UAE real estate market is booming with home loan rates set to rise: Here’s how you can benefit

Dubai: The property market has evidently proved to be remarkably resilient during the pandemic, but what does this mean to an average investor looking to buy real estate in the UAE – is the time right?

UAE property market growth still soars in 2022

The UAE real estate market is expected to ramp up going forward, with the property market already witnessing record-breaking growth since the last quarter of 2021. For instance, the value of property deals in Dubai more than doubled last year and broke a 12-year record for value of sales.

Nearly 80 per cent of property professionals surveyed over the past 12 months are confident that the UAE’s real estate market will grow faster over the coming year, as per a 2022 real estate report published by global real estate brokerage Berkshire Hathaway HomeServices.

During 2021, Dubai recorded over 52,000 apartment and villa real estate transactions, totalling Dh114.2 billion, which was more than the total for 2019 and 2020 combined. Meanwhile, about 15,000 property transactions tallying to a total value of Dh71.5 billion dirhams were recorded in Abu Dhabi last year.

Prices on the rise, but will demand be hit?

With high demand for real estate, prices have expectedly been on the rise too. But Dubai-based property experts evaluate how that hasn’t put a dent in the demand.

Analysis from market tracker service Property Monitor shows that January 2022 recorded the highest price appreciation since August 2021, in tandem with monthly transaction volumes growing by 2.1 per cent. Residential segments including villas and townhouses saw a steady rise in demand since 2021.

Insights from global real estate consultant Knight Frank highlighted that villas are projected to account for just 15 per cent of total new stock expected to come to the market between 2022 and 2025. This hinted strongly at the continued outperformance of villas, relative to apartments.

Dubai-based property consultant Core reports that 37,000 residential units, including 5,900 villas were delivered in Dubai in 2021. Estimates made in January 2022 by Core suggested a similar volume of units was expected to come to the market, but revisions would be made based on shifting market conditions.

“The demand trend will continue, and property prices will help boost profits,” said Cyril Lincoln, executive vice president, global head of real estate finance and advisory at Mashreq Bank. “But in the longer run, it could give way to shortages in prime segments while keeping prices elevated.”

Where is property demand booming in the UAE?

In Abu Dhabi, Dh4.1 billion in real estate transactions were seen in Yas Island during 2021, with Al Reem Island posting deals worth Dh3.2 billion. Saadiyat Island saw deals totalling Dh2.5 billion, while the Forest Belt Al Jarf project recorded Dh1.1 billion and Khalifa City had Dh915 million worth of deals.

In term of types of houses in demand, the Berkshire Hathaway HomeServices study showed that more than half (55 per cent) of property professionals surveyed said that the pandemic had generated increased demand for ‘starter’ homes.

(A ‘starter’ home or starter house is a house that is usually the first which a person or family can afford to purchase, often using a combination of savings and mortgage financing. It is a compact house or flat specifically designed and built to meet the requirements of young people buying their first home.)

Dubai, often seen as a ‘luxury home destination’, had luxury home sales last year hitting their highest since 2015. A total of 93 homes each worth more than $10 million (Dh36.7 million) were sold as wealthy buyers tapped into the post-coronavirus recovery.

However, the results of the survey illustrated a shift towards purchasing first and ‘primary’ properties (explained below) in Dubai. Demand has grown for most property types, but there was a significant rise for ‘detached’ homes (explained below) and for apartments and flats.

(The ‘primary’ real estate market consists of new properties, which include new launches and ongoing projects from the developer. A ‘detached’ house is a stand-alone residential structure that does not share outside walls with another house or building.)

Furthermore, the proximity to amenities is particularly in-demand, with almost 70 per cent of respondents highlighting the metric across the Middle East and neighbouring regions.

How can a home buyer financially benefit from a booming market?

Interest rate cuts in response to the pandemic have led to a fall in the cost of borrowing, with rates falling from 2-2.75 per cent in 2019 to 1.5 per cent in 2021. Mortgage rates also became attractive for investors as the mortgage rate fell from 5.2 per cent in 2019-end to 2.5 per cent in the start of 2021.

However, with the recent rate hikes analysts see mortgage rates touching 4.75 per cent to 5.25 per cent at some point during this year compared to the 3 per cent to 3.5 per cent average available now. When that happens, it would be the highest levels on mortgages since 2018. (Residential mortgage loans contributed about 20 per cent to 25 per cent of residential real estate demand in Dubai.)

For now, anyone wanting to take out a mortgage should opt for a fixed rate loan, at least in the initial year or two. Unless something drastic happens to the global economy, the immediate future will all be about steady upward march on rate hikes.

Subsequently, they should either take on a new variable rate loan when the market softens, or have the option to convert the fixed term to a variable with minimal penalty clauses such as a loan structure

(A fixed rate loan has the same interest rate for the entirety of the borrowing period, while variable rate loans have an interest rate that changes over time. Borrowers who prefer predictable payments generally prefer fixed rate loans, which won't change in cost.)

Average villa service charges – which is the recurring fees paid for the maintenance or upkeep of a property – have also fallen to Dh2.96 per square feet from Dh3.60 per square feet in 2019. Service charges tend to be the largest fixed cost for property and a lower service-charge-to-rent ratio makes property investment attractive as more revenue is retained by the investor or property buyer or owner.

Loan-to-Value (LTV) ratios, which compares the amount of a loan you’re hoping to borrow against the appraised value of the property you want to buy, have increased by 5 per cent for all first time property buyers – who can now borrow up to 80-85 per cent of a property’s value as the home loan amount.

This means that you only need to invest 15-20 per cent of a property’s value as a down payment. Higher LTV ratios reduced a significant barrier to entry for first time buyers, therefore opening up a larger pool of local, expatriate and foreign investors and homeowners.

Cheaper options to buy properties boosts UAE real estate prospects

Since 2019, the UAE has become a hotspot for emerging financial technology firms, especially those that have provided cheaper alternatives for UAE residents to own, buy or invest in property.

Research shows that the COVID-19 pandemic has accelerated digital changes in the real estate space as the industry now utilises technology to make real estate more accessible and affordable, particularly due to the significant fall in prices and costs brought about by the pandemic.

There are now different platforms available to partly own property in the UAE, like SmartCrowd, Stake, among others, wherein investors can utilise a real estate investment platform (REIP) to invest in a variety of real estate opportunities using a crowdfunding model, where your share of ownership is proportional to your investment.

Source: Gulf News

Share on