Dubai’s Real Estate Cycle - Is it the right time to buy ?

Do what Billionaire Dan Gilbert Did: Buy Up Detroit after the housing market crash

Buy low and sell high. This should be your mantra when investing. You will need to be far-sighted and up to date with most recent changes and events in the market. Most importantly you must be aware of the mechanics behind Dubai’s real estate cycle.

“What goes up must come down” - as true as this saying is when speaking about the laws of gravity, it is as prophetic when describing the real estate cycle.

History does repeat itself in real estate and it is mostly due to our innate human behavior. An irrational exuberance almost always builds up, fueling prices to very high and risky levels (unsupported by personal income and rental levels), which always leads to a market ‘correction’ driving prices back down.

The real estate cycle consists of four main phases: “ Recession-Recovery-Expansion-Hyper Supply”.

To help explain the cycle, let’s do this quick exercise. Assume you have a time-machine, which year would you rather visit to make your first real estate investment in Dubai - 2012 or 2015 ?

To freshen your memory, here is how things looked back in early 2012:

Construction Supply in Dubai was at an all time low

Oil prices were fairly stable, fluctuating between a minimum of 80 - 105 dollars a barrel.

Job growth showed promising positive signs with an increasing rate of new business formation

Real Estate prices were stable and had already bottomed out mid 2011

Rental levels were just bottoming out

Rental Yields were much higher than the long-term equilibrium levels

Here is how things looked back in early 2015:

Oil prices were cut by more than half

Job growth was negatively impacted; especially in the oil and gas sector.

Construction supply was at an all-time high since 2012, with developers delivering 6,399 buildings in 2015.

Real Estate prices were already lower than late 2014 levels

The rate of increase in rental levels started slowing down back in late 2014

Rental Yields were much lower than the long-term equilibrium levels

Clearly purchasing a property in 2012 would have been a much better bet than having jumped in the real estate game in 2015.

Come 2012, the Dubai real estate market had previously underwent the worst financial crisis it has ever seen (late 2009 - 2010).

Following the recession the market went through a recovery phase in 2011-2012, which for any savvy investor would have been the perfect time to buy.

“When the supermarket has a sale, say on toilet paper, the consumer runs in and stocks up. But when the housing market has a sale, most often called a crash or correction, the same consumer often runs away from it”
— Robert Kiyosaki, Author of Rich Dad Poor Dad

Below is a chart of Dubai’s Real Estate Cycle.

Dubai’s mojo back in 2013 was hugely boosted by the announcement of the Expo 2020. Any growth was blown out proportions and the market bubbled with no intrinsic explanation given the fundamentals at the time.

Post 2014, a significant drop in oil prices and the strengthening of the dollar lead to a major loss in the purchasing power of Emiratis, Saudis, Brits, Indians and Pakistanis. This huge drop in foreign investment combined with job loss, low rental yields, and a surplus in supply drove real estate prices down to the levels they are at today in 2017.

For those wondering if we have hit rock bottom yet, or if a further spiral down in rental levels will place pressure on rental yield levels and push prices down a bit further - the answer is a bit more complicated.

What we are currently witnessing in Dubai is a unique phenomena partially due to the run-up towards the Expo 2020, the emergence of post-handover payment plans and the current bank risk appetite for home financing.

Usually after house prices start their decline, developer's profit margins fall and construction activity effectively is slowed down. However with the artificial yet sentimental demand towards expo 2020 and the huge profit margins that are available to developers in the Dubai market, fundamentals are currently taking a backseat in the Dubai Real Estate Market.

Developers have decided to ramp up supply and offer shadow financing in terms of post-handover payment plans that are even more attractive than secondary market bank financing.

This continued over-supply at a time when prices have started their decline could lead to a further correction in the market in the next 12 months.

While the market has still not embarked on a road to recovery, the recent fiscal adjustments (VAT on construction costs) and regulations (a bigger escrow amount in cash is now requested from developers) will slowly curb the supply and help stabilize the market.

Remember, any major upswing can happen fairly quickly. I suggest you remain closely up to date with the market at this pivotal phase and seek out deals that already guarantee a reasonable price cushion to protect from further price correction.

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