Build to Last

Despite an uptick in sales in 2017, there is widespread consensus that Dubai’s real estate market will remain “soft,” i.e. with more sellers than buyers, through 2018 and likely into 2020, as a major Standard and Poor’s report forecast in February. A combination of low oil prices, geopolitical uncertainty, and the introduction of a new 5% flat VAT on a great many transactions all point to a continuing slide until an expected equilibrium is met in time for Expo 2020, when Dubai will become the first Middle Eastern city to host the world’s largest such showcase. Though organizers are expecting 25 million people to descend upon the Emirate for that year’s festivities, there are nagging worries that developers will exceed demand in anticipation of the event, exacerbating a supply-side glut that has already seen many “preferred communities” across the Emirate fall to 65% occupancy rates.

Indeed, one of the biggest trends since mid-2014, when property prices reached their decennial peaks, has been the heavier decline in higher-end markets. While overall property prices declined 5-10% in 2017 in Dubai, prices of single-family homes, known simply as “villas,” fell by 10.2% that year. And while overall prices have declined by 13% since July 2014, on the eve of the oil crash, homes in the ‘super-prime’ market have fallen 25-30%, according to JLL, a leading Dubai-based real estate consultancy. And to take but one prime example from the highest-end niche, flats in the Burj Khalifa’s 160 floors fell 25% between March 2016 and March 2017 alone and some 71% since 2008.

As for current “standardized” rates, according to the FT a small two-bedroom semi-detached house without a view goes for USD450,000; a one-bedroom in a high-rise in Dubai Marina or The Palm Jumeirah, both exclusive and centrally located, will set you back USD1.75 million; while a three-bedroom apartment at The Royal Atlantis Residences with a view of the skyline went for USD5 million in 2017.
Whatever the case, extreme elasticity at the top end needn’t spell trouble for those further down. For starters, the crash in oil prices wrought a disproportionate number of job losses among higher earners. Despite this, a total of 17,000 new apartments still came on the market in 2017, and ‘post-handover payment plans’ in which people pay 40-60% of a property’s value after its construction and are popular with lower earners, resulted in 25,600 purchases last year—the highest-such number since the meltdown of 2008.

Altogether, it was still a robust year of construction: of the 150 projects worth USD22.3 billion that were initiated in 2017, 90 were completed. According to the municipality of Dubai, some 5,630 buildings covering a total area of over 75 million square feet were completed in the first nine months of 2017. The municipality also revealed that 28,600 buildings covering an area of 551 million square feet were under construction at the beginning of 4Q2017. Indeed, these are all part of a broader trend of constant supply growth: JLL, for its part, now expects the residential supply to increase a further 9% in 2018 and 7% in 2019.

Which brings us back to the Expo. 2018 is expected to see the most Expo-related contracts of any single year—the total value of which is now thought to be USD6.1 billion. Yet, the Expo itself is but a minor piece of a much bigger puzzle, Dubai South, a 145sqkm master-planned smart city “based on the happiness of the individual” and designed to create 500,000 jobs and sustain a population of 1 million. It will also house Al Maktoum International Airport, a megaproject initiated in 2010 that developers are claiming will be the largest in the world upon completion. Not to mention the rest of the infrastructural investments being made for the Expo—extensions to Dubai World Central, the metro, and Road and Transports Authority (RTA) road improvements—for starters.

As in so many other hubs of activity around the globe, Dubai has also seen a noticeable uptick in its Chinese presence. Not only did the number of visitors from the Middle Kingdom increase by 49% in 2017, according to JLL, but Chinese contractors also now figure prominently among the largest five in the Emirate. The China State Construction and Engineering Corporation, for example, is now the second-biggest contractor in the UAE and signed contracts worth USD2.3 billion in the region in 2017 alone, including serious works on the Dubai Canal and a USD67-million road infrastructure package for the Emirate’s RTA. Finally, Chinese buyers accounted for 3% of all property purchases in Dubai in 2017, more than making up for the 2% represented by Qataris prior to the blockade of summer 2017 that is still in force.

All things said, total property prices are still down 16-19% on three years ago, according to the National Bank of Kuwait, a figure most starkly outlined by falling profits at two of the Emirate’s largest contractors. Emaar Properties, Dubai’s largest listed developer, reported a 16% dip in Q42017 net profits, as rising costs bit into its margins. Another huge player, Damac Properties, a firm that had revenues of USD1.95 billion in 2016 and was the first Middle East real estate developer to list on the London Stock Exchange, saw its profits plunge 47% in 1Q2018. Meanwhile, experts such as the Phidar Advisory, a Dubai-based consultancy, believe that property prices are still 15-20% overvalued.

While much of this can be explained by the aforementioned fall in oil prices and lingering geopolitical uncertainty, the new VAT must also be taken into account. Though it does not directly target residential, it does apply to commercial real estate as well as hotels, bed and breakfasts, serviced apartments, and all residential property leased out on a short-term basis—less than six months—to non-residents. It also applies to Dubai Electricity and Water Authority (DEWA) fees, in addition to district cooling and the like. Since sales and leasing are also considered taxable goods and services, they too are subject to the flat 5% fee. While JLL expects the VAT increase to result in 2% inflation across the board, it is clear that the indirect costs related to the new measures will find their way into both renters’ and purchasers’ pockets before long, with likely adverse effects on the “velocity of real estate transactions,” one might say.

Of course, VAT is but one of several policies intended to modernize the Emirates and their relationship between citizen, legal resident, and state. After all, the VAT isn’t merely about raising funds and diversifying the state’s source of income away from oil; it’s also about giving citizens (and residents) more ‘skin in the game’. Rather than “you break it, you pay for it,” the VAT is likely to have a “you pay for it, you have a say in it” effect.
A further sign of the changing times, Dubai also liberalized some of its archaic zoning restrictions in 2017 to open up more areas to non-GCC citizens through land title reforms. Already the effects are being felt. This not only spurs demand, by increasing the pool of buyers for a given home or area, but also increases liquidity and drives up home prices. In Jumeirah’s Umm Suqeim neighborhood, for example, luxury five-bedroom homes with a garden are going for merely half the price of similar-sized homes on half the land less than 1km away on freeholder land. It is a trend the government would do well to take note of.