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Continued global uncertainty over currencies and economic performance in key geographies will be set off against Dubai's inherent strength this year. Real estate advisories say that the UAE property sector is better equipped than ever to deal with the challenges, which include falling oil prices, ongoing geopolitical tensions, reduced liquidity and pressure on government budgets. Consequently, for both buyers and sellers, it's time to adjust expectations.
''Buyers cannot expect a 30 per cent discount [as was the case] two years ago,'' says David Godchaux, CEO of Core Savills, Dubai. ''Sellers have to realise that they cannot wait and expect the same price as two years ago.
''Is it worth holding out another four to six months? There are several projects, both off-plan and ready products, which have factored in price drop. Some of these new projects will sell well,'' says Godchaux. ''If the project is well located and unique, you may not have the same project in the next three to four years. The window of low price is not going to last forever as Dubai starts getting ready for the World Expo 2020.''
Several factors impact the decision to buy property or sell existing stock. Macroeconomics play a role, as do regulations, financing options, supply of good stock and currency exchange rates.
''Despite declines in some performance metrics in Dubai's real estate market, [the emirate] continues to be among the top global cities when taking a longer term investment view,'' says Robin Williamson, Managing Director and Real Estate Industry Lead at Deloitte, in the Middle East Real Estate Predictions 2016.
This point of view is echoed across the market, as most believe Dubai's economic growth is assured and will positively impact the property market.
Alan Robertson, CEO of JLL Middle East and North Africa (Mena), says, ''With subsidy cuts, reduced spending and the potential introduction of a goods and services tax, the government is already realigning its strategy to further reduce its reliance on oil revenues. This year is likely to be more challenging for the UAE real estate market than last year, but it must be recognized that the overall economy is still expected to grow at around 2.7 per cent, so there remain opportunities as well as challenges.''
In its fourth-quarter report, Cavendish Maxwell notes that the Dubai government budget for 2016 was increased by 12 per cent to Dh46.1 billion, of which 14 per cent was allocated to infrastructure, reflecting the government's commitment towards the continued growth of Dubai leading up to the World Expo 2020.
''In a more challenging economic environment, real estate stakeholders [including investors, developers, occupiers and the government] need to consider a range of new strategies to realign themselves and accept the new realities,'' says says Craig Plumb, Head of Research at JLL Mena. ''Despite softening demand across many sectors of UAE real estate, there remain significant opportunities for those willing to embrace the new trends offered by an increasingly mature market. It is also important to recognise that while the pace of economic growth in 2016 is expected to be below that seen in 2013 and 2014, it remains in line with that seen last year.
''The UAE remains an attractive real estate market and some buyers, especially owner-occupiers and investors taking a long-term perspective, might see value at current levels. Overall, we remain confident that while prices and rentals will soften further in the short term, they are likely to increase again, perhaps as soon as 2017, as the UAE continues on its path to a more mature real estate market.''
Where is the money?
Real estate investment advisory JLL's 2016 Top Trends for UAE Real Estate report puts tightening liquidity at the top of the list.
''With oil prices remaining low, the government has less scope to inject liquidity into the financial system, resulting in a general tightening of liquidity that will impact investment into real estate development in 2016,'' the report states. ''Conventional project financing such as bank lending or IPOs will become more difficult, and developers will have to look for alternative funding mechanisms, such as joint ventures, refinancing, public private partnerships and coinvestment vehicles.''
For the retail investor, Dubai has introduced several measures to cool off the market. These measures, in addition to many banks now exercising caution, will lead to tightening liquidity. The Deloitte report predicts that for 2016 ''lenders will continue to carefully scrutinize their real estate exposure, particularly for speculative development''.
For project financing, the reports says that nonrecourse structures are likely to be limited to projects and investments with quality tenants and long-term, reliable rental flows, with lenders requiring greater equity contribution (in addition to land) and other forms of security for higher-risk lending. ''With the prospect of base rates increasing over the next 12-18 months, we predict that the hedging of benchmark interest rates will become more common in finance packages,'' according to Deloitte.
The question first-time buyers are asking is whether the UAE Central Bank will change the mortgage cap in their favour. ''Given the volume of residential supply planned across Dubai over the next few years, a reform in mortgage regulations to permit non-resident loans [unrestricted] and a reduction in deposit requirements [for qualified customers] could be an option to stimulate residential demand,'' says Deloitte.
According to property advisor CBRE, global cross border investment in commercial real estate reached high levels last year with US investors topping the list with investments worth $25.4 billion (Dh93.3), followed by Canada and Germany at $8.46 billion and $7.12 billion respectively. In Dubai, the investor mix changes depending on the state of the economy of different geographic regions.
''In Dubai you have domestic demand and international demand from countries including the UK, India and Russia. Some of this international demand is not back,'' says Godchaux. ''Europe is still emerging from the crisis. Demand from Russia is not back.''
Core-Savills considers flight to quality an important part of property dynamic. ''I expect more demand from other GCC countries if the oil prices are not high,'' says Godchaux. ''If the economies are shakier — and they are not now—wealthy investors may want to diversify and invest in high yields, which Dubai provides.''
On the other hand, if the oil prices are back at high levels, Russian buyers could return. ''High oil prices would attract global investors; low oil prices will attract GCC investors — that's a general trend, simplified,'' says Godchaux, stopping short of speculating on oil prices.
Middle East buyers
According to JLL, this year will see reduced capital outflows from the Middle East into real estate markets in the rest of the world. ''Capital outflows are expected to decline from 2015 levels, when Middle East investors injected $11 billion in overseas markets.'' Furthermore, an increasing share of the Middle East capital flow this year will be from wealthy private individuals or families, as compared to sovereign wealth funds (SWFs) that dominated activity last year. As SWFs become more mature, they are expected to change their investment strategy this year and will look at profitable exits, which will increase selling activity.
''Data from the first half of 2015 shows a continuing acceleration in the flow of capital out of the Middle East by private offices and high-net worth individuals,'' says Nick Maclean, Managing Director of CBRE Middle East. ''This, to some extent, is compensating for a decline in sovereign wealth capital going overseas, naturally perhaps as a consequence of reduced revenue allocations because of recent oil repricing. The interest in overseas investments, particularly from the UAE, is also being influenced by some uncertainties in the local real estate markets.''
JLL has put the ''materialisation rate'', which is the difference between completions being announced and being delivered in the year, between 30 per cent and 45 per cent.
''Over the past five years, the materialisation rate of proposed projects has been relatively low, with only 30 per cent of proposed residential projects and 45 per cent of proposed office space completing on schedule,'' says Plumb. ''The materialization rate is expected to remain low with further project delays this year, which in effect will reduce oversupply risks. Project delays will be attributed to a number of reasons, including financing issues, contractual disputes, construction delays and licensing/approval delays, while some developers will deliberately hold back completions to avoid flooding the market.''
However, Deloitte says that a factor often overlooked is the impact of increasing stock in more mid-market sectors and discounting in emerging locations, putting downward pressure on citywide average sales prices.
''While published pipeline forecasts estimate that some 40,000 residential units will be delivered this year, consultations with key developers suggest that a more realistic number will be about 10,000 units,'' according to the Deloitte report.
Rental clock is ticking
Anecdotally, most residents report increased rents. However, market watchers are pointing to declining rents, albeit at a rate slower than sales prices. ''We predict that while there may be a softening in residential rental prices in some sub-markets, we do not anticipate that this will be to the same degree of recent declines in residential sales prices,'' says Deloitte. ''We consider that rental price decline could be exacerbated further if speculative investors who are unable to sell product for a satisfactory return, instead decide to release units for rent.''
However, if residential sales prices continue to drop, there is likely to be an impact on rentals. ''Even though macroeconomic factors may trigger lower prices, it's an indicator that the market is softening and you see an effect on the rental market. In general, the rentals market is more resilient,'' says Godchaux. Some of the lag is also coming from the fact that tenants don't tend to relocate to take advantage of a 1 or 2 per cent difference in rents, even though landlords wanting to rent an empty unit may find themselves pricing it lower than a year ago.
Godchaux says the slight drop in rents has no effect as ''most people are not moving, [but] if the price gap between rent for empty and occupied [units] becomes wider, it will affect the tenants.''
For tenants looking to take advantage of the market situation, Godchaux says instead haggling over discounts, ''the right approach is to negotiate added benefit''. He says asking to extend the tenancy period to 13 months for the same rent is likely to be more acceptable to a landlord. ''It translates into an 8 per cent decrease, but the landlord is more likely to accept that since the amount has not changed,'' says Godchaux.
Deloitte reports an increasing number of leasehold spaces driven by the robust performance of the rental price index. ''This has spurred the launch of a number of developments offered on a leasehold basis to end users/occupiers,'' the report says. ''Developers such as Nakheel, Meraas and Al Wasl have been growing their residential leasehold portfolio, focusing on a rental income strategy.''
Safe buildings find favour
According to JLL, building safety will be a key this year, whether it's fitting older buildings with cameras in lobbies or fireproofing. The trend is attributed to greater awareness, particularly on the heels of recent high-profile fire incidents in Dubai. ''The market will also witness new regulations where building owners will have to adhere to stricter fire safety guidelines,'' the JLL report states . ''The important need in 2016 is probably less for new regulations, but for more effective enforcement of the existing codes and regulations. This is likely to remain a hot issue as stakeholders seek to reduce the reputational risk to their brand from accidents and incidents relating to building safety.''
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Source: Shalini Seth, Special to Property Weekly