Special Report contents:

Throughout 2015, Dubai’s real estate market has continued to slow down, with transaction values dropping across all sectors.

The most common explanation for the slowdown is dampened investor sentiment caused by falling oil prices, but other factors such as concerns of an oversupply have also put downward pressure on pricing. Some analysts say this cooling is a natural stabilisation of a market that had been growing too fast.

One segment that is not held back by oversupply is affordable housing. Dubai will fail to serve the low-to-mid-range residential market as long as affordability definitions remain ambiguous, says Faisal Durrani, international research and business development manager at the UK’s Cluttons Real Estate.

“The average annual expatriate income is about AED200,000 [$54,452] a year, so if you are talking about a household that earns that amount a year and then you are sending them to go get a mortgage that is about three and four times that, which means AED600,000-AED800,000, there is very limited stock in that price bracket,” says Durrani. “You have a squeezed middle, similar to what you have in the UK.” He says there are very few developers offering products in the mid-band price range.

Maturing market

Analysts have suggested the move towards more affordable housing is part of the market’s maturing process and, with introductions such as the mortgage cap, end-users are being forced to look towards the lower end of the property ladder.

As such, Dubai’s villa market has been hit the worst by this drive for affordability. Cluttons predicts a 5-7 per cent contraction in the value of villas across the emirate by the end of the year.

This view is echoed by Nick Maclean, managing director at property and real estate services company CBRE Middle East. Maclean adds that Dubai has tried to press ahead with more affordable options as the market forces developers to do so.

Affordable villas

Local developer Danube Properties is capitalising on this opportunity. When it launched the Dreamz by Danube scheme in Dubai, villas sold out within a day of going on sale. The development will cover an area of 65,000 square metres, which includes 171 ‘affordable’ luxury three- and four-bedroom villas.

“Developers will be forced to look at the lower end of the market as off-plan sales slow down and developers find that the contribution of capital that was previously enjoyed is drying up,” says Maclean. “Affordable options are definitely a gap in the market and developers are starting to realise this. However, luxury units still attract foreign investors from other Arab countries and Russia.”

An issue for Dubai is to pin down what it means by the term affordable, as it remains ambiguous, with many developers claiming to be delivering affordable options at prices far higher than average salaries across the emirate.

According to analysts, it is becoming clear Dubai is likely to witness a trend of affordable schemes from developers, particularly as the luxury segment slows down. During this year’s Cityscape real estate exhibition, developers told MEED that their focus is shifting to affordable luxury.

Rising costs

The drive for affordability has been accelerated by rising living costs across the UAE. The authorities have tried to encourage developers to focus on this segment.

In March, the Dubai Municipality said it planned to introduce regulations imposing affordable housing quotas on all new residential developments in the emirate. The move would emulate similar initiatives in other countries, and force developers in Dubai to include affordable options when planning new residential projects.

Cluttons says the affordable housing asset class is becoming more attractive to investors due to the perceived ‘safe-investment’ badge it carries. 

“The introduction of this asset class in Dubai is likely to bring a surge in interest, especially if the affordable quotas are reasonably high; say in the region of 20 per cent to 30 per cent of the total number of units being built,” says Durrani. “The interest is likely to be highest from institutional funds, which should then pave the way for partnerships between local developers and large multinational funds, effectively catapulting the emirate’s real estate market to the next stage of its evolution.”