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With the oil price slump affecting investor confidence, liquidity and the government’s ability to inject more funds into the real estate sector, conventional methods of project financing such as bank lending and initial public offerings will become more difficult, according to JLL’s 2016
Top Trends for UAE Real Estate report. Developers will therefore have to look for alternative funding mechanisms such as joint ventures, refinancing, public-private partnerships (PPPs) and co-investment vehicles, according to the report, even as more project delays as expected this year as a result of slowmarket conditions.
“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 Craig Plumb, Head of research, JLL Middle East and North Africa (Mena). “Mid-tier developers are likely to bemost impacted as they would need faster sales cycles to recover development costs in a market that has seen residential prices drop by over 12 per cent last year.”
Property consultant Cavendish Maxwell, in its firstquarter report, revealed that 43 per cent of the total number of homes initially scheduled for delivery last year were postponed to this year, while 4 per cent were placed on hold with no definitive completion date. This trend has continued this year.
“As the first quarter came to an end, many developers delayed the delivery of their projects from 2016 to 2017,” the report states. “Of the total number of projects initially scheduled for delivery in 2016, excluding those delayed from 2015, 20 per cent have been further delayed to 2017 and 6 per cent have been placed on hold.”
Meanwhile, taking out mortgages may become difficult for first-time buyers as lending from banks becomes limited. Rising inter-bank borrowing costs have also raised mortgage rates. Typically banks add 3-5 percentage points above the Emirates Interbank Offered Rate (EIBOR) to arrive at a lending rate for customers. From January, HSBC Middle East was among banks that raised its mortgage rate.
The monthly Emirates NBD Dubai Economy Tracker Index (DET) improved in April, rising to 52.7 from 52.5 in March and from a series low of 48.9 in February. The construction sector index rose 0.7 points in April to 52.7, signalling the fastest rate of expansion in the sector since November. The output and new work sub-indices also rose in April, and jobs growth in the construction sector outpaced the average for the whole of Dubai. The employment index for construction rose to 52.7, indicating the fastest jobs growth in five months.
Some say these are signs of recovery, but the lack of visibility on demand continues to pose a threat to real estate investment activity. “This is why assets with long and medium-term leases will still generate significant investor appetite, as they will outlast the current market cycle,” explains Gaurav Shivpuri, Head of Investment Transactions at JLL Mena.
Despite softening demand, there still remains significant opportunity for those willing to embrace the new trends offered by an increasingly mature and sophisticated 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 in 2015,” says Plumb. “The market may be slowing but it is still growing.”
The Dubai government budget this year was increased by 12 per cent to Dh46.1 billion, of which 14 per cent was allocated to infrastructure. Analysts say this underlines the government’s commitment to spur growth in various sectors, including real estate, ahead of the World Expo 2020 in Dubai.
“Overall, 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 becoming a more mature real estate market,” says Plumb.
Source: Property Weekly