Luxury real estate is the business card of Dubai.
This offer comes in various types, sizes and configurations. In the premium class, the investor and the buyer will find large vertical apartments, penthouses, villas with five or more bedrooms, townhouses made of the best materials with the involvement of famous designers.
All this, of course, is located in attractive tourist, resort and business areas — closed cottage villages like Arabian Ranches, artificial islands of Palm Jumeirah and Palm Jebel Ali, lively Business Bay and Downtown Dubai.
In other words, the offer is wide and diverse, which has always attracted a lot of attention from tourists, business investors and expat foreigners.
However, Dubai is not the only luxury real estate market in the world, at the same time, the population ready to buy such a property is quite limited for obvious reasons. In this regard, even a lot of attention to the emirate's real estate has been insufficient for many years and has not kept up with the growth in demand.
All this has led to a long-term trend of falling prices for expensive real estate. The increase in supply due to the constantly increasing pace of construction has reached such an imbalance by 2021 that among the 25 leading luxury real estate markets in the world, Dubai was one of two cities, the second one was Buenos Aires, which did not show any price growth at all.
Luxury real estate is a fancy market. Being in the highest price segment, it can count on demand only from a relatively narrow stratum of buyers and investors with large capitals and large incomes.
Because of this, it is subject to fluctuations, since the supply regularly exceeds the demand, and only the specified target audience loses interest in the market for a short time — the supply will begin to rapidly lose in price.
Sometimes there are also such excesses, in which some elite real estate is slightly more expensive than large objects of the middle segment. These are not the best indicators of what a premium-class property should be.
This trend has been observed for many years in luxury real estate in Dubai, reaching a record price drop in 2020, when expensive living turned out to be cheaper than ever.
In this article, we will analyze why such a trend has formed and what is happening at the moment in the luxury real estate sector.
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The content of the article:
Multi-year price drop
We have already talked about how Dubai turned out to be one of the two cities in the Top 25 luxury real estate markets, which by May 2021, according to the Knight Frank agency, showed a continuing trend of falling prices.
Interestingly, the rest of the market grew in the first five months and did so largely with an increase of hundreds of percent compared to the previous year. More than 62,000 units of real estate have been sold, and in 2022, the indicator is expected to be more than 63,500 residential buildings.
Since 2009, these were the highest rates of construction in the Emirate. Interestingly, it was in 2008-2009 that the Dubai luxury real estate sector peaked due to a strong imbalance of supply and demand, from which it cannot get out for more than a decade.
It should be noted that the decline in the cost of luxury real estate is not a completely negative trend. In Dubai, the premium sector shows ups from time to time — they are simply not strong enough to consolidate a new trend.
So, against the background of the weakening of quarantine measures in early 2021, many new and rich foreign investors and expats were attracted to the market. But the growth in demand turned out to be uneven both by type of real estate and geographically.
In this regard, some supply sectors grew, but others compensated for the growth, continuing to decline.
Let's illustrate the situation with concrete figures: at the moment, for one million dollars in Dubai, you can buy five times more luxury real estate objects than, for example, in London or New York. For $1 million, you can buy 42,356 houses on the territory of the Emirate.
According to forecasts, prices for luxury real estate worth about $1 million in 2021 will continue to decline by 2%.
According to Faisal Durrani, head of Middle East research at Knight Frank, the cost of residential real estate in general should fall by 2-3%, the cost of villas — by 3-4%. As already mentioned, the overall downward trend is likely to continue in the next few years.
However, in the spring of 2021, it was noted that the rate of price decline may slow down in the next year or two.
But this will happen if restrictions on movement between countries are eased, and the upcoming world exhibition "Expo-2020" in Dubai will be just such an incentive for the market, analysts say today.
It should be understood that cheap luxury real estate is certainly not a problem. On the one hand, there is no better time for investors than now to buy a record-cheap premium-class property for the future.
However, without a pronounced growth forecast for the coming years, it is unknown when this acquisition will begin to bring sufficient income to cover investments. At least, if you want to buy a property as an investor, and not for personal use.
However, all that we have outlined above is the situation for May 2021. By the beginning of July, there were unexpected changes that forced many to reconsider their expectations for the sector in the coming years.
The turn of 2021
In the first days of July, several rating agencies published positive forecasts about the upcoming rapid growth of the luxury real estate sector. This completely exceeded all previous market expectations.
The main thesis in all the forecasts was the confidence that all market segments have passed their lowest point, including the offer of premium real estate.
This news was followed by news about the increase in the credit ratings of several major developers in Dubai.
For example, the international agency S&P Global Ratings changed the negative rating of Emaar Properties to stable. It was pointed out that one of the main sources of income for Emaar is expensive real estate, so against the background of a positive shift in the market, it is logical to expect an increase in the company's profit indicators.
In the first half of 2021, more than 10,000 new investors entered the Emirate's market. And this is despite the fact that there are still serious restrictions in the world to combat the coronavirus caused by the COVID-19 pandemic.
Dubai has finally managed to remove the economy from the "needle" of oil dollars and tourism, diversifying the market due to the developed IT sector, high commercialization and the development of industrial areas of the city.
Diversification was strengthened by new reforms in the field of migration, as well as joint plans of the state and developers in the real estate market until 2040. At the moment, the echoes of the strengthening of the economy are already visible — they are expressed in the growth of FDI and the influx of foreign highly skilled workers.
The demand in the sector, including for premium real estate, is fueled by the start of the world exhibition Expo-2020 in October 2021.
S&P Global has given a positive forecast for the sector's revenue growth of 30% by the end of this year, and overall GDP growth is expected to be about 3.5% in 2021 and 2.5% in 2022.
Villas and townhouses have shown rapid growth, and apartments should follow this trend in the next few months. The overall price growth in the emirate was 8.3%-10%, if measured compared to 2020.
Ready-made real estate, including elite, received special attention. Investors' demand for this offer has shifted from off-plan real estate, which dominated last year (note: off-plan is real estate under construction).
Jeanne Jocinke, CEO of Property Monitor, expects that growth will not always be high, but it will definitely be stable.
In some areas of Dubai, there is already a situation where the demand for premium class exceeds the supply, so sellers have the opportunity to aggressively raise prices.
Among these areas, the main place is occupied by coastal and resort areas, as well as those located near Dubai South - the venue of the Expo.
July — sharp growth of the sector
In the first six months of this year, more premium-class real estate was sold than in the whole of 2020.
The Dubai real estate market ended June with such figures.
In total, 22 luxury properties were sold for a total of $770 million in the first six months. In 2020, 19 objects were sold.
However, real estate for $10 million is becoming the norm.
All of the above are the best market results since 2015.
Palm Jumeirah turned out to be the most popular area with buyers of expensive real estate — there were leading sales of villas worth more than $30 million.
Such changes in Dubai, which has always been away from the trends of rising prices for luxury property, shows the prospects for price growth around the world.
Knight Frank attributes the increase in demand to the success of the Emirati government in the fight against COVID-19, the stabilization of the situation and the easing of quarantine restrictions.
Another event will also affect the price growth in the next couple of months — the actions of landlords before the upcoming freeze of rental rates for the next three years.
This situation at the moment looks very uncertain and is a problem.
The essence of this problem is that against the background of turbulence and fluctuations in the rental housing market in Dubai, the main real estate agency of the Emirate — the Dubai Land Department (DLD) — in April announced plans to freeze rates for the next three years. The beginning of the freeze should occur in the summer of 2021.
However, the DLD itself is silent about which sectors will definitely be frozen and which may receive relief, whether it concerns the entire property or individual types, whether there will be areas excluded from the freeze, or it is planned to conduct full regulation of the entire market.
Given that rental income is the main source of earnings on real estate in the emirate, for many, the freeze became a source of panic and forced them to quickly renegotiate contracts with tenants at higher rates, such as should be fixed for the coming years.
In just a few months from January to May 2021, the rental rate increased by $9,500 - $15,000. And this is not the limit at all.
If this trend continues, and it is likely to continue, it means that the rental of luxury real estate will grow rapidly, and this will be followed by an increase in selling prices, as part of the demand will move from renting to buying still cheap luxury real estate.
And so, for investors and buyers — what to expect from luxury real estate in the coming months and what to do?
Real estate of the upper price segment has been in a phase of stable price decline in recent years. As a result, they reached their historical minimum in 2020, which made them an extremely profitable acquisition for those who want to find luxury housing to live in, as well as for rich investors who take assets "for growth".
However, in just six months, by mid-2021, the trend that has been going on for more than a decade has finally shown signs of change.
This makes you think that perhaps the next few months are the last chance for investors to buy luxury real estate at record low prices.
The luxury real estate sector is not large in absolute numbers, but it can be very profitable.
There are all prerequisites to expect a multiple increase in prices and profits from such an asset, so it is important not to miss the moment.