It’s no surprise to anyone that works in or with the real estate market to know that it moves in cycles. From a burning hot market where valuations skyrocket and properties sell for double what they were purchased for only a few years back to ice cold where it’s difficult for even the most respected people to find financing.
Evidence of this type of up and down cycle can be seen in many historical real estate markets. Countries such as Japan, Hong Kong, and the USA have all suffered from this type of boom or bust real estate market.
So, is the UAE market cooling off or tanking?
2015 was not a good year for the previous strong UAE real estate market. It is estimated that housing prices declined an average of 13% over the years (source). Unfortunately for investors, 2016 is not looking much better.
UAE’s real estate, especially in Dubai, has been rocked by outside influences such as overproduction of oil and a weak Euro, as well as the vote for England to leave the EU. While the market has not fallen off a cliff, it’s still in significant decline.
Even worse is the fact that one of the reasons the market has not dropped more than it currently has is due how developers are attempting to stay afloat in a declining market. Iyad Abdulrahim, former CFO of Arabtec, the largest construction company in the region, has stated that many developers are aiming their businesses to appeal to more modest and lower priced projects as that’s where the current demand is.
The lack of demand for high-end development projects, enough so that developers are instead seeking other avenues of cash flow, is a major signal of a market on decline, and not of a market attempting to recover.
Furthermore, Abdulrahim explained how previously completing projects by agreed upon deadlines to avoid any fees was paramount, even if rushing the project meant higher priced materials and labor. Demand was so high that there was always another project waiting, meaning there was always more money to be made.
Now there isn’t enough work to go around. So, many times it makes more financial sense to break a deadline and pay a fine in order to save costs on other aspects of the project.+
Also, many contractors are seeking work outside their normal areas of expertise. As work opportunity shrinks, they know they must expand their services in order to survive.
Another sign of the major downturn is less labor demand. This is mainly due to contractors trying to cut costs even more by limiting their spend on labor. All unnecessary positions are being eliminated.
All the evidence points to a continuing slide in the UAE real estate market. There is ever shrinking demand for new construction, and the construction that is in demand is much more modest.
While the more affordable housing demands are currently keeping developers and contractors afloat, there’s a finite amount of this type of demand. The next few years look to most likely follow the same downward trend.