The difference is no longer just about big price gaps between off-plan and ready-to-move-in homes.
Dubai: The difference between the prices of new off-plan properties and those in the secondary market is growing significantly in Dubai’s real estate sector. This trend shows a change in the market dynamics, moving beyond just the large price differences that were previously seen between new off-plan projects and finished homes.
Beyond The 2008 Recession – Understanding Market Changes!
Contrary to what many believe, the fall of Lehman Brothers did not start the Great Recession of 2008. Extensive academic research has looked into the decisions made in a connected economy, showing that the main issue was not just high borrowing but also investors’ lack of understanding of the hidden risks they were taking on while chasing easy profits.
In a time when traditional scarcity economics is losing its importance, there is a tendency to adopt new ways of thinking that seem to go against normal economic rules. The latest issue of The Economist has called the current real estate market a “super-cycle,” which is similar to past predictions, like when the magazine incorrectly said that oil prices would stay very low in the late 1990s.
Signs Of An Overheated Dubai Real Estate Market:
Looking back with the benefit of hindsight, it is clear that many signs throughout the year have suggested an overinflated real estate market in Dubai. While new off-plan sales have continued to rise, there has been a noticeable increase in the price gap between primary prices and those achieved in the secondary off-plan market.
This growing gap is seen in key areas such as Jumeirah Lake Towers (JLT), Dubai Harbour, Dubai Marina, Business Bay, and Arjan. The difference has grown so much that it matches the commissions paid out by developers, which have also gone up over the year.
Effects of the Growing Price Gap:
The increasing gap indicates that the true price discovery is happening within the secondary off-plan sales. Developers’ price incentives are being passed on to secondary investors, leading to a situation where in areas like JLT, Arjan, and Business Bay, the price gap has exceeded 20%.
This significant difference matches the broker incentives and generous payment plans offered by developers. Despite the attractiveness of these payment plans, they have led to a higher number of units being offered—often labeled as distressed—as investors try to sell their inventory quickly.
Rising Off-Plan Launch Prices:
These payment plans naturally increase developer borrowing, causing prices to keep rising. As a result, areas from Ras Al Khaimah to Business Bay are now seeing median prices of AED 3,000 to AED 3,500 per square foot, regardless of the different land prices in these developments. While each area has its own unique factors, the rush to buy off-plan properties at similar prices shows that underlying factors like more flexible payment plans are driving this trend.
The Euphoria Effect And Market Weaknesses:
A common theme in this analysis is the growing excitement among investors. Many have learned that betting against Dubai and the UAE’s steady growth is often unwise. However, it is also true that market processes can become disconnected from economic basics, leading to a “mean reversion” where high prices eventually come down. This has not yet happened in the current U.S. capital market cycle, despite many warning signs like price differences. In the real estate sector, even with lower interest rates, mortgage rates have not yet decreased.
Investor Caution And Future Market Outlook:
At the heart of this situation is the need for investors to clearly understand how much money they are willing to risk. The idea of “easy wealth generation” is rarely true. Investors must learn to find and understand weaknesses within the system. The ongoing lag in ready-to-move-in sales is a clear sign of two possible outcomes:
- Shift Towards Ready Properties: Investors may increasingly look to invest in ready properties to take advantage of price differences.
- Price Corrections in Off-Plan Sales: The value and number of off-plan sales are likely to drop, leading to price adjustments.
By the time the media notices this trend, the market changes may have already happened.
Sameer Lakhani
Managing Director of Global Capital Partners
