Analysis: Dubai's property boom shows signs of fizzling out

Jones Lang LaSalle Incorporated

26/01/2024 06:00

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      Growth set to slow but tight supply could prevent severe
dip
    

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      Plans to diversify economy showing signs of progress
    

  
    By Sinead Cruise, Iain Withers and Hadeel Al Sayegh
       LONDON/DUBAI, Jan 26 (Reuters) - As cranes speckle the
Dubai skyline and ultra-luxury homes change hands at record
prices, signs that the city-state's property boom is fizzling
out are coming into view.
    Developers, investors and brokers are privately asking how
quickly one of last year's hottest real estate markets could
turn and whether a painful correction akin to the slump that
rocked the emirate in 2008 can be ruled out. 
    Since then Dubai has pursued an economic reboot anchored on
what it hopes is sustainable growth, including a 10-year plan
known as D33, to double output and become one of the world's top
four financial centres.
    Still, the real-estate industry remains a key barometer of
its success, accounting for 8.9% of the economy.
    "Dubai's vulnerability to correction lies in its dependence
on foreign capital, particularly from China and Russia," Ronan
Hannan, principal at consultancy Proven Partners, told Reuters.
    Massive infrastructure spending, generous income tax
policies and an 'open-door' approach to immigration reinforced
after the pandemic have attracted thousands of foreigners.
    Russians were the top non-resident buyers of homes in the
first quarter of 2023 but dropped to third place by the end of
the year, according to Betterhomes research, with buyers from
India and the UK accounting for most of the transactions during
the twelve months. 
    There was also a notable rise in buyers from Egypt, Lebanon,
Pakistan and Turkey, the firm said, underlining the city's dual
role as a safe haven as well as a magnet for the ultra-rich.
    Although Russian and Chinese inflows are slowly tapering
off, increased interest from Indian investors could keep any
downturn swift and shallow, said Hakim Abdeljaouad, Managing
Director in Kroll's Valuation Advisory Services practice. 
 
    COOLING PRICES
    A record 431 Dubai homes were sold for more than $10 million
in 2023, nearly doubling the previous year's tally and making it
the largest such market in the world, according to research from
property agency Knight Frank shared with Reuters.
    House prices in Dubai's three 'prime' residential areas -
Palm Jumeirah, Emirates Hills and Jumeirah Bay Island - are
however forecast to increase at a more modest 5% in 2024 after
adding 15.9% in the year to September 2023, according to Knight
Frank.
    House prices outside those luxury areas leapt 19% over the
year to September and are forecast to grow 3.5% in 2024.
    "My worry is the state of the global economy," Dubai's
former finance chief Nasser al-Shaikh told Reuters. "We're open
to the world and whatever happens in other places affects us."
    But he added that so long as both national and local
governments deliver on broader development plans, future housing
supply should be absorbed by new residents. 
    Others sounded less optimistic with a senior source at a
major Dubai developer saying house prices could tumble by 10-15%
over the next few years.
    Another source close to the situation said at least one
large local landlord is seeking to sell multiple hotel
properties, including one on luxury hotspot Palm Jumeirah to
de-risk their portfolio.
    "Supply is going to outpace demand to a certain extent
within the next two to three years especially in the luxury
segments, so this is naturally going to cause a form of
slowdown," Mireille Azzam, JLL's head of strategic consulting
for the Middle East and Africa, told Reuters, adding some
residents were waiting to see if prices became more affordable
before moving. 
    
    NEW-FOUND RESILIENCE?
    Memories of Dubai's 2008 property crash which ultimately led
to a $20 billion bailout by the emirate's oil-rich neighbour Abu
Dhabi still loom large, but analysts say lessons have been
learnt and the risk of contagion from any downturn appears
lower.
    "The financial institutions and major developers in the
region have learned from past crises and are well-prepared,"
Kroll's Abdeljaouad said. "The market focus is shifting more
towards mainstream housing and infrastructure."
    Economic indicators remain strong, with an S&P Global
December purchasing manager survey recording its highest reading
in 16 months, reflecting Dubai's non-oil businesses firmly in
expansion mode.
    Meanwhile, Dubai is forecast to deliver just 13,000 homes
annually over the next six years, well below the 30,000 run-rate
over the last 15 years, suggesting a shortfall that could
underpin demand, said Knight Frank partner and head of research
for the Middle East and North Africa Faisal Durrani.    
    The exposure of the 10 biggest UAE banks to real estate,
which analysts put at more than 30% during the 2008-9 financial
crisis, has decreased for nine straight quarters, according to
consultancy Alvarez & Marsal, falling to 16.2% in the third
quarter of 2023 from as high as 22.3% at the end of 2020. 
    Although banks and developers have reduced their risks,
industry sources warn thousands of other industry players are
more vulnerable to an extended slowdown. 
    Those include Dubai's brokerages, the number of which has
ballooned to about 4,000 from 1,200 in 2020, noted Betterhomes
chief executive Richard Waind.
    The biggest threats to Dubai's real-estate sector come from
unexpected spikes in inflation, unpredictable global interest
rate policy and regional contagion from the Israel-Hamas war,
eight sources told Reuters. The potential impact of disruption
to key shipping routes in the Red Sea is so far unclear. 
    But geopolitical turmoil such as Russia's invasion of
Ukraine has boosted the emirate in recent years, and some
speculate this could continue.
    "Dubai will always benefit whenever there is chaos," the
developer source said.     

 (Additional reporting by Rachna Uppal; Editing by Elisa
Martinuzzi, Kirsten Donovan)
 ((Iain.Withers@thomsonreuters.com;))