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It was little surprise that the oil price slide that saw crude prices drop from more than $100 (Dh367) to $50 in six months from June hit the Dubai property market at the end of last year, but on reflection, the 26 per cent fall in sales in the second half was not as bad as it could have been.
Experts warn that as investors wait to see what will happen this year, prices could fall further, especially given massive oversupply in both the residential and hospitality sectors. More than 23,000 residential units are due to be handed over this year, up from 16,000 last year.
But while many feel that this year will be a challenge, there is also a widely held belief that Dubai is now a very different market from seven years ago, when a huge property bubble impacted the emirate.
Craig Plumb, Head of Research at JLL, says, “Our overall theme is that last year was something of an exceptional year and that markets are now close to their peak and will stabilise or trend downwards slightly this year. No major decline is expected and this stabilisation is a welcome sign of a more mature market.”
If anything demonstrates that the emirate has changed since the days of the financial downturn, it is the recent announcement that Dubai World has successfully agreed with its long-suffering creditors to refinance $14.6 billion of debt.
In the past, such announcements were liable to create shock in the property market - serving as a reminder of how large a role leverage played in Dubai’s last boom, and how much debt remains seven years on — but this time around markets were largely unaffected by the news.
New capital avenues
The role of debt in the current construction drive — which has been provoked by the upcoming World Expo 2020 in Dubai as well as rising tourist numbers — has been, for the most part, notable for its absence. Developers have found another way to raise funds for the projects: markets.
There were two massive initial public offerings (IPOs) on the Dubai Financial Market (DFM) last year by developers Emaar Malls Group and Meraas, and although the latter underwhelmed on its opening day, it has steadied as oil prices stabilise.
Meraas launched a triple theme park project at the end of last year to be financed by a combination of cash, bank lending and equity raised through an IPO. Experts and market watchers expect this move to be imitated by other developers in the near future.
Harshjit Oza, Assistant Director of Research at Cairo-based Naeem Brokerage, says, “The IPO pipeline looks promising as there are many unlisted and private companies waiting to be listed on the DFM or Nasdaq Dubai. The number [of IPOs] might change but I think this year will be another good year given the investors’ strong appetite for the market.”
JLL’s Plumb suggests that going forward, the market could see increasing use of IPOs to fund new developments. The huge IPO from Dubai Malls Group last year, following another one from Emaar and Damac Properties’ listing, has paved the way for more this year.
“We expect further public equity raising over the rest of the year. While debt levels have declined in recent years as major real estate developers have been able to refinance loans on more attractive terms, they remain significant,” Oza says.
No more bubble
In the first half of last year, many feared another real estate bubble in Dubai, as sentiment went through the roof following the Expo announcement. JLL expects stability this year and an overall decline in prices of up to 15 per cent, a welcome cooling in a hot market.
Matthew Green, Head of Research in the UAE at CBRE, also urges optimism, especially given that the market is a very different place than it was in 2008. In light of that, a correction — and even a certain degree of oversupply — should not raise comparisons to the bursting of the bubble that hit the UAE market during the financial crisis.
“It’s important to put the current situation in context,” says Green.
“Occupancy rates in both the residential and hospitality markets remain strong, while this year is also expected to see further economic growth — albeit at around the 3 per cent level rather than the 4-5 per cent experienced in recent years. While we might see some corrections, the market certainly has more solid fundamentals at play.”
Other trends analysts expect this year are generally positive. There is a common perception that real estate legislation is improving, and while there is a great deal of supply in the pipeline, it is largely from better-thought-out and better-funded projects by experienced and reliable developers.
While key deficiencies in recent years have been public transport access and car parking, Plumb feels this is being addressed. There’s been a reduction in parking on patches of sand outside new developments. He also says that car parking could an emerge as an asset class in itself with the spread of paid parking across the emirates.
“Investors are looking for new forms of real estate in which to invest. They are seeking a secure, long-term income stream.
“Car park buildings let out to reputable operators on long leases — ten years plus — is one such option.”
Plumb adds that like hospitals and schools, car parks are attractive due to the certainty of their future income stream for the investor. The sector is an attractive investment in mature overseas markets such as London, Hong Kong and Sydney.
In the commercial sector, the oil price slide has undoubtedly had a major effect, particularly in Abu Dhabi where the majority of companies in the oil and gas sector and ancillary services are based.
However, commercial consultancy Knight Frank says that vacancy rates actually dropped to 26 per cent last year.
Matthew Dadd, Abu Dhabi Commercial Leasing Officer at Knight Frank, says that there had been a marginal slowdown in the number of inquiries in the second half of last year, and companies that were looking at leasing in the emirate were generally going for small offices of around 100-500 sq m.
“The market dynamics continue to change in Abu Dhabi as the city expands further from the main island. Regardless of economic trends, its real estate continues to offer a good depth and breadth of opportunities for occupiers, although a limited pipeline of new offices will impact the market over the coming years,” Dadd says.
This expansion from the main island includes developments such as Khalifa Port, which saw growth of 24 per cent from January to September compared to the same period in 2013.
Dadd also highlights the impact of the Abu Dhabi Global Market (ADGM) financial centre, which signed a 50-year lease in January for the Financial Building on Al Maryah Island owned by Mubadala. ADGM will now begin registering entities in the free zone and financial services on the island, bringing in more business over the next few years.
This diversification is good news for commercial property in the wake of the oil price crash, given that at present some 16 per cent of commercial activity in the emirate is in the oil and gas industry.
So in conclusion, moving into 2015 with the turbulence of 2014 behind, the key word appears to be sustainable. Experts feel that while there is oversupply in some sectors of the UAE, it is manageable. And while prices could fall this year and transactions slow, Dubai and Abu Dhabi are very much in a position to weather the storm.
Martin Cooper, Director of Real Estate at Deloitte Corporate Finance, points out that despite a fall in residential transactions witnessed in the second half of this year, analysis of sales data from the past four years show an average monthly residential transaction volume of approximately 1,000 units in Dubai.
“Accordingly, we consider that residential transactions have slowed to a more sustainable level, reflecting the longer-term trend, and we expect this level of transactions to continue for the remainder of the year in Dubai,” he says.
Source: Orlando Crowcroft, Special to Property Weekly