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Dubai: The UAE real estate sector will continue to face some headwinds this year, with property prices forecast to drop by 10 per cent, on average.
In its latest note released on Wednesday, Standard & Poor’s Ratings Services said the country’s property market is still reeling from the impact of low crude oil prices and is not showing any signs of improvement so far. The market is also feeling the pressures from a strong dollar and weaker tourist sentiment.
Property prices in the country posted a 10 per cent to 13 per cent decline in 2015. This year, house prices in Dubai are forecast to drop further by 10 per cent, while those in Abu Dhabi could register a “low-single-digit” decline due to weaker investor sentiment.
“For the coming year, we see no sign of market improvement for the UAE real estate sector, despite housing affordability improving from the current price environment,” S&P said in a statement sent to Gulf News.
Following the decline in oil prices, reports indicated that a number of businesses in the UAE have either tightened hiring plans or reduced their headcount. A strong dollar, to which the UAE dirham is pegged, also means that buying property in the country has become more expensive for some foreign investors.
“Pressures have arisen from declining oil prices dampening the hiring and expansion plans of oil-exposed companies; non-oil private companies' business activities having softened; the strong U.S. dollar rendering UAE real estate more expensive for international investors holding non-U.S. dollar liquidities; and pressures on tourism negatively affecting retailers and their landlords, as well as hotel operators,” the ratings agency said in a statement.
"The UAE's real estate market will keep feeling the effects of low oil prices in 2016, in our view, and even more so than last year."
The impact from low oil prices, however, will be "less intense" in the UAE than in countries that rely more heavily on oil, such as Saudi Arabia and Oman.
Developers are also expected to continue seeing robust revenues despite the challenges. “This reflects that most of their projects are presold--that is, the majority of units are already sold well before construction ends--and proceeds from buyers are blocked in an escrow account until completion. All our rated real estate companies have secured lease structures with long lease tenures and more than 90 per cent occupancies across the portfolio.”
Jesse Downs, managing director at Phidar Advisory, said the decline in property prices has been largely due to the rise of the greenback.
“The sale prices decline since mid-2014 has largely been driven by US dollar strength, which has an immediate impact on the price of property and key industries in Dubai,” Downs told Gulf News. “Now, we’re feeling the lagged economic impact of this and the low oil price.
In its report, S&P said that a “relatively strong” US dollar, notably against the Chinese, Indian and British currencies, could contribute to “undermining” property demand from foreign investors and spending by tourists this year.
“The weaker euro, ruble, and renminbi may further affect tourist numbers. These combined factors will likely hurt real estate landlords in the UAE, and restrict demand for new space in most property segments.”
However, S&P noted that the trend will be reversed if oil prices will rebound, the US dollar will weaken and certain "geopolitical restrictions" are lifted.
"We believe that the lifting of geopolitical restrictions, such as the sanctions on Russia and Iran, could strongly benefit the recovery of the UAE property market," S&P said.