Khaleejtimes: Residential properties in Dubai may witness a moderate steep in demand due to the increase in the interest rate; The interest rate in the UAE is expected to reach 4.90% by the end of 2023 that may impact the purchasing power of consumers

The consecutive increase in interest rates is unlikely to hit Dubai real estate, but it may cause a slowdown in the sector’s growth this year, experts say.

Analysts, executives and industry stakeholders said the majority of real estate transactions in the UAE carried out in cash and it will not be impacted due to regular hike in interest rates. They said the market is expected to post a steady growth of up to five per cent this year compared to 11 per cent in 2022.

“The year 2022 concluded on a remarkable note for the Dubai property market as it broke several records. However, 2023 may see the real estate sector heading in a different way, partly due to the rising interest rate and the way it’s impacting consumers’ purchasing power. Of course, there will be growth but not at par with the previous year,” according to Zoom property chief executive Ata Shobeiry.

 
With effect from February 2, 2023, the Central Bank of the UAE raised its base rate for the Overnight Deposit Facility (ODF) by a quarter of a percentage point to 4.65 per cent from 4.4 per cent after the US Federal Reserves’ eighth increase in the policy rate to bring inflation down towards its target range of two per cent.

“As the ODF was raised to 4.65 per cent from 1.5 per cent in 2022, the purchasing power of consumers was impacted. This may result in reduced demand, which, ultimately, can impact property prices,” according to the Zoom Property Insights.

Shobeiry believes that the interest rate hike impact will be limited and the real estate market will continue its growth, but at a moderate rate.

About 70 per cent of real estate transactions in the UAE are mostly carried out in cash. This is why the impact of the rising interest rate is going to be marginal on the market, according to the Zoom Property Insights.

“The interest rate may reach 4.90 per cent by the end of the year. But, the perks Dubai offers to entrepreneurs, investors, and end-users will continue attracting potential buyers who will drive the market’s growth in coming times,” Shobeiry said.

Interest rate not the key factor

Atik Munshi, managing partner at FinExpertiza UAE, said increase or decrease in interest rate is one of the factors, which does impact real estate prices, but there are many other more significant factors that give the sector momentum.

Referring to investor sentiment, confidence about future outcome, expected returns and resale value expectations, he said the UAE and Dubai real estate market is still doing well particularly in the luxury segment as interest factor does not play a big role here.

“For individual private investors the rise in interest rate may have some impact though one also needs to consider the inflation aspect. Overall the market still seems to have a lot of steam,” Munshi told Khaleej Times on Sunday.

Property growth to continue

The year 2022 witnessed a little over 11 per cent price growth. It was down from nearly 16 per cent in 2021, but that was mostly due to reduced prices because of the Covid-19 pandemic.

As per an early estimate by the Zoom Property Insights, prices are expected to increase by five per cent this year due to strong demand in the market as high-net-worth individuals (HNWIs) and foreign investors continue to pour in and invest in the sector.

Ayman Youssef, vice-president, Coldwell Banker UAE, said higher interest rates tend to decrease demand for real estate, as it becomes more expensive for buyers to borrow money for mortgages, making real estate purchases less attractive.

“This can lead to a decrease in property values and slower growth in the real estate market. However, this was not the case in Dubai as the market was driven by strong demand for rent and low vacancies which pushed the gross yield to 6.5 per cent, up from an average of 5.5 per cent year- -on-year basis," Youssef told Khaleej Times on Sunday.

“As of January 2023, there have been 2,867 mortgage transactions worth Dh7.2 billion were recorded in Dubai,” he said.

He said the global market is usually more sensitive to interest rates increase as majority of buyers in US or UK are mortgage buyers.

“On the other hand, in Dubai around half of the transactions are off plan where clients usually don’t need finance and instead opt of developer payment plans, which is usually paid over four to five years,” Youssef concluded.