Dubai Investment: So far so good

PWApartments account for 90 per cent and 75 per cent of sales in off-plan and completed projects respectively l Shutterstock

A t the macro level, the aftermath of the UK’s vote to exit the European Union seems to be the only latest event to inject a further dose of uncertainty in the global markets. In its World Economic Outlook report in April, Too Slow for Too Long, the International Monetary Fund (IMF) brought down its global growth forecast this year to 3.2 per cent from 3.4 per cent, although growth is projected to strengthen to 3.5 per cent next year.

In a mid-year market review, property consultancy Knight Frank states that the slowdown in China, further declines in commodity prices and the slowdown in investment and trade continue to represent downside risk to global growth. In the region, the report acknowledges revisions in government budgets, which it attributes to the impact of lower oil prices. “These changes have resulted in sizable shifts in relative prices since 2011, with headline inflation rates increasing from 0.8 per cent in 2011 to 4 per cent in 2015.”

Property consultancy Core, the UAE associate of Savills, says in its Dubai Investment Outlook H1 2016 report that multiple downward pressures have influenced business and consumer confidence and pushed financial institutions to lower the region’s growth forecast in the past year. “The Middle East has witnessed growing geopolitical unrest with nations pushed to increase military spending, further straining the economic outlook,” the report says.

     What are the key trends to watch out for that will affect the UAE property scene this year?

Despite these global and regional events, the UAE’s real estate sector, particularly in Dubai and Abu Dhabi, has performed as expected. Craig Plumb, Head of Research at JLL Middle East and North Africa, tells PW, “The first five months of the year have represented a period of relative stability, with further softening but no major shift in prices or performance in any sector. This is very much in line with our forecast for 2016 to be a year of soft landing for the Dubai real estate market.”

Describing the first half of the year as “sluggish”, Knight Frank states, “The slowdown in transactional activity continued to weigh on the performance of the residential market, with sale prices softening further in Dubai and stabilising in Abu Dhabi. Similarly, growth in the commercial market was muted as [businesses] continued to scale back expansion plans amid increasing economic uncertainties.”

The Core report, however, points to a number of global factors that have favoured Dubai as a foreign investment destination. “The US dollar, to which the dirham is pegged, has appreciated by about 20 per cent since the middle of 2014,” the report states. “While that has pushed up Dubai’s housing prices on an international comparison and made the emirate more expensive for tourists, the foreign direct investment and real estate transaction volumes have been steadily increasing in the last few years and have remained resilient in 2016.

“These headwinds are influencing many discerning global ultra-high-net-worth individuals [UHNWIs] and institutional investors to take a cautious approach towards investments, [but are] also pushing them to seek secure alternative avenues.”

Citing Dubai Land Department (DLD) data, Plumb says that the market has remained stable at the bottom of its cycle. “There were no significant changes in any of the matrix over the past three months, with none of the indices moving by more than 1 per cent in either direction,” he says. “The fact that indices have moved in opposite directions, some up and others down, is another sure sign that the market is stabilising.”

Analysts across the board agree about the stability of the market. Matthew Green, Head of Research and Consulting at CBRE Middle East, says, “Sales prices were found to be broadly stable during the quarter, although transaction volumes remained low against the peak of the market as investors remain cautious amid ongoing economic uncertainty in the region and globally.”

Apartments dominate the residential sector, says Plumb, representing 90 per cent of presales and 75 per cent of sales of completed projects. The Knight Frank report also states that Dubai’s residential market sales index has remained generally stable. “Despite a 9 per cent annual year-on-year drop across the mainstream market, the general Reidin sale price index remained relatively flat on a monthly basis, with no noticeable changes in the performance of both apartments and villas,” the report states.

     Buy-to-let uptake in Dubai

In Abu Dhabi, a shortage in supply contributed to the stability of sale prices. The general Reidin sale price index points to a 1 per cent increase year-on-year in the first quarter. “While demand has declined on the back of corporate restructuring and cutbacks in government spending, this has been balanced by a slowdown in the delivery of projects, thus keeping the market steady,” the report states.

Plumb says the volume of residential transactions has remained relatively stable over the first five months of the year, with the DLD revealing a total of 6,300 transactions during the period.

“While the volume of sales remains around 30 per cent below that in the same period last year, when 8,600 transactions were recorded, at least the market is now stabilising,” says Plumb. “The level of sales is a good indicator of future changes in price and this could indicate that 2016 will see the bottom of the market.”

The off-plan market has held steady as well. “Sales over the first five months [6,500 units sold] was around 9 per cent higher than the same period last year [5,900],” says Plumb. “This suggests that developers are becoming more optimistic and are proceeding to launch more off-plan projects than in recent years.”

While transactions have remained stable, Plumb says sale prices have fallen further than rentals since their peak in 2014, but this fall now seems to have abated, with no change in the average sale price of apartments in the three months to May. The average price of villas, meanwhile, has increased marginally (1 per cent) over the past three months. On an annualised basis, average sale prices have declined by 6 per cent for villas and 5 per cent for apartments.

Meanwhile, foreign investors remain key in the market. Core reports that the relative resilience of prices in most established ultra-prime areas is “underpinned by limited new supply and continued demand from UHNWI investors” looking for ultra-prime property in locations such as the Palm Jumeirah, Emirates Hills, Downtown Dubai and Dubai Marina.

Plumb adds: “Dubai remains primarily a rental market, with the majority of residents choosing to rent rather than own their accommodation. As with sale prices, there has been virtually no movement in average rents over the three months to May, with apartment rents increasing by just 1 per cent and villa rents declining by the same amount.”

There is a clear demarcation between quality office spaces and those that are not, particularly in the face of subdued demand in Dubai and Abu Dhabi. The Knight Frank report states, “The office market in Dubai remained relatively subdued during the first half of 2016. The slowdown in the economy and consequent cutbacks in the job market impacted demand for office space. In turn, rents remained flat across the majority of locations in Dubai, particularly for lower-quality buildings in less-developed locations.”

The report says areas with free-zone status and grade A buildings command good values. “Demand for quality space in central locations such as the Dubai International Financial Centre [DIFC] remained robust,” according to the report. “The established infrastructure, ease of accessibility, availability of parking space and developed amenities, [such as] food and beverage and retail, continue to play a key factor in corporates’ choice of office space.”

     Steady office rents in Dubai

Plumb agrees, saying the office market remains polarised between the “very best locations” such as Dubai International Financial Centre (DIFC), Dubai Design District and Downtown Dubai where demand is strong and vacancies are limited, and the rest where demand is limited and vacancies are high. He notes though that vacancies across the market have declined by 1 per cent to 16 per cent this quarter, but “this remains high relative to more established office markets globally.”

This is affecting demand in the coming years as well, says Plumb. “The lack of high-quality space that meet the requirements of large corporate tenants has resulted in strong interest in the next premium office tower in DIFC — ICD Brookfield Place that is scheduled for completion in early 2019.”

In Abu Dhabi, Knight Frank points to a struggle in the occupier market as falling oil prices led to the restructuring of many oil and gas companies and government-related entities, which are traditionally the largest occupiers in the capital.

“Asking rents in Abu Dhabi’s prime commercial district, the Abu Dhabi Global Market, maintained their levels at approximately Dh2,500 per square metre,” the Knight Frank report states. “Elsewhere across grade A buildings in Abu Dhabi, landlords have maintained their asking rents given limited available quality stock and reduced supply completions. Meanwhile, grade B rents have declined on the back of weakened demand.”

Source: Shalini Seth, Special to Property WeeklyPW


For Rent


View more properties

For Sale


View more properties