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The year in real estate went by exactly following the roadmap laid out at the start, according to Alan Robertson, CEO of JLL Middle East and North Africa (Mena). With worries of a speculative bubble being formed far behind, the new year could see higher interest rates, lower liquidity and a focus on mid-market housing, with commercial property still going strong.
- What is the year end looking like?
If you'd asked me a year ago what 2015 was going to be like, I'd have said that the first half will be active and the second half, if oil prices remain low, will be much quieter. The market has actually continued at a much higher level of activity than I expected; the second half of the year has been good and more active.
In Dubai we're seeing residential prices gently falling and we think over the coming year it'll show a decline within the range of 5-10 per cent. However, we don't think that is an unhealthy situation. I think most people agree that by the middle of last year the growth rate was becoming a little unhealthy. There were danger signs appearing and people talked about whether there is another bubble developing. The government and others took measures to take a bit of steam out of the market and we believe that these have largely worked. What we're coming towards is a soft landing rather than a hard landing.
Activity levels in the residential sector are down. Sales volumes are down significantly but prices are not down significantly; that's a sign of maturity in the market. Developers are still rolling out new phases of development, which are much more carefully thought out in terms of scale and type. They're matching and building to what the demand is. For example, there is less focus on ultra luxury and more on mid-market where the demand is more resilient.
They're building smaller phases — instead of 500 units in one phase, they build 200 units. So if the market is less active than it has been, we think it's actually not an unhealthy state. It's in fact displaying very healthy signs of maturity.
- How is commercial real estate likely to fare, particularly hotels and retail?
There are a number of forces at work. If you look at retail and hotels, which are more tourism dependent, there has been a bit of a slowdown. And that's partly due to the exchange rate issues with our dollar-pegged currency being high value. It's partly due to problems in Russia and the euro currency rate against the dollar, which has made it more expensive for people to come here. However, to keep things in perspective, hotel operators are talking about occupancy rates still in the 70 per cent range. They are down from the high 70 or 80 per cent, but most cities would be absolutely delighted to have occupancy rates that our hotel industry still has.
- The office market has been active in very specific properties. Do you see that activity continuing?
The office market has remained pretty steady. Corporate demand is holding up well. We're seeing some demand not just from companies that are expanding but from companies that are reorganising themselves. They're spotting opportunities to move into higher quality, more efficient offices, or moving out of two or three buildings into one building and making savings.
There are quite good office developments coming through — projects in the Dubai World Trade Centre district are a good example. Although the vacancy rates in the office market are still high, a lot of the vacant space is not really of interest to multinational occupiers. The vacancy rate of international-quality space is quite low.
- Is mid-2016 a time to look forward to for investors, particularly in the Middle East?
I think it remains to be seen. But our view is that 2016 is going to be a year when activity levels will remain a bit lower than they were—probably similar to this year. Prices in the residential sector might continue to fall a bit, at least for the first part of the year. But Dubai, we think, will see the impact of 2020 beginning to appear on the ground in the latter half of next year. There is a lot of activity expected from that.
In other parts of the region there might be buying opportunities for investors as prices have softened; they can see good value and growth potential coming back. There might be a bit more available stock as banks are lending less money and bank liquidity is down; people might need to liquidize real estate assets to release cash to do things.
- Do you see institutional interest in the property market in general?
There may be more investor-quality stock coming on the market across the region. I know from our experience in marketing some properties this year that there is still a lot of investment interest mainly from investors within the region. We're seeing funds from the region coming in. So, for example, if you have a good, institutional-quality investment property for sale in Saudi Arabia or the UAE, you would get interest from funds from the UAE, Saudi Arabia, high-net worth individuals or family offices, and banks that have syndicates of investors. And these are coming from all over the Middle East—principally Kuwait, Qatar, Saudi Arabia and the UAE — investing in each other's and their own countries.
- How are global economic events likely to affect the local market?
Lending rates are going up a bit. There is an economic slowdown, but remember that for many countries in the world low oil prices are a good thing because their cost of production and inflation goes down. It's only in the oil-producing countries that we feel the pain of [lower prices].
I think we'll see continuing increase in economic activity in the US markets, which has a ripple effect across the world. The US corporates are feeling good. They'll be keener to invest. In this region, we're talking about an economy slowing down, but we are still going to be seeing GDP growth by 2 or 2.5 per cent, which is way ahead of western European countries, for example. While, of course, it'd be nicer if it were 4 per cent, but 2 per cent is still better than zero or negative growth.
- The Saudi economy is said to be likely most affected by lower oil prices. Do you see that having a ripple effect in Dubai or other parts of the region?
We're sure that there will be government spending cuts and budgetary constraints in Saudi Arabia. It's inevitable. That'll have a bit of an impact because if contracts are cancelled and not renewed, a lot of companies that serve Saudi have people living in Dubai and Abu Dhabi. There will be a ripple effect across the region.
On the other hand, the Saudi economy will still be growing. And there are a number of infrastructure projects that will not be stopped because they are very powerful social reasons for getting the metro systems going, for developing more affordable housing and more mid-market housing there.
We've also seen the new tax being announced for undeveloped land. The purpose of that is to encourage large landholders to release their land for development and if they do that at sensible prices, there will be plenty of demand for it—certainly for housing and also for other uses. There is a huge amount of expansion in retail, with shopping centres being developed. If you look at the demographics, the demand side of the market is growing all the time.
- How important is Iran likely to be for real estate in the UAE?
Assuming that the sanctions do get lifted, I think there is a very exciting opportunity for the UAE in both directions. Dubai has got historic links with Iran and it serves as gateway city into Iran, so companies who are in Dubai at the moment will be wanting to do business in Iran. Multinational companies with regional headquarters here will be moving into Iran. They will need goods, services and help. It's a market of 90 million people, who've money. They're sophisticated, well educated people so there will be a lot of demand for sophisticated services and goods. In the other direction, you could see more Iranians coming here and funds that have been frozen over the last 20-30 years becoming unlocked and being put to use outside Iran. And Dubai would be one of the obvious destinations for that money.
- With the world economic situation turning around, do we foresee investors from the US and Iran replacing those from Russia and China?
I'm not sure about Americans. We can see more Iranians coming. Dubai is still popular with a huge variety of nationalities — Europeans, Australians, South Africans and Africans from sub-Saharan African countries. More and more tourists from these countries are coming in as well. I'm not too concerned about losing one particular country. Dubai is a very attractive place for people to come on holiday and to live and work.
- There were recommendations that the loan-to value ratio for first-time buyers ought to be increased. Any comments?
I think we're at a stage in the market where that could be justified. It won't do any damage and probably give a bit of stimulus to the market. People who are taking mortgages are not property speculators, but families who want to buy a home. And the more you can get families to buy properties, the deeper the roots they form in the region. And that has to be a healthy sign.
Real estate outlook: Alan Robertson's 2016 forecast
1. There will be continued constraints on funding as bank finance becomes more expensive. Developers and investors need to be financially secure and have a lot of cash ready. Banks will be more cautious when lending money.
2. Sustained investment out of the region. In 2014, $12 billion was invested in real estate across the world from the Middle East. The trend will continue, with both institutional and individual investors buying properties in global markets.
3. The middle-income housing segment will become more active across the region.
Here are some updates on the UAE hospitality sector
Source: Shalini Seth, Special to Property Weekly