The strong recovery in the UAE's property sector continued uninterrupted in the first half of the year, but it is likely to be moderated by an oversupply of residential properties and rising mortgage interest rates, said Fitch Ratings in a new report on the country's banking sector.

The first six months of 2022 saw a surge in transaction numbers, price increases and record pre-sales for developers. 

Villas saw the biggest rises in demand and prices, as buyers' preferences changed due to COVID-19-related restrictions. Properties remain relatively affordable, with prices 25%-30% below 2014's peak, despite a significant uptick in the past few months, the report said.

External pressure from rampant inflation is also less acute than elsewhere in the world, and the devaluation of emerging currencies underpins the UAE's attractiveness, thanks to the stability of the US dollar-pegged dirham, Fitch said. The Russia-Ukraine conflict has also reportedly fueled demand for real estate in the UAE.

However, the spiraling prices and rent increases are likely to be moderated by the addition of about 30,000-35,000 units in 2022. The additional supply is expected to contain the price and rent increases.

"We also expect slower growth in mortgage transaction volumes due to further interest rate hikes, although we don't expect this to be disruptive given that only an estimated 20%-25% of transactions are mortgage based."

(Reporting by Brinda Darasha; editing by Cleofe Maceda)