Recent data from Refinitiv highlights significant shifts in global property markets. In the United States, office prices have experienced a notable 16% decline since their peak in March 2022. This decline has been well-documented, with expectations of further drops due to the substantial investments required for property renovations. What’s more surprising is the 20% decrease in prices of multi-family apartment buildings compared to their peak a year ago. While rising mortgage rates are often cited as the primary cause, it’s essential to also consider the extraordinary surge in asset values in 2021-2022 following the US’ Covid stimulus package.
With the likelihood of prolonged higher interest rates, the possibility of further asset price declines becomes more significant. Average Real Estate Investment Trust (REIT) prices in the US are trading at a 10-15% discount to their net asset values, reflecting these expectations. In upscale property markets like Manhattan and San Francisco, price drops have been even more dramatic, with certain units trading up to 35% below their last recorded transaction levels.
Meanwhile, in Dubai, the real estate landscape presents a different picture. Record transaction volumes persist, aligning with price increases, even as rental rates begin to stabilize. While some softening of prices may occur for end-users with mortgages, developers launching off-plan projects will remain primarily focused on cashflow, as collections determine project delivery schedules.
Historically, actualization rates, the difference between expected and actual unit deliveries, have hovered around 20-25%. This could be seen as positive news for those concerned about oversupply, but in a high-interest-rate environment, it can affect buyers who have taken mortgages for off-plan purchases.
This shift in sentiment and recent developments suggest a tightening of monetary conditions in Dubai’s real estate market, driven by prolonged inflationary pressures. Bid-ask spreads in the secondary residential markets have started to widen in specific segments, reflecting investors’ demand for higher yields amid constraints on rent increases.
The question arises: Will Dubai’s real estate market follow the trends seen in the US market?
The answer depends on the specific segment of the market under consideration. At the super-prime level, evidence of a similar trend is apparent. However, in the mid-end residential and office segments, prices are on the rise due to ongoing supply shortages in the secondary markets.
Ultimately, liquidity conditions will always play a pivotal role. Recent activity in the auction market, where parcels of land are offered due to unmet sales expectations, can provide insight into market sentiment. This is where bid-ask spreads can be accurately gauged, revealing the evolving dynamics of land, apartments, and office prices. Investors should carefully monitor these trends as they make their investment decisions, as these choices profoundly impact their investment outlook.
While Dubai’s real estate market is not completely decoupled from Western markets, it does display correlations with price activity in the West and responds to higher interest rates. These factors suggest that price moderation, particularly in the primary market, is likely to continue.
