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Dubai's residential sector is expected to remain flat with prices not seeing any major increase this year. In fact, it is possible that some locations will have minor corrections similar to what the market saw last year.
This could be good news for genuine buyers, but from an investor's point of view, the sluggish price growth isn't very encouraging. Market studies show that wealthy investors in the Middle East and North Africa (Mena) are gradually looking to sell out their holdings in the residential sector in order to divert funds to other asset classes or geographies that offer better yields.
According to JLL's 2014 MENA Investor Sentiment Survey published in November, more investors are now willing to sell their assets, with 14 per cent of respondents identifying themselves as potential sellers compared to 6 per cent in 2013. This signals a possible change in opinion among some investors about future value appreciation potential. Gaurav Shivpuri, Head of Capital Markets at JLL Mena, says, ''Investors are always considering risk-adjusted returns wherever they invest.
''The general view on the residential sector is that rents are going to remain soft for some time. Given that short-term capital growth may be limited in the residential sector, they are seeking alternative sectors where they feel the market still has a potential to grow.''
The survey, which covered more than 600 regional investors including families, institutions, developers, asset managers and sovereign wealth funds, also revealed that although Mena investors still consider the UAE residential market as their top pick, they are now more open to exploring other asset classes. Craig Plumb, Head of Research at JLL Mena, who also contributed to the survey report, says, ''Most investors feel that prices have risen too quickly in recent months and there is limited further upside. JLL agrees with this view and expects little or no further growth in prices this year, with a possibility that prices could actually decline from current levels in the Dubai residential market.
''Given this [scenario], it makes sense to be looking to sell out of this sector and buy into others with better growth prospects.''
James Lewis, Partner and Office Head at Knight Frank in the UAE agrees that investors are looking to diversify their portfolio of assets in the fear that there has been too much heat in the market, which isn't sustainable. ''We are predicting a 5-10 per cent drop in property prices over the next 12 months and see this as a positive [sign], as it shows a maturing market going in cycles, such as, for example, London,'' he says.
Market data suggests that average sales prices in Dubai have already exceeded the 2008 peak. Over the 12 months to September 2014, the average prices for Dubai apartments had increased by 29.2 per cent, compared to villa prices growing by an average 13.6 per cent. On a monthly basis, residential sales prices in Dubai were either flat or registered a slight decline between August and November last year.
Martin Cooper, Director of Real Estate Advisory at Deloitte Corporate Finance, Middle East, says, ''We expect that residential sales prices in Dubai will remain flat or decline slightly over the next two or three quarters, and that transaction volumes are likely to remain well below recent highs.''
Clearly, investors understand these numbers are not encouraging. Although housing prices had increased in some locations last year, it occurred at a decreasing rate—not good for high-net worth investors for whom yield growth is key to the assessment of any property's potential. ''Investors typically target a yield of more than 8 per cent,'' says Robin Teh, Country Manager at Chesterton Mena.
''However, in the current scenario of high capital values, most projects are not offering these numbers. This has redirected many investors towards the nonresidential segment of the market and [even] international markets.''
Key asset classes
Among the asset classes that are catching the fancy of Mena investors are hospitality and office spaces, followed by other emerging sectors such as health care, education and industry.
Shivpuri says, ''Investors are keen to look at hospitality and offices given [their] perceived stronger growth prospects. The general view is that there's greater capital growth potential in those sectors compared to the residential market.''
The hospitality sector is a burgeoning category because of the number of visitors expected in Dubai by 2020. It's attracting considerable investments as well as government incentives, and even offers higher returns on investment.
Sallie Bowtell, Partner at Trowers and Hamlins, and international law firm, says, ''Hospitality is a big one with the announcement of Expo 2020 and incentives being offered by the Government of Dubai for the development of three- and four-star hotels in particular. These include exemption from payment of municipality taxes and moves to simplify the requirements for planning permissions for the construction of hotels.''
According to data from Monster.com, an online recruitment website, there has been a surge in recruitment activity in the hospitality and tourism sectors in the UAE as a series of new hotels creates demand for new employment, ahead of Expo 2020.
''The UAE has made a mark in the world as a leading tourism destination. The sector is expected to grow by 6.5 per cent annually be tween 2011 and 2021, according to reports by the Dubai Chamber [of Commerce and Industry],'' explains Teh.
However, market observers say that although much investor interest has been diverted towards hospitality, there are signs that this sector may also see reduced levels of growth this year. This is likely to increase interest in higher yielding, alternative asset classes.
Mario Volpi, Managing Director of Ocean View, a real estate advisory firm, says, ''The region has to be careful that it does not oversupply the market with too many hospitality or commercial projects. These have to be carefully planned to sustain growth for investors.''
Lewis feels there will be continued demand from developers for five-star hospitality brands, primarily those that develop mixed-use projects and acknowledge the value of a premium label.
''Because prospective buyers of residential real estate will only see value addition if the brand represents a desirable lifestyle, we expect premium hospitality brands to remain in demand among developers,'' he says.
Meanwhile, experts say the office segment will remain relatively oversupplied compared to other sectors, although some of the vacant stock has been absorbed over the past few years. Lewis says, ''We expect limited supply of new office projects in select areas of Dubai that see higher-than-average occupancy levels.''
However, in the long term, there will be an increase in investments for high-quality office spaces, suitable for global corporates. Nick Maclean, Managing Director of CBRE Middle East, says, ''The maturing status of the regulatory environment, economic strength and natural resource-driven wealth continue to attract world-class corporates to open offices in the region, with the first signs emerging that a pre-let occupier market could develop in Dubai.''
Middle Eastern investors are assessing opportunities across several countries and real estate segments in the region. Their requirements vary according to risk profiles, sector focus, overall fund size and individual lot sizes. Cooper says, ''The real estate segments and markets attracting the most interest from Middle Eastern investors include hospitality in Dubai and Muscat; industry and logistics in the UAE, Saudi Arabia, Oman and Qatar; prime residential schemes in Dubai; and alternative asset classes, ranging from health care to education and theme parks across the GCC.''
However, Saudi Arabia is fast turning into a hotspot for Middle Eastern investors due to its growing population, which, by recent estimates, will increase to between 33 million and 35.4 million by 2025. This, combined with decreasing average household sizes, is driving robust residential demand across the kingdom.
''While there has definitely been an improvement in sentiment in Egypt, most investors would currently consider Saudi Arabia to be the major alternative to the UAE,'' says Plumb. ''Most investors prefer the residential and industrial sectors in the country, rather than the more speculative and volatile office and retail sectors.''
Despite all these characteristics, experts say there are still some challenges relating to affordability and maturity in Saudi Arabia. ''The Saudi Mortgage Law — in reality a package of five laws — has yet to specify mechanisms for lenders to deal with defaulting customers,'' says Cooper.
''More recently, the Saudi Arabian Monetary Agency announced a loan-to-value ratio of 70 per cent on all residential lending in Saudi Arabia. While the full impact of this initiative is yet to be determined, it could add to the sector's uncertainty even further.''
Bowtell agrees, pointing out that although the kingdom is a large market with a lot of promise of growth, it is slightly more difficult to invest in for foreigners who require licences to own property and must be legal residents. ''Furthermore there are restrictions on the ability to sell such property, with a minimum ownership period required before it may be resold, in an effort to curb any speculative investments,'' she adds.
Middle Eastern investors will continue to increase their stakes in overseas markets because they want diversity in their portfolios. Western Europe has always been the preferred destination, with most money going into the UK, particularly Central London.
Lewis says regional investors can look to prime areas of outer London for the greatest capital returns. ''Areas on the under-construction Crossrail route provide [great] opportunities. Capital values of residential properties within a ten-minute walking distance of Crossrail stations are expected to see potential growth of 1 per cent above growth rates elsewhere in London.''
Germany and Italy are also key targets for Middle Eastern investors, while Spain is becoming a strategic destination, focused particularly around the hospitality sector. Jonathan Hull, Managing Director of Capital Markets for Europe, Middle East and Africa at CBRE, says, ''France, having developed close ties with Middle Eastern investors and offering a vast choice of trophy assets, continues to attract strong demand in core assets and sectors.''
However, going forward, the US is emerging as the area where investors expect performance to improve most significantly over the next 12 months. Four of the five top sectors for this year — office, retail, residential and hospitality — are in North America.
Plumb says, ''This is driven by the expectation that the US economy will outperform Europe this year. There is still more value growth due to lower prices and higher yields than in European cities such as London and Paris.''
Volpi says the US is emerging from a long recession and as a consequence, property prices have fallen dramatically. ''This presents a fantastic opportunity to invest as property [in the US] presently offers excellent value for money as does Europe, which still has some countries feeling the effects of the downturn.''
Experts point out that the vast majority of Middle Eastern investors are long-term players, looking for wealth preservation and strong high income-producing assets, rather than opportunistic investors looking to play the cycle for short-term gains. This means their asset preferences are prime buildings in core markets, quite often very large in lot size.
Source: Syed Ameen Kader, Special to Property Weekly