The weak US dollar, to which the dirham is pegged, increases the affordability of UAE real estate for many foreign buyers and could boost demand in the face of subdued market conditions, though it will be no panacea, analysts say.
“Looking at the top buyer groups, where the currency is not pegged, who invest in UAE property we can see that on a currency basis alone, compared to January 2017, Indian rupee-denominated buyers would now find purchasing property in the UAE 6 per cent cheaper and British pound buyers would find it 13 per cent cheaper,” said Taimur Khan, senior analyst at consultancy Knight Frank.
The dollar index fell nearly 10 per cent in 2017 and is approaching a three-year low, with confidence in the historical might of the US economy flagging. Some hedge-fund managers anticipate the greenback could shed another 10 per cent of its value in the coming year. The UAE dirham – like most GCC currencies – is pegged to the dollar, and has naturally depreciated in value. Purchasing property in the UAE is likely cheaper for many of the foreign buyers that make up a sizeable chunk of the country’s real estate investor base.
Foreign buyers accounted for around 20 per cent of real estate transactions in Dubai in the 18 months to June 2017, according to statistics from the Dubai Land Department. The top buyers were from Saudi Arabia, India and the UK, the department said.
“The fall in the dollar is likely to have contributed to Dubai’s total property transaction volumes increasing by 14 per cent year-on-year in 2017,” Mr Khan said. “As a result of the currency drop and other draws of the market we expect this deprecation will spark some additional interest.”
The uplift in property transactions in 2017 was also due to a very weak 2016, when international purchases recorded a 30 per cent year-on-year decline, noted Tim Fox, chief economist at Emirates NBD bank. Still, the weaker US dollar “probably played a part in it”, he said. "To the extent that the dollar is likely to remain soft in the medium term, this should continue to underpin foreign demand.”
However, analysts cautioned against assuming the weak dollar would be the reason to jumpstart a stagnant UAE real estate market, which has recorded falling sales and rental prices over the past two years.
“More fundamental factors such as supply and demand, job market and government spending have a far more direct impact on property markets,” said Mohamed Bardastani, senior economist, Middle East, at research group Oxford Economics.
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Dubai residential property sales prices fell on average 1.3 per cent in 2017 compared to 2016, according to data from market research consultancy Reidin, while sliding an average 7.6 per cent over the same period in Abu Dhabi. Rental prices were down even more heavily, over 10 per cent in some parts of the country.
The decline in prices reflects high volumes of supply, subdued demand due to a softer job market, and cuts in public expenditure over the past year. Meanwhile, the introduction of VAT this year added costs to commercial property transactions.
“It is rather difficult to disentangle and isolate the impact of a weaker dollar on the UAE property market from the more familiar market factors…which are more fundamental to the overall performance of the property market,” Mr Bardastani said.
“Demand for real estate still seems subdued, so we are sceptical about whether people are buying more in general, let alone solely due to the dip in the currency.”
Rather than creating a real estate market boom, the dollar drop is more likely to drive prospective buyers who are already considering a purchase to a quicker decision based on affordability.
“I don’t expect this recent weakening to drive a boom in the sector as much as continue to provide room to some buyers, given the limited impact on purchasing power,” said Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes bank.
The strength of the dollar particularly in 2014 to 2016 was a key headwind impacting external demand for UAE real estate so the dollar weakening is “definitely a positive development”, added Monica Malik, chief economist at Abu Dhabi Commercial Bank.
“However, there are other factors limiting external demand for properties – notably, ongoing weak regional demand due to slow economic growth in key GCC buyer markets such as Saudi Arabia,” she said.
The recent uptick in oil prices, which has fuelled renewed growth in GCC economies, as well as expansionary fiscal policy and increased government spending on infrastructure in the run-up to Expo 2020 Dubai is expected to drive a recovery in UAE real estate from 2019, experts added.