How the delay in the Expo can benefit Dubai real estate
As a sector that accounted for 13.6% of the Emirate’s GDP in 2019, real estate is central to the grand ambitions of the country. It is therefore understandable why the UAE top brass laid special emphasis on the real estate sector in recent months, leading to a slew of measures. Notably, a special committee was set up, entrusted with the task of regulating the supply and diversifying the offerings, while keeping affordability in check.
The upcoming Expo provided an additional incentive to invigorate the market and create favourable conditions, to encourage sales and expand UAE’s real estate footprint. The government was banking heavily on the mega event and the preparation was in full swing. Even developers were racing towards project completion, in time for the Expo, scheduled to commence on October 20, 2020.
However, the pandemic broke this momentum and the Expo was rescheduled to begin from October 1, 2021, a year later. In the meantime, priorities have radically shifted, with the public health crisis taking precedence, followed by economic recovery. The UAE is using diplomatic channels to combat the crisis and directing resources towards health infrastructure, to meet the increased demand. Additionally, the UAE Central Bank has launched a Dh126 billion stimulus package — the highest in the MENA region, to offset the economic fallout and aid recovery. But where does real estate fit in the scheme of things, given these changes?
Expo Delay: Boon or bane?
On one hand, the world is battling an unprecedented health crisis. Many countries have shelter-in-place measures in effect, while the rest are waking up to a new reality, having lived through the worst of a modern-day pandemic. This begs the question: Will the delayed Expo have the same impact that it could have had before the COVID-19 outbreak?
Given how fluid the current situation is, a definitive answer to that question is impossible to give. For instance, the original projection of 25 million visitors could be far-fetched at this stage. In turn, the lowering of the estimate could adversely impact the hospitality industry and several other sectors, which had already invested into gearing up for the additional demand that was expected. That said, the rescheduled Expo could be a blessing in disguise for regional real estate.
Firstly, Dubai real estate market is characterized by oversupply. This necessitated the government’s hands-on involvement in the attempt to regulate the supply, through the formation of a new committee. Despite the proactive measures, Dubai’s total inventory currently stands at 555,000 residential units. As per Property Finder(1), around 180 projects, comprising almost 50,000 apartments, townhouses and villas, will be completed by September, 2020. Developers who were pulling out all stops to complete projects can now invest more time into creating value-added services.
According to Cavendish Maxwell(2), as of April, 67% of UAE’s residential construction was proceeding according to plan. This is to say, regardless of the materialization rate, the real estate sector will have a healthy supply for a year, but the disruption also means that many projects could be stalled. When the Expo-driven demand peaks in 2021, the market could achieve a long-desired equilibrium.
Prior to the pandemic, affordability was at an all-time high, fueling the homebuying aspirations of the middle class who constitute a vast majority in the Emirates. The prices were expected to drop further by 7-10% in 2020, which, going by the current trend, is a strong possibility. At this rate, property values could bottom out in the coming year, according to many experts in the region. Until then, homebuyers can continue to expect attractive discounts and incentives.
Another important observation is that this pandemic has induced a significant change in buyer preferences. Current owners are in search of bigger living spaces and facilities with modern amenities, after COVID-19 outbreak unearthed several flaws in old building stock. Villas and townhouses, characterized by less overall footfall and more interstitial space between units, are expected to find takers, owing to the need for physical distancing. The Expo delay buys more time for developers to tailor their value proposition in line with changed preferences and buyer sentiment. Of course, none of these advantages compares to the benefits that real estate stands to gain from the stimulus package that the UAE government has announced.
Stimulus for real estate
The economic stimulus package consists of several real estate-centric provisions(3), aimed at rejuvenating a sector whose macroeconomic implications are both acknowledged and appreciated by the nation’s leadership. One of the package highlights is the slashing of interest rates by 50 basis points, expected to entice first-time borrowers – marking the highest interest rate cut since a decade.
Additionally, the issuing banks have been advised to raise the loan-to-value ratio by an additional 5% for first-time homebuyers. The Central Bank has also upgraded the existing limit on maximum exposure that banks can have to the real estate sector from 20% to 30%, subject to possession of more capital. And the banks designated as ‘systemically important’ will be allowed to utilize more than 60% of the capital buffer. The Expo delay means that the impact of these fiscal policies can manifest in time for the rescheduled event.
Given the extremely resilient nature of this sector in the UAE, it is rational to not only expect a timely recovery from the COVID-induced downturn, but also a successful event in 2021, leading to a further boom in real estate.