Is the Bubble about to burst? | The Elephant in the room

Hi subscribers,

Let’s address the elephant in the room!

Property prices in Dubai went up like crazy in recent years - is this a bubble about to burst?

Dubai’s property prices have been increasing substantially since 2020. That’s 5 consecutive years of increase. Can this be sustained or will there be a correction? Well, nothing can appreciate forever at rates substantially above inflation. Growth at one point must slow down or assets become overvalued and will eventually correct. DLD transaction data already shows a slowing down of the increase and Property Monitor’s price index shows the first monthly decrease in January this year.

Let’s compare to past corrections

Dubai has seen two major corrections, in Q4 2008 and Q1 2009 due to the Global Financial Crisis and a prolonged 6 year correction between Q4 2014 and Q3 2020.

The 2008/09 correction

The Global Financial Crisis was a bloodbath. It led to a lot of people losing a lot of money. Banks and insurance companies failed. Many people lost their jobs and/or savings. Six years before, in 2002, Dubai started selling properties to foreigners. Subsequently prices only went one direction. When JBR was launched in 2002, 2BR apartments could be had for less than AED 500k. Within a few months, they doubled in price. I thought them to be overvalued. I was expecting a correction. However, they still increased further to about AED 3 million. During this time, everyone buying real estate in Dubai made money. In 2007/08 people put as little as 2.5% deposit, hoping to quadruple their money when the property appreciates by 10%. When the crisis hit, they couldn’t sell and didn’t have the money for the remaining payments. Developers then couldn’t collect enough money to finish their buildings and went bankrupt. Those who could have paid also lost their investment, as the building was never finished. Everyone lost.

The 2014 to 2020 correction

In 2014 real estate was up to similar levels as 2008. Inflation adjusted it was a bit less. Besides correcting back to normal levels after the chaos of the financial crisis, one of the main drivers of the increase was the award of Expo 2020 to Dubai. Then in 2014, what could then have been a short and moderate correction was prolonged and aggravated by the introduction of VAT and the COVID 19 pandemic.

How does this compare to now?

According to Property Monitor, current prices are about 20% above 2014 levels, which is in line with inflation. However, one has to also take into account that villa and townhouse prices increased between 100 and 300% over the last 3-5 years. Also, some of the newer developments are more luxurious and therefore sell at a higher rate per sqft. Apartments in JBR for example are still below the 2014 peak.

As Dubai is growing and becoming more and more comparable to established global cities, it makes sense that Dubai’s property prices are higher than 10 or 20 years ago when the city was much smaller and the property market less developed.

However, it is clear that the opportunity to make money is now much less than what it was in 2020. This makes it even more important to select the right opportunity. The comparator function on our website allows you to conveniently compare similar projects and find the best.

How does Dubai compare globally

When we compare Dubai with other global cities, per sqm rates are still quite affordable and rental yield is high. With Dubai continuing to grow, one would expect its property prices to approach the levels of similar global cities.

Offer and demand

In the short and medium term it is important to look at offer and demand. This means increase in units versus increase in resident population.

The number of units expected to be delivered in 2025 and subsequent years is increasing substantially. However population growth as well. Dubai’s 2040 plan expects 5.8 million inhabitants by 2040. This means 125,000 additional residents per annum. However between end of 2023 and end of 2024, Dubai’s population increased by more than 200k from 3.655 million to 3.864 million. Not all of those immigrants earn high enough salaries to rent a luxury apartment. Some will live in shared accommodation. However, the number also includes almost 7,000 millionaires. Some of the units will also be used for short term rental, especially the higher end ones in prime locations.

There is of course no guarantee that the population will continue to grow at ever increasing rates. If this is not the case, or if global events limit the investment flowing into Dubai, it is well possible that there will be oversupply in some areas. This can lead to declining prices.

Global economic effects

The recent changes to US import tariffs have increased uncertainty in the global economy. This will of course impact the UAE and Dubai economies as well. However, the implications are not that straight forward. There are worries of a global recession or worse. If there is a global economic downturn, investment flows into the UAE from some global investors could decrease. However, they could also increase from those who see the UAE as a safe haven. In case the USD devalues, this could be positive for those owning property under mortgage in the UAE, for as long as interest rates don’t increase substantially. India’s recent restriction on money leaving the country is another effect impacting demand from Indian investors.

Should I sell?

If you have bought at the right time and made a good return, you might consider selling and buying in an area that still has growth potential. If there is a correction, you might be able to buy the unit back for a lower price. However, keep in mind that transaction costs are about 6-8%. So, selling with the aim of buying again only makes sense if you are confident the market will correct notably.

In case you are waiting for a correction to invest, remember that we can’t time corrections. When I arrived in 2005, I also hoped for a correction. But prices kept increasing and even in the 2009 crash didn’t come back to pre 2005 levels.

Good projects also make money in difficult times. A friend of mine bought an apartment in Bluewaters Residences in 2017 - not the best year to invest - but he more than doubled his money.

So where do I find good projects?

No project comes with a guarantee. However, supply of townhouses and villas is expected to continue falling short of demand. Waterfront property, especially with sea view and beach access is also in limited supply. Whether the market corrects or not, those projects will certainly do better than most others.

Our top pick are therefore:

• Dubai Islands - low density luxury Island development;

• RYM and Maritime City - high-end mid and high rise waterfront communities; and

• Ghantoot waterfront developments - affordable luxury villas and townhouses with beach access.

Besides choosing the right project, selecting a sought-after unit within the project (e.g. full sea view or high floor) for a good price can also improve investment economics.

Below are the latest and upcoming project launches in the above areas:

If you are interested in any of the above or want to sell a property, please let us help you get in touch with the right real estate professional advising you in your best interest.

As always, with us, you will not get unwanted calls from pushy agents. The agents we work with are independent from us, go through a stringent continuous selection process and will only contact you in the way and at the time you choose.

Below are the upcoming projects in other parts of Dubai

If you are interested in any of the above we are also more than happy to put you in touch with the right specialist.

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Until then, keep it up.

Stay tuned,

M&M

Important Notice:

The information provided in this newsletter (the “Newsletter”) is a consolidation from different publicly available sources combined with the personal view of the author and for informational purposes only. It does not in any way constitute financial, investment, legal, or tax advice. Nothing in the Newsletter or on our website is an offer or advertisement for any specific project or opportunity, but a tool for you to see and compare publicly available information on projects for your own personal purposes. While we give the option to put you in contact with independent agents specializing in different areas, we are neither in control of, nor responsible for any information given by those agents.

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