Dubai’s real estate market needs sustainable pricing for middle-income families

Middle-income families are usually priced out of Dubai’s real estate market every time the demand of properties goes up as developers increase profit margin. Prices of a studio apartment that currently ranges from Dh800,000 to Dh1 million reflects a possible ‘overheating’ in Dubai’s real estate market. Investors who are buying property at the current price, might not be able to sell them at the same price if the market softens in the coming years, says officials and market analysts.

Rental income of at best Dh40,000 from a studio flat that was purchased at Dh800,000 translates to a 5 per cent annual return, excluding the service charge. It is safe to calculate the rental income to be around Dh32,000 and if the service charges are included, the return is less than 4 per cent on investment of Dh800,000. This could make investment in real estate ‘uneconomic’, as there are other investment instruments that might offer higher returns.

A Dubai-based property developer, Dugasta Properties Development, is launching affordable homes with prices starting from as low as Dh400,000 for a studio apartment. Moreover, it is offering an 8 per cent annual guaranteed return on investment ­– based on certain terms and conditions – for the first five years for all types of apartments may it be Sudio, 1-bedroom or a 2-bedroom apartment – that aims to re-balance the real estate market and also attract new buyers into the market who were earlier priced out due to high cost of home acquisition for many fixed-income families.

Dugasta is also offering a buy-back option after the five-year period – based on certain terms and conditions – if the buyer wants to sell the property. Dugasta will buy back the property from the buyer at the original sale price, depending on certain terms and conditions, a top official told Khaleej Times.

“This effectively means that the home buyer or investor would get back 40 per cent of their investment in the first five years,” Tauseef Khan, Founder and Chairman of Dugasta Properties. “As per the programme, we are also offering the buy-back option of the property, if the buyer/investor decides to sell it off. Although properties are currently selling at a higher price, we have decided to enter the market at a comfortable and attractive price point that will attract the middle-income families to buy their dream homes and we believe this price will be sustainable in the long run even in the case of softening of the market.”

Dubai’s real estate sector saw the number of land and property transactions reach 76,119 in the first half of 2023, worth Dh283 billion, growing at 76.87 per cent from Dh160 billion recorded in the corresponding period last year. This reflects an unusually strong growth due to not only the rise in the number of sales, re-sale and mortgage of properties, but also in the increase in the value of properties and transactions.

This effectively means that the value of average transactions has also grown compared to the corresponding period last year, reflecting a jump in average price of properties. Since the Russian attack on Ukraine, the price of a studio apartment that was sold at Dh400,000 to Dh450,000 in January 2022, jumped to Dh800,000 to Dh900,000 by January 2023 – just double in a year.

“This unusual jump in property prices makes properties unaffordable even for high-income families, making the real estate prices unsustainable. Buyers investing in properties at such high prices, will not be able to sell them at their asking price if the market softens,” Tauseef Khan, who brings more than three decades of experience in leasing and selling property across Dubai, through his leasing and sales arm, City Tower Real Estate, which manages more than 7,000 apartments and villas in Dubai.

“For the third time in the past 20 years, the real estate market in Dubai is witnessing significant growth, with an increase in both the number of transactions and property prices. This surge in activity raises concerns about the possibility of another housing bubble, considering the market crashes experienced by Dubai in 2009 and 2015,” Anastasia Petrova, an analyst, says.