Why Dubai residents are buying property to save money

Despite higher sales prices and interest rate rises, some tenants are choosing to become homeowners to avoid rental increases, experts say

A home for sale in The Springs, Dubai. Property prices in Dubai surged in 2022 as the economy bounced back from the coronavirus-induced slowdown. Antonie Robertson / The National

When Alessio Faccia, an Italian assistant finance professor, decided to stop leasing a property in Dubai and buy instead, his aim was to save money by avoiding rent increases and frequent relocations.

In January last year, he took out a mortgage to purchase the two-bedroom apartment he was renting in Dubai Silicon Oasis. He paid Dh550,000 ($149,761) for the property, which he had previously rented for Dh45,000 a year.

Mr Faccia, 40, currently pays a mortgage instalment of Dh2,000 a month, as well as an average monthly service charge of Dh700. In comparison, his monthly rent amounted to Dh3,500.

“I rented the property for six months with an option to buy it at a fixed price,” he says.

“I was expecting rent increases when we relocated to the UAE due to Expo Dubai 2020 and the Fifa World Cup in Qatar. Hence, we found an agreement to have a fixed price for the option to buy. Furthermore, we don’t want to relocate any more since it is one of the most stressful activities.”

Property prices across Dubai, particularly in the prime sector, surged last year as the market and wider economy bounced back from the coronavirus-induced slowdown.

The value of property transactions jumped 76.5 per cent annually to a new high of Dh528 billion last year, while the number of transactions rose 44.7 per cent annually to 122,658.

With record transaction volumes and unprecedented gains across all performance indicators over 2022, it is interesting to see Dubai’s continued resilience against the backdrop of intensifying global recession concerns and rising interest rates, property consultancy Core says in its 2022-2023 annual report.

“While Dubai isn’t immune to these conditions, it has greatly pivoted itself into a preferred gateway city due to the government’s robust response to the pandemic, pioneering policies, thus attracting and retaining investment and talent,” it says.

Changes to visa rules have made it easier for foreigners to settle in the UAE while ultra-high-net-worth individuals have flocked to Emirates on the back of the country’s positive handling of the coronavirus pandemic.

Mr Faccia, who plans to obtain a Golden Visa soon, decided to settle down in the UAE and buy property in Dubai because he wanted to offer stability to his family.

“We have relocated internationally three times in the last four years,” he says.

“It was not an option to relocate again, even within the same city, because it is a very difficult process.”

He saved about 30 per cent of the property’s sales price, which included 20 per cent for the mortgage down payment and 10 per cent for taxes and other charges, including agent, bank and property valuation fees.

The best way to save for a mortgage down payment is to increase your income by working smarter and/or harder, Mr Faccia says.

The UAE Central Bank raised its benchmark borrowing rates this month after the US Federal Reserve raised its key interest rate. This could be a concern for mortgage borrowers on variable rates in the Emirates.

Despite higher sales prices and interest rate increases, a section of tenants in Dubai are becoming end-user buyers to avoid frequent renewal negotiations or relocations, according to the Core report.

“Significant changes in visa regulations and the pro-business sentiment are underpinning the strong market performance,” says Prathyusha Gurrapu, head of research and advisory at Core.

“With more than 151,000 golden visas issued since inception, the introduction of retirement visas and a raft of property-linked visas are drawing residents and investors alike.

“With a steady population increase across income segments, in line with the 2040 target of 5.8 million residents, Dubai is driving long-term demand.”

Although from a low base, the rise in rents has caused a significant upheaval in the rental market over the past few quarters, with many tenants receiving notices of an increase, according to the Core report.

However, tenants prefer to stay in existing units as lease renewals are considerably lower than new contracts and are regulated by the Real Estate Regulatory Agency’s rental index, the consultancy says.

Mortgage Finder, a Dubai-based mortgage consultancy, recorded an annual increase of more than 50 per cent in mortgage applications in 2022, while the overall market registered a record 16,700 residential mortgage transactions last year, according to data from the Dubai Land Department.

A significant driver for mortgage demand was the rise in rents in 2022, according to Mohamad Kaswani, managing director of Mortgage Finder.

“Renters found themselves under pressure as many were served [with] an eviction notice by their landlords to sell their property,” he says.

“Tenants were then faced with the new market reality of having to pay up to 50 per cent higher rents. Those who had the means to make a down payment rushed to take advantage of interest rates remaining sub 5 per cent throughout 2022 to secure a mortgage and buy a property.”

Meanwhile, Junaid Rana, who won Dh50 million in a Mahzooz weekly draw in October 2021, has stopped renting and invested in a property portfolio in Dubai to earn passive income.

Mr Rana, 38, a driver from Pakistan who grew up in the UAE, was renting a room in a villa in Al Warqa, Dubai, for Dh1,700 a month before he won the lottery.

“Earlier, I couldn’t afford to buy property here. I always rented property prior to the win. It was my dream to own property in Dubai,” he says.

After the life-changing win, Mr Rana purchased a townhouse for Dh1.7 million in Warsan Village and a villa worth Dh2.2 million in Al Furjan for his family to live in.

He also invested in five off-plan townhouses in Dubai Lagoon and apartments in International City that will earn him rental income. He bought the properties with cash and did not take out mortgages.

“I decided to stop renting after the win because if I own property, its value appreciates and you get passive income in the form of rent. It’s a good investment,” says Mr Rana, who also won a Mercedes G-Wagon in Pakistan last year.

He purchased all properties with the help of a friend who works in the real estate industry.

While overall market sentiment remains positive, affordability is a growing concern for the low to mid-market segment, according to the Core report.

“Although we don’t [expect] the sharp rises witnessed in 2022 to continue in 2023, we believe the market will see a steady rise, albeit at sustainable levels, as the gap between ask and bid prices rises with end users being priced out of the market, along with global recession fears and rising interest rates deterring a segment of buyers,” Ms Gurrapu says.

Only 29,000 residential units were handed over in Dubai in 2022, lower than initial forecasts of more than 35,000 units and the lowest number of handovers in Dubai since 2019 as supply chain issues affected completion rates and delivery timelines, the Core report says.

About 83 per cent of deliveries continued to be in the apartment segment while villas constituted only 17 per cent of supply, creating a supply deficit in the sector and persistent upwards pressure on villa rents and sales prices, the consultancy says.

Dubai has recorded a sharp rise in project launches as developers are keen to capitalise on the positive market sentiment.

However, most of the new announcements were for the apartment segment, which recorded an increase of 120 per cent. In comparison, new villa project launches increased 5 per cent annually.

“As most project launches and handovers continue to be in the mainstream apartment segment, we foresee apartment sales prices plateauing as supply and demand equilibrium is expected to be achieved by the end of 2023,” Ms Gurrapu says.

Secondary market transactions in 2022 grew by 50 per cent, compared with 2021, while the off-plan market registered a massive 84 per cent rise, mostly due to the higher number of off-plan launches and inventory available compared with previous years, Core estimates.

Transaction volumes in both the secondary and off-plan markets are expected to continue to rise in 2023, driven by demand from local and international buyers, the report says.

“Sales prices are to witness a gradual yet continued rise, particularly in prime villa and apartment districts,” the consultancy says.

“Rental rises and high occupancy levels are expected to continue in 2023, however, with a growing disparity between rents in new leases and renewals.”