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A comprehensive guide to real estate risk management in Dubai’s growing market

Sergei Grechkin, Chief Risk Officer at UFG Capital reveals the do’s and don’ts of investing in Dubai’s real estate market

A comprehensive guide to real estate risk management in Dubai’s growing market

Investing in real estate has long been considered by portfolio managers as protective investments, offering the promise of stable returns and wealth accumulation. Dubai, UAE, has a dynamic real estate landscape, rated among the world’s top 10 cities to live and prosper in 2024, ahead of Vienna, Amsterdam, Los Angeles, Melbourne, Zurich, and Sydney.

While the potential for investment returns in Dubai real estate is significant, the sector has its risks. Let’s delve into real estate risk management in the fast-growing Dubai market and explore modern approaches and models employed by risk managers to forecast and assess exposure at risk for investment funds.

The “Switzerland” of the Middle East

UAE’s strategic geographic location and investor-friendly economic policies have attracted an increasing number of multinational corporations. As a result, the nation is rapidly evolving into a global business hub, following the trajectories of financial centres like London and Switzerland. The appeal lies beyond tax advantages, also encompassing the country’s commitment to innovation, sustainability, and economic diversification.

Concrete proof of this transformation lies in the significant uptick in the number of businesses setting up operations in the UAE. According to the latest ‘Ease of Doing Business’ index by the World Bank, the country secured the 16th position out of 190 nations. Dubai alone recorded a 25% growth in new business licenses in the first half of 2022 compared to the preceding year.

The correlation between economic prosperity and real estate prices is historically evident. In the UAE, the surge in corporate activity directly translates into increased demand for both commercial and residential spaces. As businesses shift towards the UAE to establish regional headquarters, the demand for office spaces, residential units, and commercial properties is escalating, driving property prices upward.

Understanding the risks in Dubai’s real estate market

Before we dive into effective risk management strategies and approaches, we need to first review the main risks in the context of Dubai real estate investments.

Market risk: In the case of Dubai, any changes in visa regulations for expatriates may impact the demand for residential properties in specific areas.

Liquidity risk: Real estate investments are often less liquid than other asset classes. Introducing new property regulations in Dubai may potentially hinder investors’ ability to find buyers at desired prices.

Credit risk: In Dubai, where expatriate tenants are prevalent, economic shifts and job market conditions can impact tenant’s ability to meet their financial obligations, contributing to credit risk.

Operational risk: It encompasses property management, maintenance, and unexpected expenses, especially pertinent in Dubai’s real estate market, where property maintenance standards vary widely across the city’s diverse neighbourhoods.

Regulatory risk: Real estate investments are subject to various regulations, and updates to property ownership laws can influence investor behaviour and property demand. For instance, now, real estate laws in Dubai grant expats property ownership rights for up to 99 years. Staying informed about and complying with these regulations is vital for risk management.

Environmental and sustainability risk: Dubai 2040 Urban Master Plan, launched in 2021, presents environmental sustainability as a key pillar of infrastructural development, with a “green-first” approach. And non-compliance with Dubai’s environmental regulations may result in fines and reputational damage for investors.

Let’s see how risk managers can effectively mitigate the main types of risks in Dubai real estate investments.

How to assess those risks?

Chief Risk Officers and risk managers in the real estate sector employ data analytics, stress testing, and scenario analysis to assess exposure at risk for investment funds. These approaches represent broader categories that encompass various techniques for evaluating and managing risks: algorithmic and machine-learning (MI) models, exploring various economic, political, and market scenarios, and simulating extreme ones.

The Monte Carlo simulation method involves running thousands of simulations to estimate the range of possible outcomes for real estate investments. It helps quantify the uncertainty associated with investment decisions.

Value at Risk (VaR) measures the potential loss in the value of a real estate portfolio over a specified time horizon at a given confidence level. It assists in setting risk tolerance levels.

Sensitivity analysis examines how changes in key variables, such as interest rates or property values, affect investment returns. It helps identify critical risk factors.

Adopting cutting-edge technologies, such as blockchain for property transactions and artificial intelligence for predictive analytics, promises to revolutionise risk assessment and mitigation.

Additionally, Geographic Information Systems (GIS) have emerged as an indispensable tool for spatial analysis and location-based risk assessment. This technology empowers risk managers to assess property-specific risks related to environmental factors, neighbourhood demographics, and proximity to potential hazards, enhancing decision-making.

The future of risk management

As the UAE evolves into the “Switzerland” of the Middle East, investors and real estate enthusiasts are presented with a unique opportunity. The upward trajectory of property prices is not mere speculation; it finds its roots in robust economic growth, expanding business opportunities, and a forward-thinking government. And as Dubai’s real estate market continues to expand and attract a global investor base, the role of risk management is poised for a transformative journey.

Likewise, ESG factors have gained prominence in real estate investment decisions, aligning investments with the sustainability goals we’ve covered above. Risk managers must adapt their strategies to incorporate these considerations as sustainability becomes an integral aspect of real estate investments.

As we embrace modern approaches to risk assessment, the future of risk management in Dubai’s real estate market holds immense promise. With the diligent guidance of risk professionals, both companies and alternative investment funds are set to secure the resilience and profitability of real estate investments in this remarkable city, setting the stage for continued growth and prosperity.