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Dubai’s real estate landscape has dramatically changed over the past couple of years. More savvy buyers and investors are entering the market and developers are responding accordingly with more mature product offerings. Amid economic uncertainties and market fluctuations, developers have also learned to cope and pace their projects and deliveries based on demand. At the same time, the regulatory environment has become more attuned to the real estate business landscape, cushioning the market from excesses on either end.
Speaking to PW, real estate experts have identified 10 key trends that will have a strong impact on the performance of the property market moving forward.
Currency fluctuation was a topical subject in the industry, particularly in the tumultuous weeks that followed the British vote to leave the EU. With the weakened position of the pound sterling against the US dollar, interest in British property has spiked in recent months, but analysts advise prudence and to take a long-term view when investing in the UK.
Here are the rest of the key trends that impact Dubai property.
Matthew Green, Head of Research and Consulting at CBRE Middle East, lists currency among the top three influences on Dubai’s property market in 2016-17. For investors Dubai property is cheaper or more expensive depending on where they are from — GCC buyers would find Dubai more attractive compared with Indians or Europeans.
“Recent currency trends have certainly impacted the market, with the euro and the pound [sterling] down around 20 per cent year-on-year against the US dollar,” says Green.
“This is making real estate in Dubai a significantly more expensive investment, particularly with a downward trend in values already evident in the market.”
Turnaround is round the corner
“However, the rouble has bounced back slightly over the past few months and that has resulted in an increase in the number of Russian investors looking at the Dubai market, although their numbers are still well down on previous years.”
The pound depreciating as a result of Brexit has its impact on one of the most active group of buyers in Dubai. On the other hand, it makes real estate in the UK a more attractive long-term proposition for the UAE buyer.
“The resultant short-term impact of the depreciating British pound will be an influx of money and investment to the UK from the UAE by those taking the opportunity,” says Sofia Underabi, Head of Residential Valuation at Cavendish Maxwell. “In the long term, however, lower investment returns will make the UK less attractive for GCC investors who may then opt for the UAE. Ultimately, it is likely that spending power from the UK will be reduced, thus affecting investment and travel to the UAE to a certain degree.”
There has been a decline in transactions overall. Researchers are quick to point out that this is true not only of Dubai but the world market in general. “Given the uncertainty in the local and global economies, and the impact of recent currency volatility, this trend is likely to continue in the short term at least,” says Green.
According to a Cluttons report released this month, “Jitters in China, the ongoing sovereign debt issues in the EU and the shock result of Britain’s Brexit referendum have all weighed on global growth and this has also filtered through to the UAE. In particular, redundancies in the oil and gas sector and a more limited number of headcount reductions in the finance and banking sector have contributed to the overall slowdown.”
For a while now, no one in Dubai could say for sure whether prices are stagnant or decreasing. This is because there has been a large variation in prices depending on the location. Properties priced right and at the right location attract buyers. “We are still witnessing declining values, with average sales rates falling by around 2 per cent quarter-on-quarter, and 12 per cent year-on-year,” says Green.
“However, the market is very fragmented with some areas achieving growth while others are enduring continued deflation of values depending on where properties are located.”
The Cluttons report states that values continued to soften across almost all residential submarkets in Dubai in the second quarter, leading to an overall decrease in capital values by a further 2.4 per cent, taking the annualised rate of change to drop 5.2 per cent. However, some locations have held on to their values. “Prominent villa submarkets in this category include The Lakes, The Springs and Arabian Ranches, while on the apartment front, Downtown Dubai, excluding the Burj Khalifa, and International City have all remained resilient,” the report says.
Buy now, or don’t
The fence has been a pretty attractive place for those actively looking to buy. That may change with the perception that the market has bottomed out.
“There are some who feel that the market has further to go and many who feel we have pretty much bottomed out already,” says Craig Williamson, Client Manager at Exclusive Links Real Estate Brokers.
“I am of the opinion that there will not be much price movement either way for the remainder of 2016 with improved results for investors in the first quarter next year. I am currently seeing previous investors who have been absent from the market returning, which is always a good sign.”
Green says that 2017 looks more positive. “Investors are unsurprisingly being more cautious and that is reflected in the overall decline in registered transactions. However, we are expecting 2017 to be a more positive year for the market.”
The return of investors bodes well. “Prices in most locations in Dubai have remained largely stagnant over the past few months,” says Underabi. “The uncertainty is affecting risk-averse investors. However, we have seen an increasing amount of activity in the past few months from investors within the low to middle-income brackets entering the market.”
Whether it’s transfer fees or a push towards making units that are more user-friendly, those who are buying to live are finding that there may be more choices than before. “One consideration for this is that the continuing high rental levels have made it increasingly viable for owner-occupiers to buy more real estate,” says Underabi.
This is fundamentally different from what has been available in the market so far. But it’s still a learning curve. “Too many developers actually build purely for the investment market rather than the end user, orienting units and room sizes towards only what investors want, rather than thinking about the occupier who will eventually live in the unit,” says Green. “However, we are finding that the more savvy developers are now willing to listen to advice and value input on how to correctly orient a property so that it can be attractive to all parties.”
Affordability must rank as the most used word in the past couple of years. “There has been a demand for affordable housing for some time now and as Dubai expands more and more developers are entering this market,” says Williamson. “Areas such as Al Furjan, Dubai South, Jumeirah Village and cheaper villa developments in Dubailand are clear examples that this is a growing percentage of the market.”
Even with the variable decline in values, Green says affordability is a factor. “We have seen secondary markets and more affordable locations outperforming the wider market as end users are still being forced to orient towards cheaper accommodation.”
While there is no clear definition what constitutes affordable housing, it’s a question worth asking.
“The supply of affordable housing has had and will continue to have an effect on the market,” says Underabi. “Additional supply leads to a downward pressure on prices and eventually on rents. The impact is, therefore, a result of decisions by residents seeking lower prices, as well as investors who may no longer benefit from healthy yield profiles alone.”
Currently, there are not many publically listed real estate companies active in Dubai property market, except listed developers such as Emaar, Damac and Dubai Parks & Resorts. Experts foresee REITs and funds more active in this market.
Funds enable more investors to become indirect investors in the market by taking exposure through securities in the listed entities.
“Dubai benefits from world-class infrastructure, a robust economy and a strong labour pool that has helped to attract many of the globe’s largest companies,” says Green. “As a result it also garners significant interest from institutional investors. However, investment volumes remain relatively low, with structural challenges, lack of available product and the lack of transparency, thus far restricting many international real estate players from making investments in the region.”
The city is seeing sustained interest from GCC-based investors.
“The market is always receptive to this and developers and government agencies encourage joint ventures in areas all over Dubai,” says Williamson.
“For example the government has announced foreign investors can buy land for development in upcoming areas such as Dubai South. There are certainly plots and buildings being purchased by such funds.”
Dubai South is not just selling plots
Grade A offices
For some time now Grade A office spaces have seen more demand than supply. That trend is expected to continue. “Demand for Grade A office accommodation in the CBD and in popular free zone locations such as DIFC and TECOM remains very strong, with take-up levels actually being constrained by the lack of available product in the market.” Says Green.
“For many, Dubai is still perceived as the safe haven of the Middle East and as a result, it remains the preference for many conglomerates and international companies to position their headquarters in the region,” says Andrew Love, Head of Investments and Commercial Agency, Cavendish Maxwell. “Such companies generally seek Grade A offices, which are single-owned and centrally located, or within a free zone. This stock is in finite supply or owned by the government, therefore the rents and sales prices are not affected on a micro or macro level.”
Make it my way
However, the demand is very specific, resulting in “a number of build to suit developments being launched over the past 12 months, underlining the current levels of latent demand”, says Green.
Fit-outs have an impact on the overall profitability even as they bring the supply up to desired levels.
“We have seen a recent trend for Grade A office owners offering longer rent-free periods and larger cap expenditure contributions for fit-out, so while the headline rent may remain high, the net effective rents when amortized over the lease term are falling,” says Love.
The regulatory environment has proven its worthiness by cushioning the market against a bubble or a drastic fall. Expect to see the minutiae of property ownership to be considered in regulations.
“Improved regulations can only be a good thing for the genuine, honest investors as most new regulations are implemented to protect such people,” says Williamson.
“They discourage improper actions from all sectors of the market including developers, brokers and even property owners and potential investors. “Recent example of this is the changed parameters to Power of Attorney (PoA) laws including the length of their validity, who can hold PoA, and the fact that they must be property-specific.” The introduction of VAT in January 2018 may also impact affordability, Underabi says.
Source: Shalini Seth, Special to Property Weekly