Let’s not beat around the bush, the world economy has taken a hammering over the last month and a half due to the coronavirus pandemic. But to say that the real estate market in Dubai has plummeted as a result of the pandemic would be remiss; and frankly, misleading.
Today’s post isn’t about the pandemic, or discussing the latest buzz word, the “new normal” (well, not directly anyway).
In this post, we’re going to discuss specifically how the current pandemic situation has affected the real estate market in Dubai, what we’ve noticed at SmartCrowd, and perhaps why investing in the richest areas of Dubai might actually make sense for you, provided you can pass the quiz at the end of this article.
Before we dig into the “deets”, our compliance team tells us we need to issue a disclaimer. So here it goes: this article is purely for informational purposes. SmartCrowd is not recommending where or how individuals should allocate their money, but rather providing insight into how the real estate market in Dubai has responded to the coronavirus crisis.
Now that we have that out of the way, let’s back up for a minute and provide some context so you’re up to speed.
Dubai’s market for the last couple of years has witnessed a steady decline in property prices mainly due to oversupply in the market. Prior to the world flipping upside down, Dubai’s market was showing positive signs of recovery as prices were starting to decline at a much slower rate. Q4 in 2019 had the highest number of real estate transactions compared to previous quarters and compared to the same period in 2018 – things were looking rosier. In fact, October had the most number of transactions in a given month in 11 years!
So, what’s happened since then?
The facts, breaking pandemic myths
Well believe it or not, despite the pandemic, we witnessed the highest number of real estate transactions in Q1 since 2017 at over 10,243 transactions. Compared to the same period in the previous year, this was 10% higher, which is a great boost of confidence for investors and homeowners.
Two of the most popular areas by transactions in the last quarter were Downtown Dubai and Dubai Marina. Prices in Downtown Dubai actually increased in value from an average of AED 1,631psf to AED 1,633psf, marking an increase of 2%. On the other hand, Dubai Marina witnessed a slight decrease in prices from AED 1,283psf to AED 1,275psf, showing a decrease of 0.65%. Other popular areas such as Palm Jumeirah and Jumeriah Lakes Towers also witnessed a decline in prices at 1.64% and 1.33%, respectively.
Despite having a record-high number of transactions this past quarter, the current pandemic crisis is likely to put additional strain on a market that was just starting to show signs of recovery. There have been salary reductions and layoffs across sectors in the market. At SmartCrowd, we’ve always said that people will need a place to live and work, which is why real estate will never be out of demand. Even though we still believe that to be true, if people are without work particularly in a transient place like Dubai, they’re likely to downgrade to more affordable options or worse, relocate back home.
So, if that’s the case – wouldn’t it make sense for investors to invest in more affordable housing at the moment? After all, if people are becoming price-sensitive, they’re likely to pinch their spending where they can, right?
That’s very true. Whether you want to invest in one of Dubai’s richest areas right now boils down to your goals as an investor. Remember, when you invest in residential real estate, there are two types of earnings that you’re looking at: rental income and capital appreciation.
If you’re someone who’s more focused on cashflow in the short-medium term, investing in affordable housing makes a lot of sense. Typically, it’s easier to find tenants, maintenance fees are lower, and yields are higher because property values are much less.
Conversely though, if you’re someone who doesn’t have an immediate need for additional cashflow and want a place to park your money – investing in a “rich area” of Dubai can make sense. Why?
First, unlike other global metropolitan cities, even prime properties in Dubai can fetch investors up to 6.5% net (that’s after costs). For many cities, receiving a rental income in this range would constitute as an “income-generating property.” So it’s not like you’re truly just parking your money. You will get something for it, just not as much as an affordable unit. However, the reason you want to invest in a prime area of Dubai is to go for a big payout in the future. If you were to purchase a prime property today, you know you’re getting a severely deflated price. Whether the property price declines for another year or two should make no difference as long as you have the appetite to hold your asset for 5-10 years and cash out when the time is right. Think about it, this is the exact same advice wealth managers give their clients who want to create passive investment portfolios, using assets such as index funds or ETFs. Think long-term and don’t worry about the short-term volatility. If you approach prime real estate with that same mindset, you’re more than likely to come out as a winner in the end.
Here’s a quick litmus test to pre-qualify yourself as someone who can afford to dabble into Dubai’s prime real estate market today. If you can answer yes to all of the following, it might be worth considering. If not, it’s okay – invest in income-generating properties and most importantly, diversify your portfolio.
Quiz: Should I invest in one of Dubai’s richest areas, despite the pandemic crisis?
- I do not need cashflow from my investments to sustain myself, my family or my current lifestyle (Yes/No)
- If I purchase prime real estate and the property is vacant, I can comfortably make the mortgage payments for up to 6 months (Yes/No)
- I have other investments/savings that would protect my financial position if I am required to sell my property at a loss (Yes/No)
How did you fare in that quiz?
Even if you could not say yes to all of the questions above, that doesn’t mean you cannot invest in prime properties in Dubai. That’s the beauty of crowdfunding and what we’re trying to solve at SmartCrowd. We’re giving people the ability to invest in assets that would otherwise be very difficult or overexpose an individual to unwanted risk. With SmartCrowd, you can simply earn income and realize capital gains proportionate to your investment in a particular property, starting at just AED 5,000 – it’s really just that simple. No strings attached.
At SmartCrowd, not only are we passionate about giving everyone the accessibility to direct real estate investments at affordable prices, but we’re here to educate you so that you can make informed decisions about whether or not investing in real estate makes sense for you right now.