This year started on a solid note, building on the momentum Dubai’s real estate market gathered in 2022. With record transaction volumes and unprecedented gains across all performance indicators, it is interesting to see Dubai’s resilience given the intensifying global recession concerns and rising interest rates.
As a global city, Dubai isn’t immune to these conditions, however, it has greatly pivoted itself into a preferred global gateway city due to the government’s robust response to the pandemic, pioneering policies and visa reforms, thus attracting and retaining investment and global talent. This has created upward pressure on the real estate market with sharp rises in capital values and rentals witnessed over 2022. Coupled with a strong take-up across asset classes, we foresee this upward trajectory to continue over 2023, although expected at sustainable levels. Despite the spike in values, as residential prices remain competitive compared to other global cities along with property-linked visas attracting international buyers to Dubai’s unrivalled lifestyle, tax regime, connectivity and safety, we expect demand for Dubai’s prime residential market to remain strong over 2023.
Furthermore, as the supply-demand imbalance intensifies across the prime residential sector with higher demand and limited stock, we expect a steady increase in sales prices in the near term. However, due to increasing tenant and end-user resistance and comparatively greater levels of supply in this category, we anticipate the mainstream apartment market to experience modest growth. We remain optimistic on our 2023 outlook as Dubai is expected to see a continued uptick in prices, rents and occupancy levels across asset classes, however, in the backdrop of increasing concerns around affordability and challenging global economic conditions.
RESIDENTIAL SUPPLY SHOWCASED
Only 29,000 residential units were handed over in 2022, lower than an initial forecasts of over 35,000 units and the lowest number of handovers witnessed in Dubai since 2019, as supply chain issues impacted realisation rates and delivery timelines. Apartments continue to lead the tally with around 22,000 units and 83 per cent market share while only 5,000 units were delivered in the villa market comprising 17 per cent.
As supply deliveries have dipped compared to previous years, along with a booming transaction market, a supply crunch is being created in a few pockets of the market, particularly the prime villa and waterfront apartment market as demand continues to outstrip supply in these segments. However, as most of the new and existing stock are in the mainstream and affordable apartment segment, a large portion of the apartment market is relatively balanced in terms of supply and demand.
RISE OF OFF-PLAN LAUNCHES
We have seen a sharp rise in project launches as developers are keen to capitalise on positive market sentiment. However, most new announcements are skewed towards the apartment segment as apartment launches spiked 120 per cent while new villa project launches saw just a 5 per cent year-on-year increase, albeit expected to exert further upward pressure on villa sales prices. With lower ticket sizes and higher development returns, most developers continue to focus on the mainstream apartment market. This trend is expected to plateau apartment sales prices, as supply and demand equilibrium is expected to be achieved by the end of 2023. We have also seen a shit in o -plan payment plans with most launches now at 60-70 per cent payment during the construction period and only 30-40 per cent post-handover as developers try to capitalise on growing demand.
FACTORS DRIVING THE TRANSACTION MARKET
The year 2022 was the best in Dubai’s residential transaction market with the highest-ever secondary and o -plan market transactions recorded both in terms of volumes and values transacted.
Significant changes in visa regulations and pro-business sentiment are underpinning strong market performance. With over 151,000 golden visas issued since inception, the introduction of retirement visas and a raft of property linked visas are drawing residents and investors alike to consider the UAE a long-term home. With a steady population increase across income segments, in line with the 2040 target of 5.8 million residents, Dubai is driving sustainable demand. Lowering the property value-linked qualification for visas from Dh1m to Dhs750,000 has also resulted in a strong push, as nearly 39 per cent of all secondary transactions were between Dhs750,000 to Dhs2m, while 49 per cent of all off-plan transactions were between the same range.
The prime market saw unprecedented demand over 2022, with secondary market transaction volume above Dhs10m witnessing a 62 per cent year-on-year increase (1,593 transactions concluded in 2022 compared to 981 in 2021). This includes the highest villa sale recorded on Palm Jumeirah for a whopping Dhs600m. While high-ticket purchases were typically focused on the secondary market, prominent luxury off-plan launches in 2022 performed increasingly well with a staggering 113 per cent increase in off-plan transaction volumes compared to 2021 (695 transactions in 2022 compared to 326 in 2021). The year also broke records for the ultra-prime segment with over 24 residential transactions recorded above the Dhs100m mark compared to the five registered in 2021.
With growing ultra-high-net-worth individuals demand for luxury properties, particularly on the waterfront, we foresee this segment to remain insulated from the global recession, interest rate hikes and inflationary pressures as most of these transactions are cash purchases. In terms of sales prices, most districts are well above pre-pandemic levels with average citywide villa sales prices up by 11 per cent and apartments by 9 per cent year-on-year. However, these prices are still below their 2014 peak values, with villas lagging by -5 per cent and apartments by -22 per cent. With just 5 per cent behind their 2014 peak values, we expect villa sales prices to surpass them by H1 2023, due to sustained demand despite downward pressures from rising interest rates and inflation. While we don’t foresee the sharp rises witnessed in 2022 to continue in 2023, we believe the market will see moderate rises at sustainable levels as the gap between ask and bid prices rises with end-users being priced out of the market along with global recession fears and rising interest rates deterring a segment of buyers.
ESCALATING RESIDENTIAL RENTS IMPACT AFFORDABILITY
The rental market has witnessed the highest-ever year-on-year increases with the citywide villa rental average up by 25 per cent and apartments by 27 per cent year-on-year. Improving at a record pace and as we predicted earlier, villa rents are now 1 per cent higher than 2014 peak values while apartments are lagging by 18 per cent, albeit, expected to recover in the coming months. Although from a low base, these drastic rises in rents have caused a significant upheaval in the rental market over the last few quarters with most tenants receiving rental escalation notices. Tenants are preferring to stay in existing units as rental increases during renewals are considerably lower than new leases and are regulated by the RERA rental calculator. Furthermore, a section of tenants, despite the high sales prices and interest rate hikes, are becoming end-user buyers to avoid frequent renewal negotiations or relocations.
We expect rental rises to continue for new leases in 2023, as high occupancy levels in central locations will exert upward pressure on rents – albeit the rise in rents in renewals will be relatively lower as they are protected through the RERA rental index. As rents have witnessed a sharper rise compared to sales prices, yields are at a seven-year high, with citywide gross apartment yields at 7.2 per cent and villa yields at 5.7 per cent.
DUBAI’S OFFICE MARKET
Over 2022, Dubai’s office market experienced strong absorption across districts, leading to an unprecedented rise in occupancy levels and rates. Citywide occupancy levels are now hovering at 87 per cent compared to 78 per cent in 2021, resulting in the absorption of nearly nine million square feet of office space over 2022. As a result, there is a scarcity of stock, which is becoming increasingly concerning given the rising demand.
Furthermore, most of the upcoming office supply pipeline is already pre-leased, thus offering very limited availability upon delivery. This high demand has led many single landlords and freezones to activate new office projects. However, as it would involve a two three year construction cycle, we expect to have an office supply crunch in the near term, creating further upward pressure on rents and occupancy levels.
As office demand intensifies and outstrips supply, citywide office rents spiked by 29 per cent year-on-year with all office districts above pre-pandemic levels and nearly at par with 2014 peak values. With no new major office developments expected in centrally located established office districts, we expect continued upward pressure on office rents over the foreseeable future. While demand for office spaces remains strong, we cannot ignore global recession fears, hiring freezes and job losses across the international tech and banking sectors and their impact on Dubai’s office market. This is expected to slow international first-phase expansions and potentially bring some secondary market stock back to the market as a few firms may downsize. While regional markets are doing well, they aren’t immune to global conditions, however, the UAE government’s initiatives are offsetting these headwinds by creating a range of demand drivers to sustain economic growth.