Buying Dubai Real Estate Today?

Since April 2020, when Dubai came out of lockdown, the city has been on a continuous growth path in number of tourists, residents and overall prices for goods and services, including rental and purchasing of real estate.

It is not surprising at all; Dubai’s Government corona measures were absolutely spot on and allowed a normal life to take place in the city (yes, with a mask on but otherwise completely normal), the vaccination campaign was highly embraced by the residents and while the rest of the world was going through continuous lockdowns and limitations, we were enjoying the normality here in Dubai. That attracted loads of tourists and residents from other parts of the world, during this pandemic.

On top of that, during Q4 of 2021 and Q1 of 2022, Dubai hosted “The World Expo’, a huge and successful event, which required years of preparations, with billions spent on infrastructure and which resulted in a high demand for accommodation, transportation, leisure & entertainment and had a very good impact on the Dubai’s economy.

Today, 11th of May 2022, we are observing the whole world being open (except for China), inflation being the main talking point of the central banks across the world, the “World Expo” ended, corporation tax introduced in UAE starting 2023 (some companies will only be affected in 2024) but property prices are at some of the highest points observed in the history of the city. Yes, the war in Ukraine brought in some fresh capital from Russia, as USD account holders in Russia were only allowed by the Russian Government to transfer their money (USD, EUR or any other foreign currency) offshore, if they were purchasing property from the UAE (and other selected countries) developers (primary market ONLY, not secondary market) or invest into UAE (and other selected countries) based mutual funds and while that might be reflected as positive in overall number of transactions, it never had nor should have had any impact on the secondary market (the pre-owned real estate stock) as such property could have been purchased only with money held into bank accounts outside of Russia (US, Switzerland, UK, EU etc).

As the Central Bank of UAE is following the monetary policy of the US Federal Reserve (one of the downsides of having a pegged currency to the USD), the interest rates in UAE are rising and are expected to rise even further. With that in mind, new property buyers might be affected on the long run in multiple ways and while some UAE based real estate experts are saying people are rushing to buy in order to “lock” lower interest rates, I don’t see it as good financial decision and I’ll list below the reasons why:

1. When interest rates are rising, less people qualify to obtain a mortgage (in 2016 the Eithad Credit Bureau came into play, controlling the amount one can repay on a monthly basis also know as DBR or Debt / Burden Ratio, which at the moment cannot exceed 50% of one's income, in potential monthly debt repayments), while less people will be able to afford the higher instalments, from a mental or life style perspective (as the emotional factor is an important one to make such financial commitments and financial security has a massive role in the emotional factor). Also, when interest rates are rising, in order to qualify for a mortgage loan, the approved lended amount tends to drop. We can already observe a drop in the secondary market transaction number YTD.

2. Existing mortgages will be affected (as long as they are outside any fixed interest period) and those property owners will notice a spike in the value of the monthly instalments. In some cases, things will be so dramatic that they will be forced to sell the property, as the rental income (if any) or monthly income, will not allow them to continue holding the property, creating by doing so a “higher supply” than we currently observe.

3. When you start having the demand lower than the supply (which might be a result of the above points), the prices tend to correct on the negative side, in order to be competitive and liquid (anyone can ask for a price but if nobody is willing to pay it, you will need to drop it or drop it dramatically if you are in a rush to sell). This will make the price of the properties purchased today (11th of May 2022) drop as well.

4. While the interest rate is against the borrowed amount, the costs associated to buying a property are against the purchase price of the property (Land Department 4% of the purchasing value, real estate agent 1-2% of the property price, 0.5%-1% of the LTV as mortgage processing fee, life insurance with permanent disability in forced by some banks, property insurance etc.) therefore, it is important to have a low purchase price, as all other costs will be lower as well while the interest rates, even if higher to begin with, can be re-negotiated with the bank, at the end of the fixed rate term, IF THE PROPERTY IS NOT DOWN IN VALUE OR IF YOU ARE NOT IN NEGATIVE EQUITY or in other words, a value that will allow the bank to sell the property quickly and with no hustle nor loses, if you stop paying the instalments for any reason (low risk for the bank).

For example, if you buy a property of AED 4 million today, you will make a 25% down-payment (AED 1 million), AED 160,000 to the Land Department, 40,000-80,000 to the Real Estate agent, 15,000-30,000 Mortgage Processing fee, 3,000-6,000 valuation fees while the life insurance will have to cover you for AED 3,000,000. If the property corrects by 10-20% or more (which is highly likely but not guaranteed, based on previous behaviour in similar previous environment), all of the above changes towards your own benefit: purchase price 3,200,000 AED, down-payment of 800,000 (200k less), Land Department of 128,000 (32,000 less), real estate agent 32,000-64,000 (saving you 8k-16k) while the life insurance will be only on 2.4 million AED (saving you on the monthly cost as well). That brings the total cash saved on purchase to up to 248,000 AED, which could be used to refurbish and enhance the valuation of a property straight away however, the biggest gain will be the “freedom” to renegotiate the interest rate with your bank when the time comes, while you will be borrowing from the bank only 2.4 mil AED instead of 3 mil AED.

5. As a world-wide recession is forecasted by many central banks around the world, it is hard to believe that Dubai will not be impacted by it (if and when it comes). The most likely impact will be felt on the employment side, as companies will be restructuring their costs, in order to make sure they stay profitable for their stake holders in any given environment. Also, the introduction of corporation tax will be having a similar effect, which will impact us in 12 months from now.

6. High interest rates are not forever. While we observe the increase in interest rates in order to control these high levels of inflation, interest rates will be one of the first mechanisms to be used (dropped) in case of a recession, in order to stimulate the economy therefore, having a rate fixed for too long might play in your benefit if the rates keep going up but, it will surely play against you, if the rates are going down in the next 24 months. In this graphic, we can easily observe that "rates going up" periods are much sorter than "rates going down" periods.

7. If despite the central bank's efforts, the inflation keeps going up, it is likely to drag along the property price market (prices to go up). Also, if we are to have a full scale war in Europe and peace in the UAE, Dubai will become again "The Place To Be" as it has been during the Corona pandemic. These are the only two possibilities, where I can see a future growth in property and rental prices, over the next 2-3 years.

In 2018, 2019 and 2020, when the property market in Dubai corrected heavily on the negative side, I had a few clients paying “unfair” mortgage interest rates to their banks (EIBOR 3-6 months plus profit margin, but not less than 4.99%) and while we tried negotiating the rates (as any new applicant would have been offered a 2.4%-2.7%), having a valuation lower than the purchase price has always been a challenge, as you cannot relocate the mortgage to another bank (your outstanding with the current bank might be higher than the LTV accepted by any other bank) making you lose leverage in negotiation and while your bank might be willing to drop the rate, it will do so only if you do a cash injection into the mortgage, so the bank’s exposure to a potential default is lower.

That being said, it is up to you to decide if today is the best moment to buy a property in Dubai. Yes, you might be locking (for the next 3-5 years) a better rate than in 12 months from now but you might also be missing on the highlighted points. It’s down to you to decide what is most important for you and which scenario gives you more peace of mind.

Disclaimer: I am not, nor pretending to be a qualified (or unqualified) real estate specialist nor expert. While my comments and ideas are formed based on experience, logic and intuition, they cannot be seen as guaranteed future events. The above is my interpretation of the current market environment and should not be considered financial nor real estate advise.