In light of the retreat of rental prices witnessed since Dubai`s real estate market peaked in mid-2014, many observers have uttered concerns in view of developers continually announcing new projects, ostensibly paving the way into substantial oversupply and an aggravated price slump.
With recently revised supply projections and population figures now at hand, the goal of this article is to analyze the supply and demand dynamics at play in Dubai`s property market from now going forward.
Supply Side: Projections vs Reality
Initial projections based on developers` accounts suggested that a total of 104,912 units would be handed over throughout the years 2017 and 2018 (34,127 and 70,785 respectively) whereas the recently revised data hint at substantial delays in construction, now predicting realization rates of 79% for 2017 and 44% for 2018 (source: REIDIN). Figures of actual handovers in 2017 are not available to date. While REIDIN thus assumes delivery of 31,266 units in 2018, real estate analyst Jones Lang Lassalle expects an even lower figure of 20,000 units to come on stream.
These numbers suggest that the variance between projection and delivery reality might sum up to a whopping gap of 46,530 or more (JLL) units between projected and actual deliveries in just two years, substantially easing the concerns that have been reiterated recently.
Demand Side
Demand in housing units is obviously determined by the evolution in population in combination with the population in relation to occupied housing units. The latter parameter had been measured at 4.5 in 2008 decreasing since to a value of 3.9 in 2016 which suggests that a population of 1m residents now occupy 256,000 units as opposed to 222,000 units in 2008. Although this downward trend had seen a temporary reversal since 2011, it appears highly likely that this parameter will not increase to its former heights, especially in light of the fact that substantially smaller, more affordable units now represent the large majority of units in the supply pipeline.
With Dubai`s population exceeding the 3m mark at the beginning of 2018 and based on a long term CAGR in population growth of 6.5% (Dr. Elessawy, UAE University) we can infer that 2018 would see a housing demand of 48,750 units (net inflow of 195,000 residents at a rate of 4 occupants per unit). Considering the projections of REIDIN (31,266 units for delivery) and JLL (22,000 units), this would in fact lead to an undersupply already in 2018.
Besides, the Dubai-wide occupancy rate presently stands at 88,4% – in line with the historical average and thus providing only for little buffer to accomodate excess demand.
On a more cautious note it has to be stressed that Dubai in particular is an exremely „open“ economy, relying heavily on external demand especially within the sectors of trade, construction and tourism. Investors must bear in mind that a faltering global growth or financial crisis, a sharp recession or regional political troubles always have the potential to disrupt the trajectory of Dubai`s economic growth path, having an immediate negative effect on job markets, population figures and thus housing demand. Also, one must remember that the above migration figures are inclusive of the labour segment the members of which are housed in staff accomodations not subject to this article.
Conclusion
Due to the general economic slowdown witnessed since mid-2014, rental prices have declined gradually across all quality segments and locations in Dubai.
As cheaper housing in general and rents specifically drive more demand – from abroad and in particular from neighbouring emirates – we will most likely see an uptick in Dubai`s population figures in the near future compared to the long-term average.
Further, increased public spending in the run-up to Expo 2020, the ongoing recovery of oil prices and devaluation of the US-Dollar-pegged AED against major currencies – especially the Pound and the Euro – generate additional stimuli and will substantially drive external demand and economic activity in the UAE and Dubai in particular.
In light of these facts, the International Monetary Fund estimates the UAE`s economy to grow at a rate of 3,4% in 2018, a value likely to be surpassed by the economically diversified business hub and hotspot Dubai. This is further underpinned by the revived hiring sentiment in the UAE`s commercial sector with 86% of respondents claiming to hire new staff within the coming twelve months (Bayt.com Middle East Job Index Survey, February 2018).
That said, assuming the absence of extraordinary external events and the given supply and demand data at hand, the probability of a further and prolonged downturn of Dubai`s property market appears to be minor.
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The author advises institutional investors about property transactions and handles property portfolios in Dubai since the year 2007. Should you have comments or inquiries, please contact the author on author@property-blog-dubai.com.
