UAE: Real Estate Market Analysis

Abstract

The present report focuses on the recession in the real estate sector of the United Arab Emirates. The primary aim of the paper is to explore the market in the current context. In order to fulfill this goal, a literature review was compiled based on information from a range of academic and industry sources. The analysis of the sources followed the sequence of open, axial, and selective coding. As a result of the review, the key topics concerning the real estate sector of the UAE were explored. The findings provide in-depth information on market trends, prices, demand and supply issues, and government initiatives that contributed to the present situation. The research suggested that the core problem of the market is the imbalance of demand and supply, which is evident from the data on oversupply and price declines in the industry. Trends such as foreign ownership, technological development, and dependence on the condition of the global economy all factor into the current circumstances of the real estate sector. Although the government has already attempted to remedy the recession, positive results are yet to be seen. Based on the analysis of the market and in line with the method of issue-based strategic planning, several strategic recommendations were provided. Moreover, steps related to the evaluation and monitoring of strategy implementation were also suggested. It is anticipated that the report will provide more insight into the current state of the UAE’s real estate sector and the recession affecting it while also highlighting opportunities that the government could use to address the problem.

Introduction

The real estate sector is crucial to any state since it has a direct effect on the quality of life of its people and contributes to the economy through taxes and profits. Enhancing and monitoring the condition of the real estate market is thus among the key goals of most developed countries. In recent years, the global real estate sector has seen many new developments, including economic, technological, and cross-national (Urban Land Institute & PwC, 2019). Globalization enabled people to purchase property in various countries, while new technologies improved the construction and living experience of new apartments and houses (Urban Land Institute & PwC, 2019). In the UAE, these trends have also impacted the development of the real estate, mainly due to the government’s focus on promoting smart technologies.

Still, industry data show that the UAE real estate is currently in recession, with price decreases of over 30% between 2014 and 2019 (Holzhey et al., 2019). The aim of the present report is to explore the real estate market of the UAE in light of the current recession. The main objective associated with this goal is to collect data on market trends, prices, supply and demand, and responses to the crisis in the industry. Based on the results of the analysis, the research will seek to explain the causes of the recession and the factors influencing the current and future market situation. Moreover, the report will also try to develop strategic recommendations that would help the government of the UAE to improve its response to the recession and promote balance in the market, thus supporting its recovery. Functional strategies, as well as evaluation and monitoring suggestions, will also be explained.

Theoretical Framework and Topic Statement

The real estate market in the UAE is rich and diverse, with various types of properties available for rent and sale throughout the state. The influx of new properties into the market is relatively high, particularly in Dubai, which suggests the commitment of both public and private sectors to developing the Emirate (Knight Frank, 2020). The government of the UAE is highly focused on expanding the real estate sector because it contributes to the state’s strategic development plans (Al-Mohana & Hatemi-J, 2016). On the one hand, a booming real estate sector would help to leverage the quality of life of the UAE residents, thus supporting the state’s goals with respect to welfare and social improvement. On the other hand, real estate plays a significant part in enhancing the state’s GDP, which makes it central to the economy. Nevertheless, reports suggest that the real estate market of the UAE is currently in recession, characterized by a significant decrease in prices, weak demand, and the oversupply of new property (the Meuse, 2019). This threatens the state’s prosperity and economic growth while also creating challenges for individual market actors – in particular, the developers.

In this context, the study takes on a strategic approach to economic research and planning to explore the problems faced by the UAE real estate market in greater detail. The primary goal of the report is to highlight the causes, effects, and factors relevant to the current market situation, as well as to perform an analysis of the market to determine the core trends. The data gathered through research will be used to provide strategic recommendations on how the situation can be managed and improved to avoid worse economic consequences.

Methodology

In order to fulfill the purpose of the research and collect in-depth data that would allow making conclusions and predictions about the real estate market in the UAE, a qualitative methodology was selected. The qualitative method is highly beneficial since it enables examining information in greater depth, which is necessary to identify patterns and explore relationships. According to Cassell, Cunliffe, and Grandy (2018), the nature of qualitative research makes it particularly important for developing strategies concerning companies, markets, and industries as a whole. Hence, qualitative research allowed generating insights and analyses that were useful for this report.

The design of the research followed a literature review methodology, wherein data from multiple resources are explored and analyzed. Literature reviews focus on primary and secondary information, and thus the conclusions and strategies based on literature reviews draw on an extensive pool of data. In the present case, the literature review process involved identifying primary and secondary resources that could be of concern to the topic, selecting the articles, reports, and texts that would be most relevant, and performing an in-depth analysis of them. The details of each stage of the process will be outlined further.

First of all, it is essential to note that, to gather a significant number of resources and consider the topic from various perspectives, multiple sources of information were considered. The focus of the research was on industry reports from public and private entities, scholarly articles, books, and publications on verified online resources. The search included a multi-step strategy beginning with a regular web search. The keywords for this search included “UAE real estate market”, “UAE economy and real estate”, and “UAE real estate industry”. Additionally, reports from large real estate companies operating in the UAE were considered, such as Damac, Meeras, Dubai Properties, Knight Frank, and others. Once over a dozen of suitable publications were located through search results, academic databases were also targeted with the same keywords. The primary database used was Google Scholar, which returned the most results on the given keywords.

The selection criteria for publications were defined prior to the search process. The researcher believed that to fulfill the goals of the paper, it would be essential to include the most recent sources, with a publication date from 2014 to 2020. Other criteria for inclusion were the authors’ credibility, the relevance of the publication to the topic, and usefulness to the assignment. The compliance of texts with these criteria was judged subjectively, and all of the sources included in the analysis were deemed appropriate. The selection process helped to ensure the quality of data obtained from the selected publication, thus having a positive influence on the depth of analysis and conclusions.

The data analysis process followed the guidelines for qualitative processing by using open, axial, and selective coding. Open coding is the procedure of interpreting data by which the data is broken down into conceptual labels, which are compared for similarities and differences and grouped into categories accordingly (Cassell et al., 2018). Axial coding is the next step in the process, during which categories are related to their subcategories to deduce hypothetical patterns and relationships and verify them based on data (Cassell et al., 2018). Finally, selective coding refers to unifying all categories of data to create a single body of generated knowledge around one core category (Casell et al., 2018). Some of the categories identified in the present research were real estate prices, demand for real estate, general market trends, attempted solutions, and developers’ issues, all centered around the core category of real estate crisis in the UAE.

Analysis

Market Trends

The resources collected as part of the research highlighted some significant market trends evident in the real estate market of the UAE. First of all, there is evidence confirming that the real estate market in the UAE is dependent on the global economy. In particular, the article by Al-Mohana and Hatemi-J (2016) considered the extent of the impact of the global economic crisis of 2008 on the real estate market of the UAE. The researchers found that the market suffered a significant drop following the crisis, indicating a high dependence on the global economy. The authors explain that this could be linked both to the impact of the crisis on people’s level of wealth and financial stability, as well as on the reduction of foreign investment into commercial real estate (Al-Mohana & Hatemi-J, 2016). Following the crisis that occurred in 2008, the market had been recovering slowly, reaching its peak in 2014 (Dongare, Mishra, & Kaul, 2019). After 2014, another recession occurred, which was also in line with the trends in other international real estate markets. For example, a report by UBS shows that property prices in Dubai decreased by 35% since 2014, with a similar trend evident in many other global destinations (Holzhey, Skoczek, Hofer, & 2019). Hence, the real estate market in the UAE largely relies on the international economic environment, and any changes that affect the global economy are likely to impact this market, too.

Another trend that is important to the real estate market in the UAE is the high dependence of the state’s economy on the sector. According to the analysis by Al-Mohana and Hatemi-J (2016), the attempts to diversify the industry and promote a shift from an oil-based economy in the UAE resulted in the substantial growth of two markets: real estate and tourism. The authors note that one of the government’s current goals is to develop the UAE into an international hub for real estate by attracting foreign investment and growing the supply of property (Al-Mohana & Hatemi-J, 2016). This makes the government of UAE one of the key actors in the overdue recession that affects the market today. It also suggests that the solution to the real estate crisis occurring in the UAE is highly dependent on government policies and activities needed to support the sector.

Consequently, the focus on growing the global presence of the real estate market in the UAE has attracted significant growth in foreign investment. The growth of this market has become tied to the influx of foreign investors, which has supported the demand for both commercial and residential property (Al-Mohana & Hatemi-J, 2016). Furthermore, the research suggests that this trend is likely to continue well into the future. For example, the article by Hashem (2019) highlights the potential role that foreign investment could play in the recovery of the real estate market in the UAE. The author notes that individuals and companies from abroad could help to address the insufficient demand for real estate in the UAE, thus assisting in overcoming the recession soon.

Finally, a trend that has been noted in research on the real estate market in the UAE is technological development. As explained by Hashem (2019), proptech innovation is likely to contribute to the housing market in the UAE by introducing new technologies to aid developers and attract buyers. For example, smart technologies can help to leverage people’s experiences with their homes, while new information technology could be used to provide tailored services and offers to property buyers. One possible negative influence of technology on the retail sector is that it could render many existing marketing techniques and methods obsolete (Hashem, 2019). In an environment where firms are desperate to attract buyers, it is crucial for businesses to develop in line with customers’ expectations. Therefore, the introduction and development of innovative marketing channels in the real estate sector are due, which will necessitate additional expenses from agents and developers.

On the whole, the trends explained above helped to highlight the key actors and forces that affected the current crisis in the real estate sector in the EAU. On the one hand, the challenges affecting the global economy caused a recession in the international real estate market, leading to a decrease in the profitability of this sector in the UAE. On the other hand, the current downturn was prompted by the actions of various players, including developers, foreign investors, local buyers, and the government. In this context, the future development of the real estate market in the UAE will be shaped by the activities undertaken by these parties, as well as by the state of the global economy.

Supply and Demand

One of the core problems evident in the current condition of the real estate market in the UAE is the imbalance of supply and demand. Based on the laws of supply and demand, it is crucial for the two forces to remain balanced so that prices can remain rather stable and provide a sufficient year-on-year revenue increase (Jowsey, 2015). However, in the UAE, the market is far from balanced, and the oversupply of real estate is at least partly to blame. The report by Holzhey et al. (2019) notes that, in Dubai, “ongoing strong housing supply growth limits any long-term capital gains, offsetting the positive price effects of high population growth” (p. 9). Oversupply is evident in all housing markets, including rental and sale, residential and commercial, and has spread beyond Dubai to other emirates, including Abu Dhabi (Knight Frank, 2020). Oversupply is critical to the state of the market since it affects profitability and its contribution to GDP growth. Given the reliance of the UAE economy on the real estate sector, the continued trend for oversupply may affect the overall economic condition in the state.

The primary reason for the oversupply of real estate in the EAU appears to be poor planning on the developers’ side. In light of the state’s efforts to grow the housing sector, as well as the increase in foreign investment that promoted the market’s recovery after 2008, developers attempted to generate higher profits by building more properties (Al-Mohana & Hatemi-J, 2016). Since construction is a lengthy process, many projects that began at the peak of the market in 2014-2015 have only been completed recently. The nature of construction work causes the continuance of high supply to the market, which impairs efforts at addressing the recession. For example, Knight Frank (2020) reports that, despite the price drop, new supply in Abu Dhabi and Dubai residential markets is relatively high, at over 8500 and 62 500 units, respectively. Since the demand is not growing at the same rate, oversupply causes an increase in competition among developers and has a deteriorating effect on real estate prices (Deloitte, 2019). This suggests that unless the imbalance between supply and demand is corrected, the market is likely to continue falling, having an adverse effect on the entire economy of the UAE.

Real Estate Prices in the UAE

The problems explored above contributed to the changes in real estate prices since developers attempted to increase demand and avoid significant losses. Industry analysis confirms a substantial decrease in property prices throughout the UAE, with the most significant drops in Dubai and Abu Dhabi (Holzhey et al., 2019; Knight Frank, 2020). Reports show that, in the residential sector, the 2019 price drop constituted between 7.3% and 8.2% in Dubai and between 7.4% and 7.6% in Abu Dhabi compared to 2018 (Knight Frank, 2020). The year-on-year decrease of prices since 2014 constituted a staggering 15.3% in Dubai, as reported by Meuse (2019). This brought property prices to the lowest level since 2009 when the global economic crisis forced the market into a recession.

Still, evidence suggests that the declining prices in the retail market were not sufficient in attracting new buyers and stimulating the demand for housing. The oversupply remains too significant to be addressed through a price decrease, particularly because rent prices are also deteriorating (Knight Frank, 2020). In this way, UAE developers are caught in a loop of producing too much and attempting to bring prices down to cover up for the oversupply. Interrupting the cycle would be the primary solution to target the recession.

Attempted Solutions

Given the importance of the real estate market to the economy of the EAU, it is not surprising that the government implemented efforts to address the recession. Based on the research, the primary goal of the government was to stimulate the demand for real estate in the UAE by attracting both international buyers and UAE citizens. First of all, the UAE government attempted to attract foreign investment by implementing new visa regulations, which would make it easier for foreign individuals to achieve residency through investments. As stated by Dongare et al. (2019), the new rules involve providing a 10-year residency visa and a 5-year retiree visa to long-term investments. This policy change was designed to attract the attention of wealthy individuals throughout the world and encourage them to participate in the state’s property market.

In a similar manner, Abu Dhabi has introduced a new regulation to permit freehold ownership by foreign investors in specific economic free zones (Dongare et al., 2019). Another initiative is intended to attract foreign investment in Expo 2020. This event has been marketed throughout the world, and it is believed that it will stimulate the real estate market through both rent and property sales (AMEinfo Staff, 2020; Inayat-ur-Rahman, 2019). The scale of the event and its promotion could raise awareness of the market opportunities in Dubai and the UAE as a whole among foreign nationals.

In order to promote property purchases by all kinds of buyers, including UAE nationals, the government has also improved mortgage regulations and transaction efficiency. For instance, in Dubai, a real estate self-transaction (REST) technique was implemented to make it easier for investors and developers to complete deals (Dongare et al., 2019). The UAE Central Bank has also applied new regulations to enhance borrowers’ protection in mortgages and reduce challenges faced while obtaining finances (Dongare et al., 2019). Since the majority of people use some form of financing as part of their investment activities, these regulations could yield benefits for the real estate market.

Strategy Formation

Assessment and Identification

There are various methods and tools that could be used to develop an effective strategy. Given that the primary problem of the market is the imbalance of supply and demand, it would be beneficial to use market assessment results generated in the analysis section to summarize the issue. Then, issue-based strategic planning can be used as the primary strategy development method to address the problem. Issue-based strategic planning focuses on developing ways of solving the core problems faced by an organization or the market in general (McNamara, n.d.). As evident from the previous section, the core issue apparent in the real estate sector of the UAE is the oversupply of new properties and the relatively low demand for them. Additional topics that were highlighted during the analysis were the dependence on foreign investors, poor market understanding among developers, and unmet customer expectations with regards to housing. These problems contribute to the gap between supply and demand that affects the UAE real estate market.

Comparing Strategies and General Strategy

There are three core strategies that could help to address the issues identified above. First, the government could seek to generate more demand by focusing on the affordability of housing to young people, immigrants, and seniors. Despite the low real estate prices, these groups of people still rely on mortgages to finance their residential property due to not being able to afford to pay the whole sum upfront (Dongare et al., 2019; Lakhani, 2020). Improving mortgage conditions throughout the UAE could help to generate more demand among these market segments (Ryan-Collins, Loyd, & Macfarlane, 2017). This, in turn, would contribute to bridging the gap between supply and demand.

Secondly, the government could focus on attracting foreign investors instead of targeting UAE residents. For example, offering property tax benefits to those investing in UAE property or promoting the expansion of international companies and their workforce could assist in growing the demand among foreign buyers. This strategy would bring more profits to the industry since foreign investors are more likely to buy expensive property than low-income UAE residents. Still, such policies would require a more considerable investment from the government and might not provide sufficient improvement in demand.

Thirdly, it would also be beneficial for the government to consider controlling the supply in order to balance the market. This could be done by improving the regulation of developers or restricting building in certain areas that have already seen an influx of new rental estate. With more control over developers, the government could reduce the number of future construction products, causing a gradual shift in demand in the nearest future (Ryan-Collins et al., 2017). A reduction in prospective supply could also trigger an increase in demand since people might decide to buy property now instead of waiting another couple of years. This strategy could bring the same benefits as the other two, but it can also bring risks if the level of governmental control becomes too high, and developers lose their independence.

The general strategy that is recommended to address the struggles faced by the real estate market in the UAE is a comprehensive approach that would involve aspects of all three plans compared above. Implementing this strategy would consist of improving the affordability of mortgages, attracting foreign investors, and establishing controls over developers to regulate supply. While a comprehensive strategy could require more investment in terms of resources, it is also best suited to balance the supply and demand in the retail market.

Functional Strategies

Functional strategies that would be relevant to the general approach proposed in the previous subsection include the financial strategy, marketing strategy, and research and development strategy. Aligning these with the overall plan would help to achieve excellent results in the short term and maintain them over time. With regard to the financial strategy, the government should develop a plan for decreasing mortgage rates or introducing special mortgage conditions for specific groups. These groups could include students and new graduates, older adults, recent immigrants, and families with young children. According to Ryan-Collins et al. (2017), these groups often face socioeconomic inequality, which leads to them not being able to afford the property. Providing additional financial support to these groups would increase the demand for property in the UAE, leading to substantial improvements in the market.

Marketing strategy, in turn, should focus on advertising new real estate opportunities both to UAE residents and to international investors. For example, Dubai Expo 2020 is an excellent opportunity to raise awareness about real estate investment options among foreign visitors, and the marketing function should seize it. Establishing connections with European and American real estate companies could also attract interest, and this option should be considered. Finally, research and development should focus on creating meaningful real estate supply by studying locations and market trends and developing projects that would be in demand. This could prevent developers from investing in a myriad of projects that would bring losses and encouraging them to focus on better opportunities. In this way, functional strategies would support the general strategy suggested in the previous section while helping the UAE to relieve its real estate crisis.

Monitoring and Evaluation

Strategy implementation requires applying monitoring and evaluation tools that would help to track progress, identify barriers to success, and tailor the strategy to fluctuations in the market. Monitoring and evaluation aid in assessing the success of a strategy; however, they require targets that current performance can be compared to. In the case of the real estate market of the UAE, the primary goal is to balance demand and supply, thus raising real estate prices closer to the peak level of 2014. Since the price drop constituted 35%, the goal would be to increase current rates by about 40-45% over the next five years (Holzhey et al., 2019). In this way, the market would return to a good condition, and demand and supply will be close to equilibrium (Jowsey, 2015). This goal should be at the foundation of all monitoring and evaluation efforts since it represents the desired condition of the real estate market. To track the success of the proposed strategy, it would be essential to introduce other metrics that could be used as indicators of progress towards the goal.

First of all, since the focus is on the relationship between supply and demand, it would be useful to consider quarterly and annual figures relating to property sales and new property supply. The first indicator would help to determine the level of demand and its translation into developers’ revenue, whereas the second figure could be used to monitor supply changes. Reducing oversupply is among the primary goals of the proposed strategy, and hence the desired trend of new properties available for sale would be downward. With regard to property sales, on the contrary, strategic success would be associated with a stable upward trend, both quarter-on-quarter and year-on-year. Hence, these two indicators would be useful for the government in tracking the process of strategy implementation.

Secondly, there are also some specific market data that should be considered as signs of progress. Because attracting foreign investors is a significant part of the strategy, the government should monitor the number of property sales to non-UAE nationals continuously. Apart from providing information on strategy implementation, this measure would also help to assess the effectiveness of the marketing strategy utilized to attract foreign investment. If the positive trend is lacking or very slight, this could mean that the current marketing strategy is ineffective, and additional efforts are required to fulfill this part of the strategic plan.

In a similar way, drawing customers from low-income backgrounds into the real estate market is crucial to the success of strategy implementation because it would leverage the demand for real estate throughout the UAE. Thus, the government should also monitor either low-cost property sales or property sales to members of the identified groups. The latter option would require collecting extensive demographic data on the market and defining age or household categories to be included, but it would provide the most accurate information reflecting progress in the low-cost housing market niche. If improvements are minor or nonexistent, it will be critical for the government to review the alterations made to mortgage rates and find ways of making more significant changes to demand in this market sector. For instance, if mortgage rate changes are insufficient, the government could develop subsidies for developers engaged in low-cost residential and commercial projects, which would enable them to reduce the overall housing costs. As a result, some people would get the opportunity to buy a property that meets their current socioeconomic conditions.

Besides the quantitative methods of evaluation mentioned above, it would also be useful to introduce qualitative progress-tracking tools, such as objectives. SMART objectives represent smaller goals that are part of the process of achieving a more significant aim that is specific, measurable, achievable, relevant and time-bound. This tool could help individual functions to keep track of their performance and projects on a regular basis since SMART objectives can be adapted to any organizational context. For instance, for the marketing function, the first SMART goal could be to perform an analysis of current trends in foreign real estate investment in the UAE and prepare a report by May 1, 2020. The next SMART objective could be to develop a marketing plan to attract more real estate investors from certain countries by June 1, 2020. Establishing sequential objectives that can easily be measured based on the outcomes of work could help specific functions to assist in strategy implementation and prevent issues in local planning and performance.

SMART objectives could also be applied beyond the individual functional areas to the entire task force. In fact, this tool could assist in strategy implementation by promoting clarity, setting specific deadlines, and clarifying the persons responsible for each task. This would help to track progress with regard to strategy implementation while also motivating members of the task force and other agents involved to remain motivated and show high-performance outcomes.

Conclusion

On the whole, the real estate market in the UAE is currently in recession, which is evident based on the price decrease suffered by all types of properties. The primary problem that this industry faces today is the imbalance between demand and supply, which contributes to the price decline. The government in the UAE has already implemented some efforts targeting the real estate market in an effort to increase demand and regulate supply, although the effects are yet to be seen. The in-depth analysis of the market examined issues such as market trends, demand and supply, and prices in order to produce a well-informed view of the problem. Based on these results, three alternative strategies for addressing the recession were provided along with a comprehensive approach that combines the aspects of all three plans. In order to implement the strategy, the government has to develop clear plans with objectives both for the main task force and for the individual functions. Moreover, quantitative metrics, including property prices, new property supply, and property sales, should be monitored and evaluated continually to assess the progress of strategy implementation.

References

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