Dubai real estate faces price drop of up to 10%, says S&P

Reuters

• ‘Cyclical slowdown’ due
• Fall over next 18 months
• Supply and demand issues

Dubai’s real estate market is poised for a 5 to 10 percent slump in prices in the next 12 to 18 months, an analyst said on Wednesday.

The shift in the market – an important driver of the emirate’s economy – will be driven by imbalances in supply and demand, according to Tatjana Lescova, associate director and primary credit analyst at S&P Global Ratings.

This will be compounded by lingering global economic uncertainties that could undermine the sentiment of a predominantly expatriate investor base, she said.

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“The risks of a cyclical slowdown and potentially a mild reversal are increasing,” Lescova told reporters at a press briefing on Wednesday. 

“We think there could be pressure points on both sides of the [demand-supply] equation.” 

Lescova said that property prices are near previous peak levels, particularly in the villa segment, which could dampen buyer interest and push down demand.

There are also big concerns about over-supply, she said, with annual new unit supply projected to be around 40,000 for the coming year, potentially exceeding market demand unless balanced by population growth.

“There was some [oversupply] relief during the pandemic, particularly in 2020 when there were no project launches and developers used that time to sell out the existing inventory,” she said. 

Residential property prices in the emirate rose at their fastest rate in almost a decade in the first half of 2023, climbing 16.9 percent year on year.  Villas topped previous records set in 2014.

A market slowdown could also mean strained liquidity for the emirate’s property developers. 

“If the cycle slows down, we see the biggest pressure on cashflow because advanced payments will go down,” Lescova said.

“This could significantly increase their funding needs, because construction is very capital intensive. They would need to raise funding because they cannot reduce construction costs on the projects they already have in development. Debt will go up and credit metrics will weaken.” 

Increasing competition, marked by the entry of new developers like Aldar into Dubai, is also likely to intensify pricing pressures and reduce profit margins, she added.

Nick Maclean, managing director of the property consultancy CBRE Mena, told AGBI: “Pricing growth is driven by supply, demand, affordability and appetite for risk.

“At the moment, the weight of demand remains very strong, but the pace of growth will, inevitably, be affected by affordability in the local market. If pricing levels continue to exceed increases in salaries and profitability, then a rebalancing of seller and buyer expectation is likely.”

Pexels/Abid Bin Nazar

Smaller units grow in popularity

The market adjustment comes as high-net-worth individuals continue to invest in luxury properties.

Dubai’s real estate market became an attractive destination for global capital during the Covid-19 pandemic, and was further spurred by a significant rise in geopolitical risks.

In 2022 and 2023, Dubai witnessed more property transactions exceeding $10 million in the luxury segment than New York, London, and Hong Kong.

“You still have high-net-worth individuals that can afford multi-million properties,” Lescova said, adding that cash transactions in real estate have been growing at “double-digit” rates for the past three years.

As prices have risen, she nsaid, there had been a shift towards smaller property units, moving away from the larger living spaces that became popular post-pandemic. 

“The average property size is going down,” Lescova said. 

Despite the pessimistic outlook from S&P, Sidharth Kumar, sales manager at Forest Hills Real Estate, said he sees no sign of the market cooling.

“Demand remains strong, though growth may not reach the peaks of 2022-2023 due to oversupply,” he said. 

“Even if prices decline, it will be more likely less than 5 percent.”

Louis Harding, managing director at real estate firm Betterhomes said “a welcomed moderation” in the growth of Dubai real estate prices was likely, but he disagreed that house prices would drop just yet.

“With house building struggling to keep pace with the demand that a rising population creates, we do not foresee prices dropping,” he said.

Residential property values in Dubai have continued their upward trajectory, marking the 11th consecutive quarter of price increases, Knight Frank’s Autumn 2023 Dubai Residential Market Review said.

In Q3 2023, average residential property prices rose by 5 percent, bringing the cumulative increase to 30 percent since Q1 2020, though prices remain 7 percent below the peak of 2014.