A tale of two markets: Capitalising on arbitrages through retrofits

The Dubai real estate market has been on a spectacular bull run with prices reaching an all-time high of AED 1,397/sqft in July, 2024. This represents an appreciation of over 78% from the market trough reached in April 2009 and, more importantly, prices are approximately 13.2% above the previous peak of September 2014. However, when diving into the granular details, we notice that the market is extremely fragmented, with the majority of the momentum being witnessed in the off-plan segment, which now accounts for over 67% of all transactions.

Understanding the market fragmentation

The properties being launched today are fitted with modern specifications and align with shifting consumer preferences. Therefore, it is no surprise that the off-plan price premium exceeds 20% when compared to the aging ready inventory. However, developers are launching inventory that is smaller in size compared to the existing stock in the market. The highest discrepancies are in the one-bedroom category, with off-plan launches being 12.5% smaller compared to ready units. This highlights that although these units may be better fitted, the reduction in space will not be welcomed by end users.

Opportunities for arbitrage through retrofitting

This recent intelligence portrays market dislocations and thus creates opportunities for arbitrage. Recently, we have advised a client on retrofitting a dated low-rise residential tower in an upscale location. After analysing the specifications of the newer products, we noticed that end-user preferences are changing towards more modern finishes such as luxury parquet flooring, bathrooms, and kitchens with top-of-the-line marble finishes and state-of-the-art sanitaryware.

From an investment perspective, our research indicated that the refurbishment costs and capital outlays could be optimised, with a one-bedroom retrofit amounting to approximately AED 35,000, which is AED 35/SQFT. More interestingly, the potential increase in sale rate would amount to AED 250/SQFT, highlighting a lucrative return on capital invested.

Future market trends and investment strategies

As newer and more modern products are delivered over the coming years, the price premiums between off-plan and ready units are expected to widen further, increasing the arbitrage opportunities for opportunistic investors. At the same time, investors need to be vigilant in their acquisition strategy and avoid any value traps.

Additional Insights

• The impact of consumer preferences on market dynamics
  Consumer preferences in the real estate market are rapidly evolving, with a strong inclination towards properties that offer modern amenities and finishes. This trend is driving demand for off-plan properties, which developers are responding to by incorporating high-end materials and state-of-the-art features. Understanding these preferences can help investors make informed decisions about where to allocate their capital.
• Strategic retrofitting for maximum ROI
  Retrofitting older properties is not just about updating the aesthetics; it is about strategically enhancing the value of a property. By investing in high-demand finishes and modern layouts, investors can significantly boost the market appeal of their properties. This, in turn, translates to higher rental yields and sales prices, ensuring a strong return on investment.
• Navigating market fragmentation
  The fragmented nature of the Dubai real estate market means that not all properties will experience the same level of appreciation. Investors need to carefully analyse market segments and focus on areas with the highest potential for growth. This involves staying updated on market trends, consumer preferences, and the competitive landscape.

Final Thoughts

By capitalising on these insights and opportunities, investors can navigate the complexities of the Dubai real estate market and achieve significant returns through strategic retrofitting and market analysis.

If you have any questions or would like to explore how you can capitalise on these opportunities, please reach out to our Strategy and Consulting team for personalised advice and insights.