Dubai: After luxury homes and villas, will affordable homes too start seeing price increases?

Originally published on Jun 27, 2021 | Gulf News

Dubai: Here’s an alert for property buyers - prices of even the more affordable homes in Dubai could see a 10-12 per cent spike before year-end. Developers will have no option but raise their asking prices on ongoing projects if the cost of steel and other building materials continues to soar.

New luxury villa prices have already seen fairly sharp rises since the beginning of this year, through a combination of higher demand and from the cost of construction. If more affordable homes also start turning costlier all of a sudden, it could dent demand at a time when the market is seeing a bounce back.

“Prices of steel and cement have increased 35 per cent and 20 per cent, respectively, in the last eight or 10 months,” said Kalpesh Kinariwala, Chairman of Pantheon Development. “The rest of the building materials have more or less increased by the same levels. This resulted in a 6-8 per cent construction cost escalation.”

So far, off-plan property buyers have not felt the increases as developers refrained from passing on the costs. But if the current rate of increase in building material prices continues, they may not have that option for long. So far, “we optimized our operations to negate the effect - hence our existing project costs have not seen a major impact,” Kinariwala added. “We managed to hedge at least 70 per cent of the construction cost.”


Feeling price pinch

Over the last three years, property values in Dubai dropped by an average 15-20 per cent set off by lower demand, persistent worries about oversupply in some categories, and a slowing economy. Developers had adjusted their prices in response – which is why when building material prices shot up all of a sudden from October last, they got hit with a double-whammy. “While we were in the midst of awarding a contract, the spike was noticed in prices of steel, copper, cement/concrete and even supplies like white goods, elevators, etc.,” said Vijay Doshi, Chairman of Vincitore Realty. “In fact, on all shipments coming into the UAE.

“The pandemic situation also has contributed to the price increase as there have been lots of scarcity of resources. We are left with no choice but to factor in the higher cost for project completion.”

Suppliers won’t budge

It doesn’t end there. “Fuel prices are increasing; all raw material prices, especially metal, are also higher, which creates a domino effect,” said Doshi. “There is an acute shortage of containers to get shipments from overseas. Add to that the increase in freight costs, which is directly impacting the cost of materials used in projects.”

This is why Doshi says it’s inevitable that the price of the end product – the new homes being built or delivered – will inevitably see some impact. “We have already seen a spike in Dubai’s residential project prices,” he added. “Customers do acknowledge and understand market conditions.

“The market has become so volatile that building material suppliers have become conservative. They will let the order go but they won’t reduce their prices.

“There is no room for compromise in quality. So, to counter the market-driven increase in costs, the change we are bringing in is cost optimization through alternative materials to keep costs down.”

Take on direct control

Indeed, developers are starting to take direct control of their projects. Late last year, Azizi Developments caused a stir by stating that it will do all the ordering of supplies rather than let the main contractors do it on their behalf. This was done to bring down project costs and time overruns. It helped Azizi speed up decision-making, and in more ways than one, helped stabilize their construction-related costs.

Impact on new launches

The higher cost of building materials will be another factor that developers have to factor in when they decide on new off-plan launches. While demand for premium homes can withstand sharp increases in values, it won't be the same in the mid- and more affordable categories.

Developers will have some tough decisions coming up…