Real Estate in Dubai: Risks and Pitfalls

Purchasing residential or commercial real estate in Dubai can be a profitable investment. To achieve this, it’s necessary to find a property with good returns and minimize risks. Let’s examine the pitfalls and risks involved in investing in Dubai’s real estate and what should be primarily considered.

Market Volatility

The real estate market in Dubai is very volatile. From 2008 to 2021, apartment prices in the emirate fell by 55%. This led to difficulties in selling and renting out properties at a profit for investors. The main reasons for the plummeting prices were the drop in oil prices, followed by the COVID-19 pandemic and a significant decline in tourist flow.

After the pandemic, the market gradually began to recover and then showed serious growth. By the end of 2021, a significant revival of the real estate market was recorded. Housing prices increased by 175% compared to 2020.

Given the strong market volatility, it’s difficult to predict what will happen to real estate prices in a few years. An investor may invest money and end up at a loss, but there’s also a chance for substantial gain. Therefore, it’s crucial to carefully select properties for investment.

Legislative Changes

The government periodically makes changes to the legislation regulating the real estate market. This, in turn, can affect price dynamics and the number of transactions.

Let’s take the example of housing rent. In 2007, the Dubai government made changes to rental legislation to balance the relationships between landlords and tenants and create an attractive environment for the latter. The law included changes such as freezing the rental rate for the first 3 years of the lease agreement. This provided stability for tenants but at the same time limited the possibilities for landlords to increase income.

Buying Property During Construction

Purchasing property at the project stage or during construction also carries its risks. The main risk is delays and halts in construction work, which can lead to lower returns than initially expected.

In case of delays in commissioning, developers in the UAE pay large fines. Still, many new developments in Dubai are introduced with delays. When choosing a developer, it’s important to assess their previous projects and whether they were completed on time.

Investors in Dubai are reliably protected from complete construction freezes. If the developer is unable to complete the project, the authorities transfer it to another developer, so it will definitely be commissioned. But all this also takes time, so it’s crucial to carefully select properties.

Buying property during construction carries another risk – the discrepancy between the picture in the promotional brochure and reality. To avoid such situations, experts also advise studying the developer’s reputation and buyer reviews.

Excessive Supply

There are serious concerns that the increased activity of developers in the real estate market will lead to an oversupply. This, in turn, could trigger a significant drop in housing prices. In such a scenario, the investor might find themselves at a loss.

At the same time, according to the UBS Global Real Estate Bubble Index 2022, Dubai ranks second in the world after Warsaw among cities with the lowest risk of a real estate bubble. In Frankfurt and Toronto, the risk of the bubble bursting is almost 14 times higher compared to Dubai.

Mortgage Risks

Developers actively offer investors favorable conditions for purchasing real estate in installments or with a mortgage. Yet, experts advise not to rush and assess all the risks before entering into such a deal.

One of the advantages of a mortgage in Dubai is the relatively low interest rate (3.99%). Developers often offer several payment options. The investor can make an initial payment of 20–30% of the property’s cost, and pay off the rest after the house is commissioned. Many investors take out a mortgage for the remaining amount. Here lies the serious risk of taking advantage of the developer’s favorable conditions but ultimately being denied by the bank.

If denied a mortgage and lacking the full amount to pay off the remaining installments, one can resell the property. However, it’s important to carefully study the sales contract before concluding the deal. It specifies when an investor can resell the housing. Usually, a minimum of 40% of the cost of the apartments or villa must be paid, but this percentage may vary among developers. Therefore, it’s important to have at least this amount in case of mortgage denial.

Increasing the chances of obtaining a mortgage is quite possible. After arranging for installments, the investor still has plenty of time to prepare to apply for a mortgage at a bank. While the building is under construction, one can manage to officially settle in the UAE: obtain a residency visa through the purchase of real estate or start a business.

Legal Aspects

One of the most important legal aspects of purchasing real estate in Dubai is that foreigners can only acquire properties in certain areas of the emirate. These areas are called freehold zones. There are more than 70 such zones in Dubai, and their number continues to grow. In these areas, a foreign investor can buy a property or land plot in full private ownership. This gives them the right to resell the property, rent it out short-term or long-term, bequeath, etc.

Other legal aspects to consider when investing in Dubai’s real estate:

  • The sales contract may specify restrictions on selling the property before its commissioning. In some contracts, the developer includes a clause requiring the buyer to immediately pay a certain sum of the total purchase price, for example, 30–40%, before the developer approves the resale.
  • The developer may set a price barrier and not allow primary buyers to resell unfinished apartments below a certain price to not slow down their own sales.
  • An investor buying residential property for its subsequent rental must ensure that the future rental price declared by the developer corresponds to market values. Sometimes developers “subsidize” the rent for a certain period, for example, 1–2 years. But after this period, when the apartments enter the open market, their rental value and cost may fall, which would be an unpleasant surprise for the investor. Before concluding a sales transaction, it’s important to consult with a lawyer and let them review the contract. This will help avoid many negative consequences, including the potential decrease in investment returns.

Also, do not forget about the tax implications in your home country. There’s no income tax or capital gains tax for individuals in Dubai. If the real estate buyer is a tax resident of another country, then, according to its laws, they will likely have to pay taxes in case of renting out the property in their home country. It’s best to calculate in advance how much tax will have to be paid to avoid finding that the tax amount exceeds the rental income.

Currency Risks

Investments in Dubai’s real estate may also be associated with currency risks. Currency exchange rate fluctuations can affect the value of investments and returns.

It’s worth noting that Dubai is renowned for its financial stability and the pegging of the dirham to the US dollar. This creates a relatively low level of currency risks. The stable economic situation and low currency risks attract investors who want to protect their funds during periods of instability in the global financial markets.

Maintenance and Management

Simply purchasing apartments in Dubai and forgetting about the purchase is not possible, even if it’s an investment property and not housing for personal use. The property owner is fully responsible for maintaining the property properly and must pay for its maintenance.

Maintenance costs are set by the management company or the Homeowners’ Association if it has already been established. The cost of maintenance can be quite high, which the investor should be prepared for. On average, the payment is 20–80 dollars per square meter.

The maintenance fee for apartments usually includes:

security expenses for the building; garbage removal expenses; cleaning expenses for common use areas; expenses for maintaining the internal infrastructure (parking, swimming pools, gyms, coworking spaces, rest areas, etc.). If the property is not rented out, the additional expenses can be significant for the owner. Yet, most owners cover such expenses by renting out the property.

In summary, when purchasing real estate for investment purposes, it’s important to minimize risks and avoid mistakes. To do this, one must thoroughly study the market and the situation in the country, evaluate developers and the properties they offer, learn about the conditions of purchase and the specifics of concluding deals with housing. It’s quite challenging to figure all this out on one’s own. It’s best to seek the support of realtors who have been working in Dubai’s real estate market for a long time.