Dubai real estate sector faces risk of cyclical reverse | Arabian Weekly

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Dubai real estate sector faces risk of cyclical reverse | Arabian Weekly


K Raveendran

As real estate prices continue to rise in Dubai, the risk of a cyclical reversal is mounting, rating agency Standard & Poor’s has said in a report.   The agency, however, adds that the Dubai developers are well prepared for such a turn of events.

S&P estimates that prices will increase 15%-18% in 2023 and by another 5%-7% in 2024 as the Dubai market gradually slows down. The prices for villas have reportedly exceeded previous peak levels, but apartments are lagging at 10%-20% below previous peaks due to a historical oversupply.

But it adds that it does not expect a profound market disruption. Instead, it thinks price increases could decelerate and potentially slightly reverse over the next 12-18 months, with price declines not exceeding 5%-10%.

At the same time, pre-sales are also expected to decelerate to a still-healthy level.  Developers will adapt their offerings to demand and will likely continue to launch prime properties–including branded residences–for which demand from high net-worth individuals should be more resilient, the S&P report points out. They are also likely to launch smaller units since the price per square foot has become expensive and buyers are starting to downsize spaces. This contrasts with an earlier preference for larger properties following pandemic-related restrictions.

Foreign investors, including high net worth individuals, have helped to sustain strong demand, particularly for prime properties. Strong pre-sales in 2023 contrast with the previous expectation that the market would stabilize. Dubai has remained relatively immune to external pressures from the sluggish global economy, echoing the strength it showed during the pandemic.

Dubai benefits from a diversified economy and has performed well since the pandemic despite higher funding costs for corporates and lingering inflation, which nevertheless remains below the global average. Dubai’s economic growth is expected to average a relatively robust 3% over 2023-2024, following the post-pandemic recovery that led to average 5% growth in 2021-2022.

Supported by the strong economic performance, the government’s fiscal position is likely to strengthen and its debt burden will continue to decline as a share of GDP, the agency says. Conversely,  it forecasts a period of subpar global growth as more heavily indebted economies are hit by higher-for-longer interest rates.

S&P expects continued strong momentum in the hospitality, wholesale and retail, and financial services sectors to drive growth in 2024-2025. In contrast, real estate will likely slow down in the next 12-18 months after another strong year in 2023.

Dubai’s population has grown by over 2% to 3.6 million according to the Dubai Statistics Center (data as of September 2023). And international visitor numbers are continuing to recover. Dubai International Airport handled over 41 million passengers in the first half of 2023, exceeding that of 2019. Dubai is on track to reach 17 million visitors per year, representing a full recovery in just three years.

Dubai stands out as an exception to the general trend in which unfavourable economic headwinds have undermined developers in other markets.   The European real estate market has been marked by weakened purchasing power since 2022 due to high interest rates and relatively higher inflation. The China market also remains challenging for its leveraged developers, with margins tightening as prices drop–pressuring profitability. The picture has been a little brighter in the U.S., where demand picked up at the start of this year after a slowdown.

S&P Global Ratings took several negative rating actions on Dubai developers in the early days of the pandemic. But this was followed by a series of upgrades from 2022 as positive sector trends improved the performances of all rated entities. Downgrades have persisted in other regions, however, even as the pandemic subsided. This reflects the markets’ less-favourable macro and sector trends, their greater sensitivity to interest rates hikes, and higher inflation, which lowered consumers’ purchasing power, the report adds.

 


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