Over the past week, we not only witnessed multiple major currencies going down against the dollar, we also noted the sterling hitting a record low against the USD. Considering UK nationals remain one of Dubai’s top investors in real estate, the currency depreciation is making many wonder its impact on the property market in Dubai. Without question, if the current weakening of the pound remains, sooner rather than later, we will witness an impact on the market.
When looking at the buyer side of Dubai’s real estate industry, the two key players remain the investors and end users. This year alone, large activity was witnessed from investors, predominantly from those in Europe who are pooling into Dubai’s real estate predominantly with cash transactions.
Post the fall in value of the sterling, we’re already seeing some of these investors pause their buying into Dubai to assess whether the run on sterling is purely speculation with quick recovery looking promising or if the economic situation seems to attract long-term consequences. That said, many of these investors buying in cash are undoubtedly going to be hurt by the exchange rate.
On September 1st, the cost to buy a AED1.5 million apartment would cost approximately GBP353,000 ($395,149). The same apartment, after the change in the value of the sterling, now costs GBP375,000. This results in an additional GBP22,000 with today’s exchange rate of 4.0. Considering cash transactions comprise approximately 75 percent of real estate transactions, the stark increase in costs could potentially result in cash buyers looking towards financing options.
One doesn’t need to speak to many UK nationals to know that anyone that can, is currently sending money back to the UK. The situation is similar to those who have Euro as their home currency. It’s too good of an opportunity to pay off existing mortgages and debt in the UK and reap the benefits wherever possible.
However, for residents residing here and who are currently in the market to buy, it’s unlikely it will shift their location of buying from Dubai to the UK. Instead, what’s plausible is that many who are actively looking to buy in Dubai may hold off transacting for an additional month or two while they send a portion of their deposit back home to take advantage of the strong exchange rate.
Some may also question if we may see a repeat of 2016. The last time the sterling slumped to 4.5 back in 2016 (which looks attractive now!), it led to a large Middle Eastern investment into the UK market. However, the outlook of the UK property market, despite the reduction in stamp duties, is still questionable since over 100 mortgage products have been withdrawn by lenders over the last few days.
The average cost of a home in the UK has also doubled in the past decade due to low interest rates fuelling demand and allowing buyers to stretch their budgets with cheap debt.
Now, overexposed to mortgage debt, UK homeowners will feel the pinch of interest rate hikes over and above the general increase in the cost of living in the UK due to inflation. With interest rate hikes set to become more aggressive, it certainly puts a question mark on investing in the UK property market right now.
Meanwhile, Dubai’s real estate market has benefited from additional regulation, the introduction of the new 10-year golden visa and greater investment choice, with many now feeling comfortable investing in real estate here.
The coming days and weeks will be telling as to how the currencies continue to react and if the dollar continues to hold its strength.
Sarah Hewerdine, head of marketing at houza
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