UAE real estate market to remain strong, Moody’s says

The reliance of major UAE real estate developers on banking services has decreased since 2022, with the pre-receipt payment system helping them provide high liquidity, enabling them to continue delivering units without being affected by high interest rates, according to Moody’s Ratings Agency.

“Strong demand from domestic and foreign investors, including large numbers of Russian buyers since the start of the war in Ukraine in 2022, allowed developers to dictate early payment terms for most of the unit price before delivery, which helped significantly improve their cash collections and reduced their reliance on bank financing for construction work,” the Ratings agency explained in a report.

Banks in the UAE participate in the real estate sector by providing loans for construction and through retail services of mortgage lending to individuals.

”Developers’ high liquidity has helped repay some of their loans in the past few quarters, and recent interest rate increases have accelerated the trend towards lower borrowing. As a result, mortgage lending from UAE banks fell by 6% in the entire year 2022 and by 4% until June 2023 on an annual basis,” according to Moody’s.

However, UAE banking sector loans are still going to construction and real estate, accounting for 16% of total loans as of June 2023, down from 20% in December 2021.

UAE real estate market to remain strong over the next 12 to 18 months

Moody’s expects the UAE real estate market to remain in a strong position over the next 12 to 18 months, but demand will be slower than in the last two years.

“Prices have increased by an average of 15% in Dubai and Abu Dhabi since the second quarter of 2021, with some 80 thousand units currently under construction,” the Ratings agency explained in a report.

The report attributed this strong performance to the success of the UAE government’s recent visa plan and the immediate reopening of the economy after the pandemic, as well as the continued rise in oil prices and strong economic activity.

Moody’s expects high interest rates to have a limited near-term impact on real estate developers, especially with strong credit rates, and most of its debt is at fixed rates with maturities of at least four years.

However, Moody’s report noted that high inflation and high interest rates could pose a long-term risk to real estate companies, especially small ones that do not have the advantage of prepayment and are more vulnerable to high interest rates.