According to the latest analysis from global property consultancy Knight Frank, house prices in Dubai have continued to grow, rising by 4.8 per cent in the second quarter of 2023, the 10th consecutive quarter of growth.

This latest increase means that residential values have grown by an average of 24 per cent between the current and third freehold property market cycles in Dubai.

Flat prices have risen by 21 per cent since January 2020, with the average price per square foot now standing at Dh1,290, Knight Frank said. Villa prices remain in strong demand and have experienced even stronger growth of 51 per cent over the same period, with the current average price per square foot at Dh1,520.

Faisal Durrani, Partner, Head of Middle East and Africa Research, said: "Despite the significant increase in prices, prices in the city are still 11 per cent below their 2014 peak. As things stand, relative long-term price growth shows no signs of slowing down.

If anything, all market dynamics continue to point to further rises, especially in villas, as supply and demand dynamics remain out of balance. This is particularly evident in prime urban markets such as Jumeirah Bay Island, Emirates Hills and Palm Jumeirah, where villa prices have risen by 11.6 per cent in the second quarter, and by a further 125 per cent since January 2020. What's more, only eight villas are currently under construction in these neighbourhoods.

Villa prices in other parts of the city are not far behind, up 5 per cent from their peak in 2014. More affordable locations are also experiencing strong price increases on a per square foot basis. For example, villa values in Dubai Hills Estate have risen by 24 per cent in the last 12 months alone, making it the fastest growing area in the city.

Knight Frank says the main driver behind this growth has been strong and sustained demand for luxury second homes, particularly from international buyers, but also from domestic buyers. Palm Jumeirah remains the city's top performing villa market, with prices increasing by 9 per cent in the second quarter alone. Over the past year, this performance has pushed the growth rate up to 44 per cent.

Since January 2020, villa prices in Palm Jumeirah have risen by 146 per cent but remain at around Dh4,800 per square foot, reflecting the huge demand for homes in Dubai's iconic Palm Jumeirah. However, villa prices are now 67 per cent higher than their 2017 peak, while flat prices remain seven per cent below their 2015 peak.

Knight Frank emphasised that one of the key features of the current and third freehold residential market cycle in Dubai is the dominance of genuine end-users, particularly second-hand buyers.

 Historically, the market has been largely driven by speculative activity, fuelled of course by the abundance of off-plan purchase options," said Durrani. For example, in 2009, just as the global financial crisis loomed, 61 per cent of all home sales in Dubai were off-plan transactions. the 10-year average is around 42 per cent, while the figures for 2021 and 2022 - the first two years of the third property cycle - are 42 per cent and 44 per cent respectively, broadly in line with the 10-year average. Over the past 12 to 18 months, sales of off-plan homes have unsurprisingly climbed as developers have responded to steady and sustained demand for homes and product launches have risen, now accounting for just over 50 per cent of sales".

Shehzad Jamal, Partner, Head of Strategy and Consultancy, Middle East and Africa, added: "Existing homes continue to be highly sought after, especially by international second home buyers who want to enjoy the 'Dubai Lifestyle' immediately. This trend is also evidenced in our Destination Dubai 2023 report on the acquisition of 'new/completed' homes in Dubai. Demand is strongest among those with a net worth of more than US$10 million (61 per cent) and 71 per cent of HNWIs from East Asia. Overall demand for off-plan purchases is relatively low among global HNWIs, at just 10 per cent".

According to Knight Frank's analysis, while supply remains tight in prime neighbourhoods, new home construction continues to expand in other parts of Dubai.

Knight Frank expects 85,200 homes to be delivered by the end of 2028, 69 per cent of which will be flats (59,000 units). Some 40,000 homes are expected to be completed this year alone, some of which may be delayed until next year, a common feature of Dubai's residential market.

Jamal noted: "Excluding 2023, and assuming that all of the 40,000 homes expected to be completed this year are delivered on time, the 42,500 homes scheduled for completion between 2024 and 2028 represent an average of only 8,500 homes per year, a 75 per cent reduction in the long-term residential delivery rate, which strongly suggests continued upward pressure on house prices, particularly as the population continues to expand, recently exceeding 3.5 million residents. This is a static view, of course. Of course, this is a static view, which could change if more projects are announced".

Positive sentiment is a key factor in the Middle East's property market and Dubai's property market is thriving due to positive sentiment, Knight Frank said.

The announcement of the Dubai Economic Agenda (D33) has further fuelled this positive sentiment. As well as outlining a new roadmap for Dubai to double its foreign trade by 2033 and become the world's fourth largest financial centre after New York, London and Singapore, Dubai's population is also expected to increase from the current 3.5 million to 6 million, a key consideration for Knight Frank's long-term outlook for Dubai.

Durrani said: "The projected growth of the city's residents will justify a massive residential development boom. Indeed, the city's current housing stock will need to almost double if it is to meet its population targets, which the government expects to rise to 7.8 million by 2040.

"All signs are already pointing to a housing shortage in Dubai in the long run. First and foremost is Dubai's gross domestic product (GDP), which grew by 2.8 per cent in the 12 months to the first quarter, and the continued dominance of sectors such as retail, trade, airlines and hotels, which contributed to Dubai earning the accolade of having the world's highest average hotel occupancy rate in the first half of the year, with the emirate's nearly 150,000 rooms having an average occupancy rate of 78 per cent. In addition, the emirate's Purchasing Managers' Index (PMI) for non-oil sectors has been expanding for two and a half years. Companies are hiring and expanding aggressively, resulting in a tight supply of Grade A office space".

Dubai Electricity and Water Authority (Dewa) registered a 5.5 per cent increase in the number of customers in the first half of the year compared to the same period last year. While this covers all property sectors, it is a further indication of the emirate's growing population, Knight Frank said.

Rental market

Outside of the sales market, rental growth has almost kept pace with sales prices, meaning yields have not been compressed.

Stephen Flanagan, Partner, Head of Valuation & Consultancy at Mena, explains that rental growth continues to closely follow sales price trends, avoiding yield compression. Yields for quality single-let flats (6.25%-7.50%) remain slightly higher than those for villas, but some beachfront neighbourhoods that attract holidaymakers can command a significant premium.

Average rents in the city currently stand at Dh92 per sq ft, 22.3 per cent higher than last summer. Compared to the second quarter of 2022, villa rents in Palm Jumeirah have risen by around 15 per cent, while overall rents have risen by just over 110 per cent since January 2020, making it one of the highest rising areas in the market. Rents here currently stand at Dh151 per square foot.

In the mainstream market, more affordable villa locations are also seeing similarly high rental price growth. For example, in The Springs (Dh83 per sq ft) and Arabian Ranches (Dh82 per sq ft), average rental prices have climbed by nearly 31 per cent and 17 per cent respectively over the past 12 months.