Interview: Dubai not just a speculative investment anymore, buy-to-live is the new way, says Knight Frank’s Durrani

The skyline of Dubai is getting denser as the world’s rich and ultra-rich flock there to grab a share in its pie of luxurious, yet affordable real estate. Even as the rate of growth of residential prices begins to fall with the current property cycle maturing, experts deny a slowdown is approaching.

Interestingly, a new trend of buyers buying to hold and live, than to “flip”, is emerging, making Dubai a global luxury second homes market.

Invezz sat down with Faisal Durrani, partner and head of research, MENA (Middle East and North Africa) at Knight Frank, to decode the various facets of the boom and how the rate of construction is lagging.

Invezz: Give us an overview of the real estate market in the Middle East and Northern Africa region…

In the UAE, and in Dubai in particular, the market continues to remain exceptionally buoyant.

During the first half of this year, we had about 74,000 residential transactions in Dubai. Last year, for the whole year, we had 120,000 residential transactions, just to put it into context. So, we’re definitely not seeing a slowdown in deal activity.

The total value of transactions for the first half of the year was somewhere in the region of 170 billion dirhams, compared to about 315 billion dirhams last year. So, looking purely at H1, if that persists, it looks like we’re going to do better than last year.

In terms of price performance, prices are continuing to trend upward. However, we could say the rate of increases in prices for residential prices is slowing a little. This is because we are now in the fifth year of price increases in the current residential market cycle. During our two previous cycles, prices increased for about six years in the first cycle and about four years in the second cycle.

It’s virtually impossible to forecast how many weeks, months or years are left before prices start to plateau. But we have seen some pretty extraordinary growth in the last four and a half years.

Dubai residential market could attract $4.4 billion of private capital this year

Overall, however, despite all the double-digit growth, residential values are only 1.8% higher than they were 10 years ago. Villa prices have done a lot better.

Their prices today are about 19% or so higher than they were 10 years ago, which is where we’ve seen the bulk of demand domestically and also, particularly in the case of Dubai.

The international high-networth individuals have been targeting the city’s most luxurious properties, which are typically standalone beachfront homes.

But even if we zoom into this segment of the market right at the top, what we find is that the demand from overseas investors to purchase in Dubai’s most prestigious locations, our prime residential areas, has not slowed.

We carried out a survey of about 300 or so global high net worth individuals. And what we found is that there is about 4.4 billion dollars of potential private capital that is targeting Dubai’s residential market this year. And this is 76% higher than we were able to identify last year.

At the end of the day, in the mainstream residential market in Dubai, the average transacted price is about $400-$450 a square foot, which is extremely affordable on a global scale.

And even if we look at our prime residential neighbourhoods, and I can give you the definition of how we define that.

You’re talking about $1000 or so a square foot, which makes Dubai one of the most affordable luxury or prime residential markets in the world because a million dollars gets you about 980 square feet of space in our prime neighbourhoods, which is three or four times more than you would get in Singapore or London or New York.

So, that’s another major, major pull factor for Dubai residents.

Invezz: How has Dubai achieved this momentum?

To answer that question, we need to rewind to the start of the pandemic. It was an unprecedented event and we had an unprecedented response by the UAE government routinely throughout COVID.

The UAE was amongst the world’s most vaccinated nations. I think there were a couple of times when it was the most vaccinated nation in the world.

Pandemic legislations, soft factors lead to a real estate boom in Dubai

There was just one single lockdown that lasted six weeks. And after that, it was business as usual. Dubai, the UAE is an emerging market and sentiment plays such an important role in influencing economic activity and also buyer behaviour.

And five years later, we’re still benefiting from that unprecedented response to an unprecedented event.

The pandemic fast-tracked certain legislation that may have been planned, such as the introduction of a wide range of new residential visa options that were designed to attract and retain talent, making it much easier for people to move and live and work in Dubai and the UAE.

But there are also the softer factors that make Dubai and the UAE a great place to live, work and invest- the climate, the safety and security, the rule of law, high quality or world-class education, world-class infrastructure, all of these factors combined have made it as successful as we see today.

Invezz: What does the overall office space segment look like across the regions you spoke about?

It is a challenge not just for Riyadh, but also for Dubai and also Abu Dhabi, in that these are cities that have run out of prime grade A office space. It is a different narrative to what you hear for cities in Europe, the UK or North America.

The occupancy levels, for example, in Riyadh for grade A offices are about 97- 98%. The number is very similar in Dubai and Abu Dhabi as well. And for some of the best buildings in these cities, there are waiting lists that are years’ long. And the reason for it is that the pandemic, I guess, drew developers to reassess office development plans.

Not enough office space across the UAE and Saudi

We’ve seen a real constriction in the amount of new office supply coming to the market.

In Dubai, there were 1.2 million square feet of office space completed between 2021 and 2023. And over the next five years, we’re expecting just 3.3 million square feet of new office space.

Now, the real highlight of that is that most of this is already pre-leased. This is a new phenomenon in Dubai because businesses know if they don’t commit to the space now when the time comes to expand, they will not be able to grow.

And even while 3.3 million may sound like a big number, half of that supply is in two developments. The DIFC Square, which is a million square feet, and TECOM, which is developing half a million square feet of Grade A space in Dubai Design District.

So, we do not have any office space which is putting upward pressure on rents in all of these three cities.

Invezz: Would you say then that the real estate boom is driven as much by scarcity as by increasing demand?

Well, I think it’s a sort of a chicken and egg situation, isn’t it? But at the moment, I would say that demand is outstripping supply. Demand continues to exceed supply in the residential market and in the office market.

Rate of construction not enough for projected population growth

In the case of Dubai’s residential market, we have 261,000 residential units planned or under construction due to be delivered in the next six years.

Now, at a sort of a rudimentary level, if you divide 261,000 by six, it gives you 43,500. So approximately 43,500 homes per year are expected for the next six years.

Historically, we’ve had 30,000 homes per year. Looking at it purely like that it may suggest that we’re overbuilding.

However, there are always two sides to every equation.

Considering the demand side, based on the government’s population growth projections of 7.8 million by 2040, our estimates tell us that we’re going to need 70,000 homes per year for the next 16 years. So on that basis, we are under building for the expected population surge.

However, over the next 16 years, undoubtedly, we will have gone through one, if not two full more property cycles. But looking purely at supply and demand in isolation, it’s telling us today that we’re not building enough homes.

Dubai emerging as global luxury second homes market

Invezz: What is your big theme or takeaway from the current property cycle?

The only one that I’d probably highlight is the emergence of Dubai as a global luxury second home market.

The reason I say that is because we’ve recently started tracking the number of 10 million dollars and transactions in Dubai.

Last year, Dubai sold 431 homes priced at more than 10 million dollars. That was more than London and New York combined, which is, again, a remarkable achievement for such a young real estate market.

And during the first half of this year, we’ve had 190 homes sold at more than 10 million dollars, which again leaves Dubai as the deepest market globally for 10 million dollars plus home sales.

And if we look at the number of listings of homes priced at more than 10 million dollars, you may not believe me when I say this, but the number of listings is actually down by 65.5%. We’ve seen a 65.5% decline in the number of homes available for sale over 10 million dollars in the last 12 months, which is telling us that people who are buying those homes are buying them not to flip, but to hold, because they are now living in them.

They’re using them as holiday homes, retirement homes, etc.

And, it’s not just at the top end of the market, maybe a little less pronounced, but across the whole city, there has been a 23% decline in the number of homes available for sale in the last 12 months.

So, that mentality of buy to hold or buy to live is a big shift in buyer behaviour compared to what we’ve seen in the past, which was all driven by speculative investments.

Impact of Israel-Palestine conflict

Invezz: Has the Israel-Palestine conflict had any kind of impact?

What I will say is that for us, the conflict remains a risk to the market. I would describe it as a medium-term risk.

And without talking in too much detail about the unfortunate events unfolding, we know from the IMF that for every 10% increase in oil prices, there is a global slowdown in economic growth of 0.15% and a subsequent increase in global inflation of 0.4%.

Now, every time inflation rises, the go-to level for global central banks is to increase interest rates. If interest rates go up, it makes it more expensive to borrow to buy and it makes it more expensive to borrow to build.

So that, inevitably, could hurt demand for real estate. Right now, we are not seeing a direct impact of that. However, the high interest rate environment generally means that it is way more expensive today to take out a mortgage than it was three years ago.

And that has impacted demand in Saudi, less so perhaps in Dubai, given that the bulk of the market is being driven by cash purchases because there is so much capital pouring in from overseas.

And of course, if you want to buy something off-plan, the only way to do that is through a cash deposit. No bank will lend you funds against something that hasn’t been completed or achieved a certain construction milestone.

Is real estate in Dubai skewed in favour of the rich?

Invezz: Would you say the real estate market is skewed in the favour of the ultra-rich and rich? These are countries which also see a lot of immigrants who come here to work.

Based on the analysis that we have done on income multipliers- these are the number of years of salary that you need to save to be able to buy a home.

We have done this analysis of every neighbourhood in Dubai and if you look across the whole city today, that average ranges from somewhere between 3 to 10 times your average annual income.

What is considered affordable around the world is usually a multiplier of 6. Anything above 6x is considered unaffordable.

Broadly speaking, Dubai looks pretty affordable for people who live and work there. And these are not your high net worth cohort but your normal working professionals.

Some areas are expensive and that includes the Palm Jumeirah, Emirates Hills, Jumeirah Bay Island and Jumeirah Islands. For somewhere like the Palm Jumeirah, you need 65 years of all of your income to buy a villa.

Emirates Hills is 81 years old. And that’s fine because every city has super high-end areas. But broadly speaking, the city looks pretty affordable.

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