The Dubai Real Estate cycle

Since the introduction of the freehold law in Dubai, the real estate market in the emirate has gone through almost two full cycle in 15 years. In established real estate market (London, Paris, New York…) a single cycle can take up to 25 years to complete.

In order to capitalize of the real estate cycle, the investor must understand its different phases

1. The growth (The Booming): This phase basically occurs at the end of the previous cycle and it’s initiated by a growing demand to buy properties coupled with a limited stock available in the market. Best example of this phase was following the freehold law introduction that granted foreigners the right to own freehold properties in Dubai, we experienced a huge demand to buy properties, while the offered stock was very small and was geographically limited to some areas in the emirates. The result was prices inflation like never seen before, where units doubled their value within months from purchasing. As the value and demand increase, they will be more development and project lunched, which will create a near to balance supply – demand situation in the market. The feelings within the market at this stage are Excitement, thrill and euphoria!

2.  The Over Supply: When the demand slows down and the supply increase, that is the end of the Growth phase. The tipping point is reached and sellers will start to outnumber the buyers. The market changes from a seller’s market to a buyer’s market as more units are available for sale, vacancy rate increase and rentals start to soften. As the supply can’t be controlled or hold, the developments projects stock will continue to come onto the market while demand is decreasing, developers and sellers will put new deals together to attract buyers: Service charge waiver, post-handover payment plan, Transfer fee paid…. While facing higher vacancy, lower rental income and lower ROI, owners will get into the pressure to sell and cash out, especially if the unit is under a heavy mortgage. The feelings within the market at this stage are anxiety, denial and fear.

3.  The Recession (The Slump): Vacancy increase above average and landlords will lower the rent in order to cut on losses caused by low demand and high vacancy. Sellers will get into the feeling of panic and further drop the selling prices, which will drag the market further down into depression. In recession time the economy slows down, companies cut costs, job redundancy increase and market population decrease, this will put extra pressure on an already instable real estate market: Lowest demand and massive supply, we are almost at the bottom of the curve. The feelings within the market at this stage are desperation, panic and surrender.

However, once the real estate cycle is deep in the recession phase, this can open up opportunities for distressed sale and property bargains, strategic investors will be waiting for this particular phase with their cash in hand ready to snatch the perfect deal. Surely a buyer’s market time: it’s the point of maximum financial opportunity.

4. The Recovery: This is the phase that follow the depression. Market will slowly show signs of recovery like low unemployment, increased consumption, stronger purchasing power and attractive interest rates. As active population increase due to high jobs offering, housing demand will grow, in both renting and buying market. Lower vacancy will inflate rentals and investor will enjoy a higher ROI. The feelings among market actors switch from depression and pessimism to excitement, optimism and hope.

Some property expert will see the Dubai real estate market volatility as a risk for a long-term investment, but I personally see it as a great opportunity to capitalize on a short cycle and maximize your investment returns. Let me know your point of view