Off-plan luxury projects drive real estate risk in Dubai

October 2, 2024, 9:25 AM

'Speculative demand' for off-plan and an 'overvalued' luxury segment are driving up risk of a real estate bubble in Dubai, says UBS

Oversupply in luxury segment
Dubai’s ‘bubble risk’ is rising
But prices beginning to stabilise

The rapid growth in off-plan development, particularly luxury properties, is injecting vulnerability in Dubai’s otherwise solid real estate market.

Developers launched 391 projects in Dubai between January and mid-September, a 43 percent year-on-year increase.

Many of the apartment towers in the pipeline are designed as high-end, and often branded, residences.

“I feel there’s an oversupply to some extent in that part of the market that will bring the prices down, and it is combined with a lot of people buying off-plan not wanting to live in the apartment, but wanting to flip it as an investment,” says David von Rosen, founder of the luxury villa developer 25 Degrees.

“I don’t think there will be a larger real estate bubble bursting, as we have seen a very healthy and much needed increase in prices: with Dubai being a global metropolis now, it’s normal that there is a lot of demand.”

The Swiss bank UBS publishes an annual report on the “real estate bubble risk” of 25 cities around the world. In the 2024 edition, published last week, UBS said Dubai had the highest increase in its risk score of the 25 over the past year. The city’s overall risk profile remains moderate, however, and far below the scores of the three most exposed markets, Miami, Tokyo and Zurich.

“Speculative demand” for off-plan transactions and an “overvalued” luxury segment drove much of Dubai's increase in risk, according to the report.

Matthias Holzhey, the lead author of the UBS report, says: “For me it is a big surprise that Dubai is not a high bubble risk. But what we are seeing is very strong rental growth, very strong income growth, so we say there is no bubble, everything is normal.

“But construction seems to have been picking up, and in Dubai historically that’s always been a major risk, and then prices are so high that’s also a risk factor, because people start to try to speculate in this kind of environment.”

The higher the UBS bubble score, the higher the risk a city will experience a significant price correction, in the range of 15 percent, over the next one to three years.

There are signs that a slowdown might already be starting, as off-plan prices in Dubai begin to stabilise after jumping as much as 30 percent in 2023 in areas such as Dubai Hills, Business Bay and Jumeirah Village Circle.

The emirate is attracting a growing expat population eager to take advantage of longer-term residency options such as the new golden visa and the ability for foreigners to own a local business outright.

While that has fuelled strong economic growth, it has also put pressure on the secondary real estate market, where high-quality homes are increasingly hard to come by.

It is no surprise, then, that developers have focused on Dubai’s still ample supply of undeveloped land to launch off-plan projects.

“There is a lot of evidence that suggests that speculative activity is high on the off-plan market,” says Fahd Iqbal, chief investment officer for the Middle East at UBS Global Wealth Management.

“What concerns us is if you have a situation where buyers don’t have the financial resources to complete the outstanding payment that comes due on delivery, and you start seeing increased selling activity,” he says.

Such a scenario could even affect the secondary market, if off-plan buyers are forced to unload ready properties to cover their payment plans.

Iqbal says this is not necessarily a likely scenario as the “very positive sentiment” about Dubai’s real estate “hasn’t approached the level of euphoria” seen at this point in the past two cycles and given that higher prices are “well underpinned by rising incomes and rising long-term residents”.

“But I think it’s important to be aware of the risk itself.”