Greasing the wheels of real estate


Oil prices last year fell below $30 (Dh110.17) per barrel, reaching levels last seen more than a decade ago in 2003. Since mid-2014, oil prices collapsed up to 70 per cent, which prompted global producers to slash exploration and production spending. According to a report by the International Energy Agency (IEA), an organisation comprising 29 oil importing countries, capital expenditure dropped by 24 per cent last year and is estimated to fall another 17 per cent this year.

The UAE, for its part, continues to undertake diversification measures to become less reliant on hydrocarbon. In the real estate sector, the impact of the oil price drop has so far been mitigated as reflected by healthy transaction levels over the past year. In its annual report released in January, the Dubai Land Department (DLD) revealed an 8 per cent in total transactions last year over the previous year, with real estate transactions exceeding Dh267 million in the emirate.

“The market has become more innovative and the developers were keen to boost the new projects with facilities that aim to satisfy residents,” says Sultan Butti Bin Merjen, Director General of the DLD. “Keeping this momentum for years proves that the real estate market in Dubai is able to continue to attract investors from around the world, which means that it is likely to maintain sustainable growth again for years to come.”

However, experts point out that the oil price slump has affected market confidence, although the improved regulatory environment and broad investor profile will stabilise real estate activity in the medium to long term. “Due to the reduced money supply in the market and expected flat demand, the sentiment has certainly weakened,” says Gaurav Shivpuri, Head of Investment Transactions at JLL Middle East and North Africa. “The impact of the same is that larger deals and assets with shorter leases have lesser suitors, thus driving up cap rates for those assets.

However, given that returns across the entire investment spectrum, including equities and fixed income, is uncertain, I expect investors to return their focus to real estate over the next few quarters.”

Sectoral impact
The hydrocarbon sector’s contribution to GDP has become a key determinant of the overall impact of the oil price slide in each emirate.

“At the emirate level, the contribution of oil revenues to GDP is higher among northern emirates [and] Abu Dhabi, where it is nearly 45 per cent. In comparison, this figure is closer to 5 per cent for Dubai,” says Faisal Durrani, Head of Research at Cluttons. “In the capital the hydrocarbon sector is the main occupier group for office space. There is likely to be space consolidation as headcount will be reduced globally. In the short term the outlook for commercial real estate remains less bright.

“From a macroeconomic perspective, the UAE is among the first economies in the region to be actively tackling the oil price slide through steps like energy and utility subsidies being phased out.”

Office rents in main commercial markets in Dubai have remained stable since January, with demand from both domestic and international occupiers continuing to be high, according to Cluttons, which does not expect significant rental falls this year as landlords remain optimistic and are willing to offer better incentives to tenants. However, the oil price is among the macroeconomic factors multinationals in the region will be following closely when deciding on office space requirements.

Meanwhile, residential rents fell in Dubai at the start of the year compared with the third quarter last year, especially for one-bedroom apartments, according to the Real Estate Regulatory Authority. Rentals are expected to soften further this year on the back of readjustments linked to persistent low oil prices and revised government budgets.

“Lower oil prices will have both a direct impact [less supply through revised government budgets] as well as an indirect impact [less residential demand from individuals and less commercial demand from corporates dependent on government contracts],” says Harmen De Jong, Partner, Development Consultancy and Research at Knight Frank.

The hospitality sector has also been impacted by the oil price slump, with lower revenue per available room (RevPar) and occupancy rates. According to the latest Middle East hotel benchmark survey by accountancy firm Ernst & Young, Dubai hotels witnessed a 9.3 per cent drop in RevPar in January compared with the same month last year. While new supply and a strengthening dollar are key factors in this drop, the oil price slump has specifically impacted visitors from Russia and central Asian countries.

The hospitality industry is expected to fare better in the medium to long term with the Department of Tourism and Commerce Marketing projecting 20 million visitors by 2020. The resultant accommodation needs are in line with existing supply and pipeline over the next few years.

In a February report, the IEA noted that oil prices should start to rise gradually as the market begins rebalancing next year. Analysts had cut their forecasts during the first quarter this year, but oil prices have since rallied, with Brent crude trading slightly above $50 per barrel. Even as concerns over the supply glut have reduced, experts still expect the real estate sector to face difficulties this year.

“Even though Dubai’s reliance on oil may be limited, investors in Dubai’s real estate are impacted by the oil price,” states the Building Confidence report by KPMG in January. “The macroeconomic picture is unclear with the uplifting of secondary sanctions in Iran and China’s economy underperforming. Understandably then, a wait-and-watch approach can be expected unless there is a significant recovery in the global economic picture.”

The report concludes that infrastructure work related to the World Expo 2020 in Dubai should create more jobs in the construction sector and drive demand for residential and commercial space starting next year. A steady improvement in oil prices is also expected around the same time, resulting in a more positive outlook for the real estate sector in the medium to long term.

Source: Manika Dhama, Special to Property WeeklyPW


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