Why Off-Plan Buyers Should Watch Interest Rate Movements: Even if Paying Cash

Buying an off-plan property for cash is an exciting prospect. It involves no mortgage worries, no bank paperwork, just a straightforward transaction. However, even if you are paying cash for your off-plan property in the UAE, keeping an eye on interest rates is still important. Although you are not directly affected by mortgage rates in the way someone borrowing from a bank is. They see their monthly payments fluctuate. The interest rates, especially those set by the UAE Central Bank (which often aligns with the US Federal Reserve, as the Dirham is pegged to the US Dollar), ripple through the entire economy, including real estate. It's like a pebble dropped in a pond creates waves that reach every corner. While you won't have monthly repayments to worry about, interest rate movements can still have an impact on your investment. Let's break this down.

Property Value and Capital Appreciation

Off-plan properties are generally more affordable than finished properties. But how much will the property be worth in the future? If interest rates are low, demand for real estate will surge. More individuals can borrow money with smaller monthly payments, resulting in a greater number of buyers in the market. This demand can increase the price of property. However, if interest rates rise, the opposite occurs. Fewer individuals can afford a mortgage, which can reduce price increases or even lower the price for certain properties.

Even though you are not taking out a mortgage, the overall market conditions still influence how much your property will be worth when it's ready. If interest rates have risen during the construction phase, your property may not see the same level of price appreciation that you initially expected.

Economic Health and Inflation

Interest rates are closely linked to inflation. When interest rates are low, it signals that the economy is performing well or, at the very least, that the central bank is attempting to stimulate economic activity. In this environment, people feel more confident about spending and investing, which can lead to increased demand for real estate. In contrast, when interest rates rise, it means that inflation is increasing, and the economy may be cooling down. Inflation can reduce the purchasing power of your money. The cash you pay today may not stretch as far in the future.

If you are buying an off-plan property in a market with rising interest rates, the amount of cash you have might lose some of its value over time. Inflation can erode your purchasing power. As a result, the property you are buying today may be a more expensive investment in the future.

The Impact on Rent Prices

When mortgage rates climb, buying a property becomes less affordable for many. What's the alternative? Renting! This increased demand for rental properties can push up rental prices. If you have bought an off-plan apartment in a popular area of Dubai or Abu Dhabi, and interest rates have gone up by the time your property is ready, you might find yourself in a stronger position to command higher rents.

People will always need somewhere to live. If buying a home becomes harder, renting is often the next best option. Investing in off-plan properties can be a good idea, as they can generate steady rental income. Keeping an eye on interest rates helps you determine how much money you can earn from renting, which is a crucial aspect of your overall investment strategy.

Developer Behaviour and Deals

Developers are also affected by increased interest rates. They typically borrow to finance their developments. When their borrowing costs increase, they attempt to find ways to maintain sales, which can involve providing more attractive offers to off-plan purchasers.

We have seen developers offer flexible payment plans, waive Dubai Land Department (DLD) fees, or even guarantee rental returns to attract buyers. While these incentives are often part of the off-plan package, they can become even sweeter when interest rates are higher, and developers want to maintain sales momentum. These perks are more common when interest rates are higher.

Resale Market and Future Buyers

If you plan to sell your off-plan property soon after it's handed over, your potential buyers will likely be a mix of cash buyers and people looking for mortgages. When interest rates are high, fewer people will be able to get a mortgage, so you might rely more on cash buyers. While the UAE has many cash buyers, having fewer buyers can mean less competition, which can help keep prices from rising.

On the other hand, cash buyers often have more power to negotiate when interest rates are high, so they might expect better deals. That's why it's essential to monitor interest rates to set realistic expectations for the price you can sell for and how long it might take to sell.

How to Stay Ahead?

So, how can you stay ahead in a market where interest rates are affecting cash buyers? Here are some simple strategies:

Follow Central Bank Decisions

Interest rate decisions made by the UAE Central Bank can provide insight into the state of the economy. An increase in interest rates indicates that the economy is attempting to control inflation or reacting to external influences, such as changes in the price of oil or the global economic situation. You can use this information to predict the potential impact of interest rate increases on real estate prices.

Focus on Fundamentals

Location, the developer's reputation, and the project's quality are still the most important factors. Interest rates are just one part of the picture, but they don't change the fact that a great location with a trusted developer will always perform better over time, regardless of how small the interest rate changes are.

Monitor Supply and Demand

Off-plan properties can be particularly sensitive to shifts in supply and demand. While interest rates are one factor, the general availability of new properties in the market also plays a role. If there is a high demand for properties in a certain area, even rising interest rates may not be enough to lower prices. Conversely, if supply outstrips demand, you could see a drop in property prices, even in a low-interest-rate environment.

Conclusion

Should you consider interest rates when buying an off-plan property with cash? Yes. Even if you are not directly affected by monthly mortgage payments, interest rate changes can influence the worth of your investment, property appreciation, and the economy in general. The UAE economy, with its rapid growth and high demand, is highly accommodating for cash buyers; however, interest rate changes are crucial in making the right decision.

Contact us today to learn more and start your investment journey in the UAE’s real estate market!