As the world grapples with inflation spikes, impact on UAE’s economy and Dubai’s residential property market seems limited for now, with villa and apartment transactions in Dubai estimated to have reached AED 61.9 billion between January and May this year, global property consultant Knight Frank indicated.
Citing data from Oxford Economics, Knight Frank pointed to the expected rebound in Abu Dhabi’s GDP growth from about 0.5 percent to just over 6 percent this year with Dubai’s GDP predicted to expand by a similar figure.
“There are many reasons for cautious optimism when it comes to containing inflation in the UAE. The government’s extremely diversified imports strategy, steps to boost food security in recent years, and the strength of the US dollar, which is curtailing imported inflation, are all huge positives,” said Faisal Durrani, partner, head of Middle East Research, Knight Frank.
“By far the most effective measure is the government’s pre-emptive stealth move to freeze the price for 11,000 basic goods, including milk, bread, meat and poultry. The policy has been bolstered by the surge in crude oil prices, which is going to underpin a sharp turnaround in economic growth,” he continued.
Business confidence
The relative positivity in the economy is percolating through to business activity levels, with the latest PMI reading for the UAE’s all-important non-oil sector holding steady at a 12-month high in April as orders continued to rise.
The pace of recruitment appears to have slowed slightly, however, Knight Frank indicated.
“The April PMI readings indicate that businesses are clearly nervous about rising cost pressures. Two immediate pressure release valves are a reduction in the pace of new hires and passing on costs to consumers. The latter is often seen as a last resort and we’re not seeing that yet,” Durrani said.
Residential market remains relatively insulated
Explaining that the rising inflation poses a limited threat to Dubai’s residential property market, Ashley Bayliss, partner – head of Mortgage and Debt Advisory, Knight Frank, said: “The UAE’s fiscal policy correlates with the US, and the recent 50 basis point hike in interest rates to 2.25 percent does mean higher outgoings for mortgaged households going forward. However, it remains comparable with other international prime markets.”
Mortgaged buyers for villas and apartments account for just 18 percent of Dubai’s residential market, by value, at present, according to Knight Frank.
Last year the figure was nearer 40 percent and in 2007 just over 50 percent of transactions was financed.
“While this appears to be a decrease in residential mortgage lending, as at the end of May there has been almost AED38bn of financing extended across all real estate asset classes. Extrapolating the number of transactions, we have seen so far this year, 2022 could be on course to see the second-highest level of mortgaged deals in the last five years for the whole real estate market. The main challenge is for banks to keep pace with the current growth of the market”, explained Bayliss.
“For the residential market, however, the bulk of deals at the top end of the price spectrum are cash purchases, in large part due to the unrelenting influx of ultra-high net worth capital targeting Dubai’s most expensive homes. So, with cash remaining king, the risk to the housing market is low for now,” explained Durrani.
“With house price growth in Dubai this year expected to hover at around 5-7 percent for the mainstream market and 12-15 percent for the prime markets, residential property in the Emirate is still an excellent inflation hedge,” he continued.
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