The most optimistic forecasts on the local real estate that were making the rounds at the beginning of the year have given way to guarded realism — and even bearish forecasts in many cases — as the market has slowed down visibly. This has been both in terms of prices as well as transactional activity.
Amidst reports of some brokerage houses shedding staff, and developers offering sweeter incentives and longer payment plans to entice new buyers to commit to their projects, there has been one underlying trend that has perhaps gone unnoticed. And that is of the level of mortgage activity in the ready market. Moreover where this activity is being concentrated on sheds light on the nature of the buyer.
There have been two main underlying themes in the residential real estate space that have dominated headlines this year — the flurry of off-plan projects and the slowdown in price and transactional activity (40 per cent on a year-on-year basis).
However, what has been ignored is the pattern of buyer behaviour in the secondary markets. That is to say that even as overall activity declined significantly, there has been a continued steady uptick in mortgage activity (an increase of 18 per cent this year).
More tellingly, this increase has been predominant in the two-bedroom space in the apartment sector (37 per cent of all apartment mortgages this year has been in this category, with three-bedrooms following closely with 21 per cent). Then came the three- and four-bedroom villa space (cumulatively accounting for more than 65 per cent of all villa mortgages).
When a granular analysis is done, what emerges is community concentration, with JLT and Dubai Marina emerging as the top spots for mortgages among apartment buyers. Sports City and Jumeirah Village Circle recorded the highest percentage increase in this segment on a year-on-year basis, while Emirates Living and Arabian Ranches were the preferred destination for villa buyers.
This buyer pattern indicates a number of underlying dynamics: (1) the trend towards owner-occupiers continues to gather momentum and that the slowdown in transactional activity has taken place exclusively among cash and speculative buyers as a combination of government regulations and off-plan projects led to reduced exposure in the ready market.
A second point is that community preferences in the apartment and villa segment signal a preference among upper mid-income expats to switch from being tenants to owner-occupiers and who show a strong preference for affordability. More than 85 per cent of the mortgages recorded this year in the two-bedroom segment were taken at price levels of under Dh2 million, illustrating latent demand for this price in the built-up segment of the market.
A third factor would be that with rents unlikely to record significant declines given the high pace of job creation, the continued migration of tenants to the status of owner-occupiers is expected to continue. An increasing number of people now call Dubai their home.
Most important variables
These dynamics shed light on where opportunities lie for investors and developers alike in terms of changing market fundamentals. As Dubai matures as a real estate market, it is apparent that end-users will play an increasingly prominent role in the read markets. If investments are to be allocated in this space, it is crucial to highlight where the demand is highest.
A combination of location, built-up space and price point appears to be the most important variables here. It is apparent (contrary to conventional wisdom where brokers emphasise smaller units such as studios and one-bedrooms) that the two-bedroom space — particularly in areas like Dubai Marina and JLT — are likely to be in high demand given the relative supply shortage for the foreseeable future.
This segment of the market, however, has historically been ignored due to the longer closing time of the transaction. Only now with the speculative froth out of the market has this dynamic come to light. Developers and investors alike would do well to cater to this segment as the next phase of the building boom gets underway.
The writer is Managing Director of Global Capital Partners.