In 2024, property buyers in the UAE, particularly end-users, are poised to favor mortgages more as interest rates are anticipated to decrease by as much as 100 basis points.

Real estate analysts emphasize that fluctuations in mortgage rates wield substantial influence over the strategies adopted by buyers in the UAE property market. Against the backdrop of escalating rental costs in the UAE, they observe that a considerable number of renters might seize the opportunity and transition into property ownership in 2024.

ValuStrat reports that the Dubai real estate market is predominantly driven by cash transactions, with the third quarter of 2023 registering 16,485 cash deals compared to 8,238 mortgage transactions (excluding off-plan transactions).

As a result, Abu Dhabi presents a distinct landscape where mortgage transactions play a more substantial role in the property market. During the same quarter, Abu Dhabi documented 1,247 mortgage transactions, surpassing the 890 cash transactions (excluding off-plan transactions).

Bankers and economists widely anticipate a reduction in US Federal Reserve rates ranging from 25 to 100 basis points (bps) in 2024, following 11 consecutive rate hikes. Given the dirham’s peg to the dollar, the UAE aligns its monetary policy with that of the Federal Reserve.

Significant impact

Ayman Youssef, Managing Director at Coldwell Banker, emphasized that lower interest rates have a considerable positive effect, boosting demand and driving higher home sales. Conversely, elevated rates may result in diminished affordability and a potential deceleration in the real estate market.

“Nevertheless, the influence of increased interest rates in Dubai remained constrained, given that almost half of the market transactions consist of off-plan sales, wherein investors frequently leverage the payment plans offered by developers,” he added.

Recognizing the substantial influence of mortgage rate fluctuations on property purchases in the UAE, particularly for individuals acquiring homes for personal residence, Svetlana Vasilieva, Sales Director for the secondary market at Metropolitan Homes, emphasizes their noteworthy impact.

“As a projected 1 percent decline in mortgage rates looms, there is an anticipation of a substantial expansion in the potential pool of homeowners in the UAE. This enhanced affordability is poised to allure end-users who may have found the market less accessible previously. Nevertheless, this decline could also create an opening for investors to secure low-cost borrowing for short-term ventures in other potentially high-yield opportunities,” stated Vasilieva.

In alignment with the perspectives of his colleagues, Rachit Pant, CEO of Hedge & Sachs, emphasized that mortgage rates wield substantial influence over the dynamics of property acquisition, exerting an impact on both affordability and demand.

“Higher mortgage rates directly correlate with increased monthly payments, leading to a decline in the affordability of properties. This frequently compels buyers to contemplate smaller or less preferred locations. Moreover, in the event of rate surges, the maximum loan amount for which buyers qualify diminishes. This exclusionary impact can impede certain buyers, especially those with lower incomes or smaller down payments,” he explained.

The Abu Dhabi market is poised to be a primary beneficiary of the projected decrease in mortgage rates in 2024. ValuStrat analysts suggest that this anticipated reduction may result in a surge of buyers opting for mortgages rather than cash transactions. This shift is especially expected as it could potentially inspire renters to contemplate the transition to homeownership. This becomes more significant against the backdrop of escalating rents in Dubai when compared to capital values.

However, it’s noteworthy that Dubai’s real estate landscape is predominantly characterized by cash transactions. Consequently, although there might be an increase in mortgage transactions, a substantial alteration in the cash-to-mortgage transaction ratio is deemed unlikely.

ValuStrat analysts indicate that interest rates could play a more substantial role in shaping property transactions in Abu Dhabi, in contrast to the predominant cash-driven trend observed in Dubai.

Primary Beneficiaries: Renters and End-Users

According to ValuStrat analysts, individuals presently renting may contemplate the shift to homeownership if interest rates decrease in the coming year.

“This inclination aligns with the ongoing trend of rents outpacing capital values, making mortgage alternatives potentially more attractive, particularly for properties in the lower and mid-price segments.”

Svetlana Vasilieva adds that the majority of buyers aiming to capitalize on the mortgage rate drop will likely be end-users seeking ready-to-move-in properties in the price range of Dh1 million to Dh2.5 million.

She emphasizes that end-users are investing in properties that are either almost ready for handover or immediately available for occupancy.

Ayman Youssef pointed out that decreased interest rates create a more advantageous environment for end-users considering homeownership over renting.

“Moreover, for investors, the returns become more enticing, providing the possibility of positive leverage. With the potential for monthly EMI installments to be covered by rental income, enhancing the overall allure of real estate investment and improving overall returns.”

Youssef anticipates that most activity will be seen among first-time home buyers with a budget of up to Dh3 million. “We will witness a rise in bulk financing for single-owner buildings as well,” he added.

Emerging Patterns in the Mortgage Sector

Technological Advancements in Mortgages: Online Application and Approval Processes: The rise of efficient online platforms has transformed the mortgage application journey, offering speed and convenience while minimizing paperwork.
PropTech and AI-Driven Innovations: Technology, encompassing property valuation bots and virtual reality tours, is revolutionizing the home-buying experience and influencing mortgage-related decisions.
Integration of Blockchain: The exploration of blockchain’s potential for secure and transparent mortgage transactions is gaining momentum, promising heightened security and operational efficiency.
Sharia-Compliant Mortgage Solutions: In response to the significant Muslim population, Sharia-compliant mortgages align with Islamic finance principles, presenting ethical alternatives to conventional loans.
First-Time Buyer Initiatives: Programs are emerging to facilitate the entry of young professionals into the property market, featuring reduced down payments and flexible repayment options.
Eased Visa Procedures: Simplified visa protocols and investor-friendly residency permits are luring foreign investments, notably in the real estate sector, amplifying market engagement.
Adoption of Real Estate Investment Trusts (REITs): The introduction of REITs is anticipated to augment liquidity and transparency within the property market, potentially broadening accessibility for retail investors.
Emphasis on Affordable Housing: Government-driven programs and initiatives targeting affordable housing solutions for individuals with low to moderate incomes are molding the landscape of the market.

Also Read : Collaboration Between RTA and the UN Committee of Experts in Advancing Big Data and AI Solutions