Property Weekly Analysis: Navigating a fragmented market

Dubai property marketDubai Design District l Image Credit: Gulf News Archives

Dubai’s residential market this year has been marked by a series of setbacks. Prices have already dipped by 15 per cent and transactions have decreased 33 per cent, according to CBRE’s Dubai Annual Market Update released this month. The office sector, on the other hand, has been characterised by sustained demand for quality, single-owner space from corporate houses, even as vacancies are common among units that do not meet these standards. The hospitality and retail sectors continue to perform well, driven by Dubai’s strong tourism push. Even with 6,000 new keys added this year, hotel occupancy has only dropped 1 per cent, although average daily rate (ADR) has gone down 7 per cent amid strong competition and a strong dollar-pegged dirham making visits to the emirate more costly for many tourists.

While results have not been consistent across all sectors, analysts remain upbeat. “The overall outlook for 2016 looks pretty solid for Dubai, with 3-4 per cent economic growth,” says Mat Green, Head of Research and Consultancy — UAE at CBRE Middle East, although cautioning about headwinds from the strengthening dollar and weakened Chinese economy, among other factors. “There are some challenges for residential sales, but hospitality has been very resilient and the fact that they have achieved 9 per cent visitor growth in nine months is fantastic. You’d have thought that given the current global climate 2015 might have been a more challenging year.

Green says estimates around 48,000 new units to be delivered over the next three years. “We estimate that 14,000 units will be completed until the end of the year. We were expecting 20,000, but we have witnessed a real slowdown in activity on our construction visits due to many reasons,” he says. “Many projects are looking completion in 2016. Some developers are slowing down to deliver into a stronger market, others have issues with investors not making final payments and some are waiting for completion certificates.”

According to the CBRE report, the residential sector has experienced further declines during the fourth quarter, with sustained pressure on the transactional market reflected in a 4 per cent drop in sales rates and lower sales volumes. Rental levels have varied across locations. CBRE states that with the actual delivery of units falling short of anticipated supply levels, the occupier market has held up comparatively well, particularly for more affordable locations such as Jumeirah Village Circle, Dubai Sports City and Dubailand Residences, which all achieved rental growth. Prime areas such as the Palm Jumeirah, Dubai Marina and Downtown Dubai continued to see rental deflation with rates falling between 1-3 per cent.

According to CBRE, the residential sector is expected to see further sales price deflation in the coming months as supply levels gradually pick up, resulting in further falls for both rentals and sales values. However, performance will remain fragmented in the short-term with the affordable areas continuing to outperform prime areas as a flight to affordability prevails.

The commercial office market has remained steady despite the emergence of more challenging economic conditions in the region, particularly amid low oil pricing. Prime rents have been stable with no change recorded year-on-year. The total office stock this year stood at 8.5 million sq m, as compared to 3.0 million sqm in 2007. However, there has been a pickup in preleasing activity this year, reflecting the presence of latent demand for good-quality, single-owned office accommodation in locations such as Dubai Media City, D3, Dubai World Trade Centre and Jumeirah Lakes Towers.

“There is an overhang of supply in areas such as Business Bay. But towards 2017-18 the composition of office will be more towards single-owner versus strata,” says Green.

CBRE reports active uptake of prelease units. “In Tecom, the Butterfly Building, the first phase of the Dubai World Trade Centre District and D3 Design District have seen significant lease activity of over 50,000 sq ft each. Chaloub Group took 180,000 sq ft in D3. Many single-owned assets being developed will come into the market without any space for lease,” says Green.

Demand for good-quality office across single-held towers is expected to remain firm, driven by expansion within Dubai’s private sector employment base. Around 1.1 million sq m is expected to be delivered between 2016 and 2018.

Key trends in the hospitality market are emerging around theme parks, budget hotels and the World Expo 2020. “There are no theme parks in the region at the moment, at least none matching the scale of [IMG Worlds of Adventure] or Dubai Parks and Resorts coming up in the next 12-18 months,” says Green. “Dubai Parks’ completion next year will give a new driver for the Dubai market, bringing in a new demographic of tourists to Dubai. Multiple theme parks delivered will see an uptake in three- and four-star properties.”

Dubai’s hospitality sector this year has proven to be very resilient in the face of more challenging local and global economic conditions.

During the first nine months of the year, the emirate welcomed 10.5 million guests compared with 9.6 million during the same period last year, registering around 9 per cent growth. Despite the increase in visitors, year-to-date occupancy rates for the first 10 months were down around 1 per cent at 77 per cent. ADR and revenue per available room have suffered more markedly, falling 7.6 per cent and 9.5 per cent respectively. This was largely attributed to increased competition amid rising room supply, with over 6,000 new hotel and hotel apartment keys delivered this year.

Increasing competition and a strong US dollar are likely to maintain deflationary pressures on ADRs in the short to medium term. However, occupancy rates are expected to fare better amid strong visitor growth.

“The supply is still oriented towards the five-star market,” says Green. “Historically, the industry is more geared towards business with city hotels. What we are starting to see is an increase in resort-oriented hotels.”

Around 22,000 rooms are expected to be delivered from 2016-18.

Despite a rise in supply, occupancy rates within major retail centres such as Dubai Mall, Mall of Emirates, Ibn Battuta Mall and Mirdiff City Centre remain exceptionally high, running at close to 100 per cent, according to the CBRE report, while Dubai continues to attract international brands, with the likes of Apple, All Saints and Lulu Lemon all opening their first regional stores this year.

“We have not had significant supply from 2011-14,” says Green. “There are significant expansions taking place—Ibn Battuta and Mall of the Emirates expansions are preleased. The Dubai Mall expansion, which will be ready in 2017, is 90 per cent preleased.

“There will no major mall [opening] before Nakheel Mall in 2018. We have major master plans of Creek Harbour and Mall of the World. These centres could be bigger than what we have in the market currently. This means that game changers are further afield. In the existing malls, most are close to full occupancy. Future phases are leased out and expect to open with 100 per cent occupancy.”

With demand outstripping supply across the retail market, vacancy rates in major malls is less than 2 per cent. An additional supply of 556,000 sq m is in the pipeline between 2016 and 2018.

Source: Shalini Seth, Special to Property WeeklyPW


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