Dubai’s Real Estate Market Poised for Growth in Luxury Segment

Even before the COVID-19 pandemic, foreign investment in Dubai was strong. With the real estate market bouncing back quickly from the financial setback of the pandemic, the attraction has only strengthened in the past year.  

International investors see Dubai as a city where money stretches very far due to its more affordable real estate prices compared to other luxury markets across the globe. Furthermore, investors stand to make a much higher return on investment from real estate in Dubai than in other markets. Rental yield is as high as 7 percent, compared to about 2 percent in Hong Kong. Moreover, vacancy rates in Dubai are quite low, and even expensive villas do not sit unrented for very long.  

With so many foreign investors interested in the Dubai market, analysts are expecting a sharp price increase in the year to come. According to data from Knight Frank, the market grew 5.6 percent during the first few months of 2023. This marks the ninth quarter in a row of growth for the emirate. While this is impressive, the growth of the luxury market is even more so. Throughout 2022, luxury homes grew by 44 percent, the highest rate in the world. During the same period, some other luxury markets dropped.  

The problem set to occur in Dubai is a lack of supply while demand continues to grow. Current projections show just 289 homes being delivered to the prime districts by 2025. Analysts thus project another year of significant growth. 

The Sharp Growth of the Luxury Market in Dubai Property 

Between January and April 2023, rents in Dubai rose by more than 25 percent. This surge has triggered renters in Dubai to begin seeking out a home to buy. With the prices of both rent and real estate increasing, people are very motivated to make a purchase and lock into a lower price. The recent increase in ultra-high-net-worth investors moving into the emirate has meant that the luxury market has felt a strong impact. Dubai ranks as the fourth most active market globally for luxury home sales with only Los Angeles, New York, and London leading. In 2022, 219 homes worth more than $10 million were sold in the emirate. In the first quarter of 2023, 88 homes in this category were sold with an average rise in transaction price of 16 percent. 

Knight Frank predicts that investors worth more than $3 million will likely funnel a total of $2.5 billion in the Dubai real estate market in 2023. A recent survey of these investors found that 90 percent are looking to buy real estate. Moreover, many of these investors are coming from East Asia, particularly China. Dubai is the sixth most popular destination for Chinese real estate investors. Agencies in Dubai have already seen an uptick in inquiries from Chinese investors, and some have created special teams or initiatives to attract Chinese investors.  

The Continued Risk of the Dubai Real Estate Market 

While a lot can draw investors to the Dubai real estate market, there is still a significant amount of risk involved. Historically, the market has been correlated to the price of oil despite efforts to diversify. In recent years, the market has struggled with oversupply. In fact, new construction in the emirate continues at a higher rate than population growth. The risk of oversupply in the general market remains very real even if the opposite is happening in the luxury market. The government has loosened residence requirements to attract more people to the emirate, but there is no guarantee this will attract enough general buyers. Currently, investors relocating to Dubai seem mostly fixated on the luxury market, which is not expanding fast enough.  

Other factors also contribute to the riskiness of the market. One is high financing costs, which reduce the purchasing power of buyers. Thus, if the property is not in the luxury market and appealing to the very wealthy, there may be problems finding a buyer. Another factor relates to macroeconomic conditions. Dubai remains particularly vulnerable to global financial trends. The rising rates of inflation and impending economic downturns have made some investors who would otherwise purchase hesitate to do so. The war in Eastern Europe has also created issues in terms of supply chains and construction costs. Many investors feel things are simply too tenuous, and this could cause them to walk away from deals and stall the current momentum.  

The Bottom Line for the Rest of 2023 

Altogether, industry analysts remain fairly splintered about the future of the Dubai market. While some think that the rising prices will hold given the undersupply in the hottest market, others believe that the bubble will eventually pop, especially due to pressures from other segments of the market. Moving forward, the emirate’s response to these pressures may be the deciding factor in either direction. Investing more in the luxury market could drive growth, but it is important to address the issues affecting other segments in ways more meaningful than easing citizenship rules.