Investing in real estate in Dubai is a unique step for many investors. The city offers exceptional opportunities, particularly in off-plan projects. Yet the process brings challenges, especially when it comes to exchanging and transferring AED (United Arab Emirates Dirham). What pitfalls surrounding real estate investments in Dubai and currency risk can investors easily avoid, and how can the greatest risks be minimised?
The purchase process: simpler than you might think
The purchase process for off-plan real estate in Dubai is remarkably straightforward. As one expert noted:
"A property can be purchased from anywhere in the world, without ever having set foot in the city."
For an off-plan property, only a few basic documents are required:
- A copy of the passport.
- Contact details such as email, telephone number and address.
- A deposit and a screenshot thereof.
In no time, the unit is registered in the investor's name, without having to complete stacks of paperwork. This is in contrast to purchasing existing property. In that case, somewhat more formalities are involved, such as a power of attorney or personal presence at the notary. For many investors, off-plan real estate therefore remains the most attractive option, particularly due to the potential for capital appreciation.
Typical structure of a real estate investment
A standard structure for an off-plan real estate investment in Dubai typically looks as follows:
- Waitlist reservation: Investors pay a deposit to reserve a spot. This amount, for example AED 50,000, is later offset against the total deposit.
- Deposit: Within two weeks of the waitlist reservation, typically 24% of the total purchase price is paid. This often includes 20% for the deposit and 4% for transfer tax. The waitlist reservation amount is deducted from this.
- Payment plan: After the deposit, a payment schedule follows. Over a period of 2-3 years, investors make monthly or quarterly instalment payments to finance the project. This can amount to 60-80% of the total purchase price.
- Final payment: Upon completion of the project, a percentage typically remains outstanding that must be paid in a lump sum. This amount can also be financed after completion by non-residents through a local bank.
All payments will be in AED. How many euros will ultimately need to be paid is unknown; this depends on future exchange rates.
The AED is pegged to the USD
The AED has been pegged to the US dollar since 1997 at a fixed rate of 3.67 AED per USD, which provides stability for the UAE. This makes the AED exchange rate highly dependent on the monetary policy of the US Federal Reserve and the European Central Bank. The exchange rate between the AED and the euro therefore runs parallel to that of the USD and the euro.
Exchange rate fluctuations, caused by economic, geopolitical and monetary factors, can make the cost of investments in Dubai unpredictable. Investors must recognise this risk and consider strategies to manage it.
The 6 pitfalls of AED
The consequence of AED exchange rate fluctuations is that investors investing in Dubai do not know in advance how many euros the investment will cost and how many euros must be transferred for a future payment. It is therefore essential to be well informed about these factors and to take appropriate measures to manage currency risks.
Investors in real estate in Dubai should not underestimate the impact of the AED and the associated challenges for the following reasons:
1. The mid-market rate is not a rate at which you can exchange
The exchange rate for AED can be found online. However, this exchange rate is precisely the midpoint of the bid and ask price on the currency market. You cannot exchange at this rate. This rate is merely an indication of where AED is trading at that moment. In a currency transaction, AED is bought at the bid price and AED is sold at the ask price. This must be taken into account when calculating the euro amount.
2. No real-time exchange rates at banks
Private investors who buy AED at their bank often have to use internet banking. The exchange rate used for the transaction is determined by means of a fixing. The exchange rates for all of the bank's currency transactions are then set at a single point in time, for example 11:30 AM.
If the investor decides to buy AED on a Friday afternoon, the exchange rate for this transaction will not be determined until Monday morning. A lot can happen over a weekend. Trading at real-time exchange rates is therefore always preferable.
3. High exchange rate margin at banks
Private individuals often pay a high exchange rate margin at their bank. This can amount to 1% on top of the interbank rate, excluding transaction costs. Banks earn handsomely from this, meaning the investor ultimately pays far more than necessary. This means that if the mid-market rate at the time of the fixing is 3.7668, the bank gives its clients an exchange rate of 3.7288. On an investment of, for example, EUR 400,000, the bank then earns more than EUR 4,000 from you. They earn this on a fully automated transaction with no risk.
4. Speculating on the exchange rate
Some investors attempt to speculate on exchange rate changes, hoping that the AED will weaken. However, this is unnecessarily risky and generally not advisable. No one has a crystal ball and can predict currency market fluctuations.
The AED is pegged to the US dollar, meaning the euro's exchange rate movement against the AED mirrors that of the euro against the dollar. This makes the AED highly dependent on monetary policy in both the United States and Europe. Changes of 10% within a few months are not inconceivable.
EUR/AED declined between 25 September 2024 and 14 January 2025, for example, by 9%. Investors who thought they would wait, hoping the tide would turn, saw their investment become 9% more expensive.
5. Timing of the exchange is everything
Investors who decide to speculate on a weaker AED in the future may also prove to be right. This means that in the period leading up to the exchange, the AED has indeed weakened.
However, what counts is the exchange rate at the moment you need to exchange and pay. And at that moment, exchange rates can be volatile due to economic data published that day or monetary policy changes that were not in line with analysts' expectations. Any advantage can then be wiped out in an instant, despite having guessed correctly for some time.
A good example to illustrate this is an investor who needed to buy and transfer approximately EUR 120,000 in AED before 7 November 2024. His assessment was that EUR/AED would return to 4.0000. Despite being right for 2 weeks -- EUR/AED rose towards 4.000 -- he ultimately had to exchange at a less favourable rate at the moment he needed to transfer the AED. The rate plummeted just before he had to make the payment.
6. Currency risks
Real estate investments in Dubai and currency risk: this currency risk begins the moment the purchase agreement is signed. The total amount in AED is fixed, but the ultimate cost in euros then depends on future exchange rates. This can bring unexpected costs or benefits if the exchange rate changes. Taking this risk is not necessary. Anyone can lock in the exchange rate for all future transfers right now with a currency specialist.
What should an investor in Dubai pay attention to?
To minimise the challenges surrounding AED transactions, there are several things that investors in real estate in Dubai should pay attention to:
- Real-time exchange rates: avoid banks that work with a daily fixing. Instead, use a currency platform that provides real-time exchange rates.
- Competitive exchange rates: choose a currency platform that offers tailored service and sharp exchange rates. All banks and many large mainstream currency providers offer one solution for all clients with a standard exchange rate margin.
- Locking in the exchange rate for future payments: With a flexible forward contract, an investor can lock in the exchange rate for future AED transfers right now. What makes this transaction special is that the investor can determine when the AED transfers take place, without there being a predetermined date on which the exchange must happen. This provides certainty about the final cost in euros and flexibility in timing.
- Efficient transfers: Ensure that AED transactions are executed quickly and accurately to avoid delays and additional costs. Transfers through the usual banks can sometimes take up to three business days before the beneficiary's account is credited.
- Use multi-currency accounts: These allow investors to manage AED payments and receive AED without opening a local bank account in the UAE, saving time and costs.
- Do not speculate: real estate investments in Dubai and currency risk -- an investor cannot escape this. But no one has a crystal ball and currency markets can be very unpredictable. Avoid unnecessarily higher costs by hedging immediately as soon as the entire (future) amount in AED is known.
- Limit orders: With limit orders, an investor can buy AED as soon as an exchange rate reaches a predetermined level. This can be useful for investors who do not follow our advice above and who hope for a more favourable exchange rate in the future. Although this carries risk, it offers the opportunity to optimise currency costs.
Conclusion
Real estate investments in Dubai and currency risk go hand in hand. Investing in real estate in Dubai offers excellent opportunities, particularly with the simplicity of off-plan projects. Yet it is essential to be well prepared for the challenges surrounding the AED and currency transactions. By working with a specialist, not only can costs be saved, but risks can also be minimised. Take the right steps and ensure that a real estate investment in Dubai becomes a success.
