Dubai’s Latest Property Spree Has Rich Buyers Taking More Risk

On Dubai’s manmade island of Palm Jumeirah, soaring laser beams signal the latest outsized construction project getting started. At 71 stories high and with 76 penthouses, Como Residences will be the archipelago’s highest structure — with the cheapest unit priced at 21 million dirhams ($5.7 million).

A short drive down the city’s main highway, Emirati tycoon Khalaf Ahmad Al Habtoor is starting work on a housing complex that’ll add more than 1,700 homes in a single development. It’s a trend on show just about everywhere in the emirate — builders revving their engines in what’s expected to be the strongest construction cycle since 2017.

Long known for sharp booms and busts, Dubai had one of its most dramatic downturns in 2008, when a debt-fueled real estate crash left some of its biggest developers teetering on the brink of bankruptcy. The Arab Spring sweeping the Middle East revived the market in 2011 as capital from Arab nations sought safety in Dubai. But the tides quickly turned in 2014 as a collapse in oil prices sent the residential property market on a seven-year downturn.

This time round developers are hedging their bets more, demanding upfront payments covering most of the property even before construction begins. The cash coming in from wealthy investors around the world is giving the emirate’s real estate market a big cushion and reducing the need for debt — but it also leaves buyers holding more of the risk.

“Developers are capitalizing on growing demand with a sharp rise in project launch volumes,” said Prathyusha Gurrapu, head of research and advisory at the property firm Core. “With money collected from buyers in pre-sales, developers are usually able to fund much of the construction, which makes the financial risk lower than in previous years.”

Gurrapu expects residential prices to rise a further 10% to 12% this year.

Capacity Concerns Still, there are other risks, Gurrapu said, like potential problems in the construction supply chain that could delay the completion of projects even after buyers have paid. Another is concern over the capacity of contractors to carry out work as they take on more projects at a time when many have scaled down capacity after years of a down market.

So far this year, 24,658 homes have been launched in Dubai, about 37% higher than those launched during the same period in 2022, according to Core. About 28,900 off-plan residential transactions have been registered since the start of 2023, the largest number for the same period since 2009.

Off-plan properties are a popular option for foreign investors who don’t have bank accounts in the United Arab Emirates, which Dubai is part of. They tend to transfer cash directly to the developer’s escrow accounts or use crypto to pay for purchases.

Analysts and developers acknowledge the risks. Mohamed Alabbar, the founder of Emaar Properties PJSC, which built the world’s tallest skyscraper, says lessons from the past shouldn’t be forgotten in the current boom.

“The big risk is that property business goes through cycles, ups and downs,” he said. “You have to maintain little debt and have reasonable cash so even if the market slows, the balance sheet and the cash position should enable us to finish our projects.”

Little Supply Cautionary tales of what can go wrong in Dubai abound. Before the global financial crisis, buyers often paid 10% of the value of a property even before a single brick was laid and sold the contracts many times over-inflating values by multiples. The rampant flipping came to a sudden halt in 2009 when government-owned developer Nakheel PJSC almost defaulted on repaying about $4 billion in bond payments. The company, along with then-parent Dubai World, was given a $10 billion lifeline by Abu Dhabi.

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