The New Normal: How Inflation Is Reshaping Dubai’s Real Estate Landscape

Residential property prices in the UAE have risen in the past few years. Prices rose by about 11 percent in 2022 and were forecasted at the start of 2023 to rise by another 5 percent in that year. The increase comes as Dubai remains an appealing venue for investment purposes.

But like with many other places in the world, inflation is impacting the market. The UAE has seen a dramatic increase in its inflation rate in the past few years. Inflation went above 0 percent in early 2021 and remains above that threshold. The inflation rate rose to 6.77 percent in the second quarter of 2022 but dropped to 4.58 percent in the first quarter of 2023.

Inflation has impacted the real estate market in the UAE, particularly in Dubai. While property investment in Dubai will remain viable and appealing, the cost of doing business in the area will rise. Investors are finding Dubai a more viable option than other spaces, plus off-plan properties may prove useful to those looking to save money on their investments.

Interest Rate Changes

One impact of inflation on residential property prices in the UAE involves how the overnight deposit facility or ODF was recently raised. The Central Bank of the UAE raised the ODF from 4.4 percent to 4.65 percent in February 2023. The increase is the highest since the financial crisis of 2008.

The ODF’s increase was a measure to slow the inflation rate. Supply chain shortages and uncertainty over various economic factors have led to the ODF changing.

The higher rate makes it where investors will spend more money to acquire properties in Dubai. This point is especially critical for more massive land plots or properties that may take longer to pay off or areas that aren’t off-plan properties currently under production.

Shrinking Home Value Increases

While home prices will keep rising in Dubai, those prices won’t increase by as much as in 2022. But even with the increases closer to 5 percent in 2023, those totals are still higher than people would expect elsewhere.

Property values in Miami are expected to rise by about 4 percent, while Rome will see a rise of anywhere from 2 to 4 percent. Singapore is the only market close to the 5 percent increase Dubai expects.

Increasing the Value of Cash Payments

The increase in interest rates has made it so that investors are becoming more interested in completing cash payments for properties instead of taking out loans. Dubai has already been a popular market for cash payments for real estate, but the numbers are rising even further. More than 80 percent of villas and flats sold in the third quarter of 2022 were in cash payments, an increase from 70 percent in the third quarter of 2021.

Cash transactions are often used by investors with enough money to acquire an entire property without requiring a loan. But inflation could make some of these properties more expensive to where investors will start looking for loans. The expenses associated with these properties might be high, but with the area being an in-demand space for investing, many people may be willing to spend that money.

The Rise of Off-Plan Properties

An investor could also buy off-plan property in Dubai to keep from spending as much on new spaces in the area. Off-plan properties are buildings that aren’t complete yet. An investor will buy the property with an agreement that it will be complete soon. The property’s value is expected to rise after completion, especially as more tenants become interested in living in that space.

The increased demand for properties in Dubai will make off-plan spaces more appealing to investors. Apartments, penthouses, villas, and townhouses are among the many off-plan spots available for investment today. Since the cost of an off-plan area is less than an already completed building, the impact of inflation likely won’t be as strong.

Will Luxury Properties Still Be Appealing?

Even though residential property prices in the UAE are rising due to inflation, luxury spaces like penthouses may still be popular. In early 2023, a three-level penthouse on Jumeirah Bay Island sold for nearly $111 million. Two more penthouses sold in the same area for about a quarter of the price, although those spots were also about a quarter of the size of the more valuable one.

The demand for penthouses for sale in Dubai will keep rolling as luxury property investors continue to pay massive amounts of money for these spots. Dubai is one of the easiest markets for outside investors to enter, plus it provides a safe haven for investors in markets where restrictions or sanctions may apply.

What About Transportation Costs?

The drop in oil prices worldwide has eased some transport and logistics issues worldwide. The benchmark for oil in the UAE and elsewhere in the Middle East saw a major rise in early 2022 over uncertainty surrounding Russia, but oil prices have since dropped. Since oil will not cost as much, inflation likely won’t be as much a factor in the UAE as in the past. But the timeframe for how well inflation can get back to reasonable levels remains unclear, especially as inflation remains a prominent threat in other countries.

Since transportation has become more affordable, it may be easier for groups to build properties and supply the goods necessary for doing so in Dubai. This point could increase the housing supply in Dubai, potentially providing a positive impact on residential property values here.

A Final Word – Dubai’s Security Makes It Valuable

Inflation will continue to influence how Dubai real estate property prices will rise, especially as loans become more expensive. But the ongoing security of the Dubai real estate market and the demand for off-plan properties will help make Dubai an appealing space for future investments. The city remains an exciting venue for real estate investments, especially when compared with other cities worldwide.

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