential buyers in the market,” said Dhiren Gupta, Managing Director, 4C Mortgage Consultancy.
How will the rental market fare?
In the rental market, there is expected to be limited movement over the coming weeks as most tenants are likely to negotiate with their current landlords, particularly those with immediate rent renewals. “However, as we come back to normalcy once the outbreak subsides and movement restrictions are lifted, we foresee a surge in pent-up demand for rental relocations as tenants look to reduce their rental outflow,” Murray Strang, head of Dubai Office at Savills, a real estate consultancy pointed out.
“After the COVID-19 outbreak, initially I expect there to be a big rush in the rental market. People have lost income or jobs and this may lead to a need to downsize. Also, families in apartments are looking to move to villas with more space for their children,” said Harry Tregoning, Managing Partner of Tregoning Property, a Dubai-based real estate agency.
Property oversupply to reduce
Oversupply of property has always plagued the Dubai property market. However, the restrictions imposed on construction sites will result in fewer handovers this year, thereby addressing the demand-supply gap. According to data from CORE, only a little over 5,000 units were handed over in Dubai in Q1 2020. In contrast, Q4 2019 saw more than 13,000 units handed over in Dubai.
Residential units handed over in Dubai in Q1 2020
“Due to the ongoing COVID-19 situation, we expect future handover volumes to come down as construction timelines and supply chains are impacted along with softened demand. Further downward revisions are expected on supply forecasts as they will inherently depend on the period of the pandemic and the pace at which functionality returns coupled with buyer confidence as developers adjust to ongoing market conditions. While this may abate some of the oversupply concerns, dampened demand is expected to continue impacting existing and upcoming inventory,” said Robert Thomas, head of agency at real estate consultancy CORE.
Further downward revisions are expected on supply forecasts as they will inherently depend on the period of the pandemic
Atif Rahman, Director and Partner, Danube Properties, said real estate investments are more buyer-friendly now owing to the temporary oversupply. The contraction in new project launches will impact deliveries in the next two to three years, thereby reducing the gap between supply and demand, he told Gulf News. Danube Properties will complete three more projects and hand over 1,488 units this year. “This takes our tally of planned delivery this year to almost 2,000 units,” Rahman said.
Foreign buyer demand
Overseas investors always account for a big chunk of buyers in Dubai property. This is because of the UAE’s strategic location, well-priced properties and attractive rental returns. With Expo 2020 being delayed, the market will still offer good investment yields. However, with the pandemic affecting all geographies, especially key source markets like India, Pakistan, the UK and China, demand is expected to be subdued in the near term.
“We expect most of the near term-demand to stem from end-users who have not been adversely impacted by the economic impact of the pandemic and opportunistic cash-rich investors. With the ease of doing business, infrastructure, government spending and inventory on offer, Dubai is well-equipped to make a recovery when full functionality resumes post COVID-19,” remarked Thomas.
With numerous fundamentals unaffected by COVID-19 such as climate, tax conditions, limited transactional cost, leisure amenities and high returns, Dubai will continue to appeal to an international investor base.
Danube Properties is, instead, pinning its hopes on demand from Dubai’s long-term residents. “Dubai continues to hold a large population of residents who are still renting their home and they are our future prospect, particularly the affordable housing segment,” Rahman pointed out.
Dubai real estate has never been short on attractiveness, especially rental yields
He added: “Dubai real estate has never been short on attractiveness, especially rental yields. Even during the lowest lows, the rental return achieved in Dubai real estate is better than the highest yield one can achieve on similar opportunities globally.”
Are any transactions taking place?
Although limited, real estate transactions are happening in Dubai, even during the disinfection drive and public lockdown. The Dubai Land Department is still open for business remotely.
“The DLD is implementing online transaction services that allow for the exchanging of contracts, implementation of mortgages and transfer of titles, with all parties being witness through web-based solutions. There is particularly movement in transactions for off-plan property, where there is just a single party purchaser [other than the developer] required to make the transfer final,” said Helen Tatham, associate director of prime residential at Savills.
There is particularly movement in transactions for off-plan property, where there is just a single party purchaser [other than the developer] required to make the transfer final
Tregoning said off-plan sales are relatively unaffected as the finished product is not available to be viewed anyway. The secondary market for sales can still operate and Al Manara Real Estate Trustees is offering an online service to complete deals, he added. However, in the rental market, transactions are much harder to complete as viewing permits are difficult to get during an emergency.
“The success of the investment in Smart Dubai has never been more evident as so many processes in all forms of Dubai government business are now operable off-line,” added Tregoning.
Which sectors will recover first?
The Dubai real estate market is likely to see a phased recovery across asset classes. Industries that continue to adapt in the changing landscape may recover first. “Sectors such as logistics/distribution and assets related to e-commerce will have benefited from the challenges faced by traditional retail outlets throughout the COVID-19 pandemic. Unfortunately, we expect hospitality, leisure and traditional retail assets to be hit hardest, particularly if landlords remain rigid and do not provide tenants with the flexibility that they require to get through the crisis,” said Strang.
According to Thomas: “Mainstream residential, office and warehousing asset classes, although impacted, are expected to show relative resilience while hospitality and brick-and-mortar retail [apart from groceries, supermarkets, pharmacies and essential services] are expected to be impacted the most.”
There is also likely to be a flight to safety, with buyers focusing on core locations and asset types; favouring security of income and value protection over the higher returns that may be gained from more peripheral locations and assets.
Relief measures so far
The Dubai Land Department and Real Estate Regulatory Agency have taken the lead to support the property market by announcing the waiver of penalties imposed on homeowners for service charge violations in 2019 and 2020, provision of flexible installments to pay service charges and reduction of service fees.
In the retail market, many developers have announced relief packages and rental incentives to reduce the financial burden on retailers. Many commercial developers and landlords are also looking at rental holidays and extended rent-free periods to help tenants. Other major developers and landlords are also expected to follow through across asset classes to maintain occupancy of their unit.
How developers are coping
Construction activity on project sites has been impacted owing to lockdown restrictions and disruptions in the construction materials supply chain.
“We continue to record new sales and enquiries though less compared to the pre-pandemic time. However, the real estate industry is not just about new transactions, it’s also about project deliveries. This is the time for all developers to demonstrate their ability to deliver improved value addition in all ongoing projects,” said Rahman from Danube Properties.
“While we need to focus on the COVID-19, it is equally important to plan life once the crisis is over. Any investment made in real estate delivers an appreciating asset. While there might be temporary cyclic value corrections, investing in real estate will always yield profits in the long run. Based on the current situation, it looks like the world should start returning to normalcy in two quarters. Once the crisis has been dealt with, the markets will bounce back immediately. A large portion of investments will be driven towards real estate,” he observed.
Good quality affordable housing has an opportunity to flourish
Meanwhile, Sun & Sand Developments, an SME developer in Dubai, is also focusing on completing its project in Warsan on time and navigating through the challenges of supply. “Most construction material comes from Europe and China. Yet, we have to ensure we will deliver without delay,” Sailesh Israni, managing director, told Gulf News.
He is optimistic that the Dubai property market will see local demand once things settle down. “Good quality affordable housing has an opportunity to flourish. There is an opportunity to do something for the lower middle income bracket. Companies need to provide housing to blue-collar staff. There is also an income bracket that today cannot get access to good housing like junior accountants, clerks, junior engineers, etc. Maybe there can be guidelines or policy to make good affordable housing accessible to them,” Israni suggested.