Dubai Property Market: Curbing volatility


While analysts deem it an important phase in the maturation of the real estate industry, the first half of the year was nonetheless a challenging period for many market players due to a combination of factors such as government intervention, increased supply, low oil prices and currency fluctuations.

Residential property prices in Dubai recorded a negative growth of 4-5 per cent from January to April, according to real estate information portal Reidin’s price index. It was the first time in four years the property index turned negative. “This has had a direct impact on sales and rental performances, particularly during the first half, where rates started to decline for the first time since the onset of the [global] financial crisis,” says Erik Volkers, Senior Consultant — Research and Consultancy at CBRE Middle East.

It is important to note though that at approximately Dh1,400 per square foot, average residential sales prices in Dubai remain strong and are close to the levels achieved during the peak of the last market cycle. According to Reidin, supply will reach 20,170 units this year, against 11,600 delivered in 2014. This has put extra pressure on residential prices, which have also been impacted by a stronger US dollar and low demand from European and Russian investors.

Industry observers see this as a sign of a maturing market and believe Dubai is better prepared to deal with any major downturn.

“The first six months can be described as a period of stabilisation following the rapid increases in prices and rents in 2013 and the first half of 2014,” says Craig Plumb, Head of Research at JLL Middle East and North Africa (Mena). He says residential prices and hotel room rates have softened slightly in the face of reduced demand and increased levels of supply, while retail rents appear to be peaking.

He adds that the office market has not experienced the same level of growth as other sectors, with rental growth restricted to a few top-performing buildings.

“We welcome this greater stability as a sign of a more mature and less volatile market, which will continue to attract strong levels of overseas investment from private companies and high-net-worth individuals [HNWIs],” says Plumb.

The UAE’s diversifying economy, coupled with its safe haven status, has helped Dubai become more resilient in a volatile global market scenario. According to Standard & Poor’s, there will be a correction in the residential real estate market after three years of sharp price appreciation, but it should be nothing of the order that led to the situation in 2009. It says real estate companies are better equipped to deal with the current slowdown and should be able to absorb it with limited ratings impact. “Our outlook on the sector remains stable, which means that despite our negative assumptions, we do not foresee major negative movements in our ratings over the next 12 months,” the ratings agency stated in a UAE property market report published last month.

UAE economy

Dubai’s lesser reliance on the oil industry has helped it mitigate some of the impacts of falling oil prices on its economy. But Abu Dhabi still has large exposure to the energy sector, which has impacted the country’s economy overall and to some extent Dubai, which had to downgrade its GDP growth to 3.8 per cent in 2014 from 4.6 per cent in 2013. However, this year’s budget shows that oil is expected to account for only 4 per cent of total revenue, down 5 percentage points from 2014. “Dubai’s economic diversification means the economy is [better] protected from changes in oil price than that of the UAE or Abu Dhabi,” says Plumb.

According to the Dubai Statistics Centre, the real estate and business services sectors accounted for 13.3 per cent of total GDP last year—unchanged compared to 2012 and 2013 levels.

“But in line with the general slowdown in Dubai’s economy, activity in real estate and business services decelerated last year [to 3.6 per cent] when compared to the preceding year [4.7 per cent],” says Khawar Khan, UAE Research Manager at Knight Frank.

However, the data suggest that Dubai’s construction sector continues to gain momentum, with 1.9 per cent growth last year compared to 1.3 per cent in 2013. “Despite the potential drop in oil revenues this year, the UAE’s 2015 budget has set an increase in public spending compared to 2014,” says Volkers.

“This sends out a positive message about the strength of the UAE economy and further underlines the importance of the country’s fiscal buffer that has been built during a period of relatively high oil pricing in recent years.”

Besides construction, the strongest sectors of the economy last year were transport and storage (8.6 per cent), which was followed by hospitality (5.2 per cent).

Industry observers say the most significant macroeconomic influence on the Dubai market over the past six months has been the strength of the dollar. This has impacted the spending power of investors from Russia, India, Pakistan and the euro economies — the effects of which were felt negatively in the property sector.

“A relatively strong dollar has meant that the purchasing power of some foreign buyers looking to acquire property in the emirate has fallen slightly, although external demand remains strong overall and real estate transactions in Dubai remain dominated by foreign investment,” says Martin Cooper, Director of Real Estate at Deloitte.

Commercial sector

The office market has been subdued for the first half of 2015 with activities only seen in areas where sellers or landlords reduced prices to acceptable levels. “Commercial hasn’t seen much movement as most investments were happening in the residential sector,” says Robin Teh, Country Manager at Chestertons Mena. “We expect the commercial segment to correct slightly over the next two quarters.”

Dubai’s commercial office sector saw significant oversupply following the downturn, which created vacancy rates as high as 55 per cent in some areas. However, the problem is more visible in strata-title properties than grade A offices that are individually owned.

Volkers says the current oversupply and high vacancy rates are predominantly a result of strata (multiple-owned) offices in locations such as Business Bay and Dubai Silicon Oasis. “Grade A office space within the commercial business districts [CBDs] continue to attract sustained demand.

“A similar story is being witnessed in free zones, while there remains strong corporate demand at Dubai International Financial Centre [DIFC] and Tecom, helping improve occupancy rates and drive rental rates.”

Volkers adds that larger-space occupiers continue to seek consolidation opportunities in better-quality offices, although these remain in relatively short supply.

According to industry data, there has been around 143,000 sq m of net absorption (additional demand for space) in CBDs over the past 12 months, with this demand closely in line with the new supply of 130,000 sq m in two major projects (Central Park in DIFC and Burj Al Salam on Shaikh Zayed Road).

Plumb points out that this has resulted in vacancy levels remaining relatively unchanged at around 23 per cent and virtually no change in average rental rates at Dh1,880 per square metre.

But Khan says although commercial property yields in Dubai have been flat so far this year, it is still at the higher end of the spectrum compared to other established and developing markets that Knight Frank tracks globally.

Cooper adds, “We anticipate that there will be increasing polarisation between office areas in Dubai this year, as well as a greater divergence within districts, as a result of planned supply increases and competition to attract occupiers.”

Mario Volpi, Managing Director of Ocean View Real Estate, says the high level of supply will continue to keep prices low in the office market for some time, “but this, in turn, will keep interest fairly high as investors look to cash in as they look for any distressed seller”.

The retail market, however, remains buoyant with high demand, especially in high-traffic and popular areas. The vacancy rate will continue to be stable as no major supply is expected to come on to the Dubai market in the next two years.

July-December outlook

Moving forward, the performance of Dubai’s property market is expected to remain subdued even in the second half of the year, with price corrections of up to 10 per cent expected in the residential sector.

“The outlook for real estate in the short term is that prices are likely to continue to slide perhaps another 1-5 per cent,” says Volpi, adding that the trend of falling prices could end at the beginning of next year.

He adds that prime real estate is not affected as much as mid-range stock. “Asking prices for larger villas and apartments in prime areas such as Palm Jumeirah, Downtown Dubai and Dubai Marina have also reduced, so HNWIs have gained by buying at reasonable prices.”

According to the Dubai Land Department, there were 4,500 houses and units sold in Dubai over the first four months of the year, for a value of Dh8.5 billion. This represents a fall of almost 50 per cent on the 9,900 sales with a combined value of Dh16.6 billion over the same period last year.

“We expect volume levels to fall further in Dubai’s residential market over the second half of 2015, given the usual slowdown over summer and continued weakness in prices,” says Plumb.

Dubai’s real estate market continues to be dominated by private investors rather than institutional or sovereign investors.

There is limited appetite from institutional investors because not many high-quality, income-producing products are available in the market.

Given the decline in residential prices, Plumb says many local investors are looking at alternative investment in hotel, health-care and education assets. “They are looking more seriously at overseas investment, with London remaining the favoured destination, or are simply holding off and waiting for better opportunities to emerge.”

Industry experts suggest there continues to be strong demand from overseas investors for residential property in Dubai, while demand for commercial property remains limited.

Plumb says the lack of high-quality investment products and the relatively opaque nature of the market remain as constraints, along with the limited prospect of short-term capital or rental growth.

However, he points out that many investors will continue to find Dubai a lucrative destination.

“Investors are attracted by the openness of the market and its safe haven status relative to other locations in the Middle East.”

Source: S.A. Kader, Special to Property Weekly


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