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July 2016

Each year around this time we take an in-depth look at current real estate market conditions and dynamics in Dubai, being the host city of our flagship event Cityscape Global which is now only a few weeks away.

This year, Cityscape Global celebrates its 15th anniversary, and is expected to welcome over 300 exhibitors with many new project launches to be announced over the course of the three days.

The show is set to have a very strong participation from all leading local developers, as well as welcoming many international pavilions including from Bahrain, Pakistan, Turkey, Korea, the UK and USA.

Positive performance of the 15th edition of the show so far is certainly a reflection of the overall positive market sentiment that prevails in Dubai.

Erik Volkers, Associate Director, Strategic Advisory, CBRE Middle East and Craig Plumb, Head of Research – MENA for JLL, share their opinion on what they believe to be the reasons for the positive sentiment.

“Dubai’s economic outlook remains broadly positive, with the IMF expecting a GDP growth rate of around 3.7% during 2016 driven by the emirate’s dominant private non-oil sector which continues to expand,” says Volkers.

In the medium term, CBRE expect the impact of lower oil prices to be buffered by the UAE’s economic diversification and continued ability to attract capital to fund a steady stream of new projects.

Second there is location. “Dubai’s strategic location and high quality infrastructure have helped it to develop its reputation as a global trade hub. The UAE is highly ranked for its ease of doing business and openness to investment and trade, which will further support investment and spending in the build-up to Dubai World Expo 2020. Overall we remain positive on the long term outlook due to future growth and demand drivers, including Expo 2020, the opening of a number of major new leisure drivers (including Dubai Parks and The Marvel Theme Park), as well as some other large scale infrastructure developments,” Volkers says.

Craig Plumb agrees, adding that in addition to Dubai’s economic diversification efforts and position as a regional hub for the broader region, the emirate also possesses a more open and transparent real estate sector than its neighbouring countries which contributes to the facts that support long term growth in the Dubai property market.

“While there may be further softening of prices in the short term, investors and developers remain confident of the long term attraction of the Dubai market,” Plumb says.

Opening of Iran

The UAE has been an investment hotspot in the Middle East for quite some time now. According to Craig Plumb, Dubai is particularly attractive to foreign investors due to the more deregulated real estate sector and the ability for foreign purchasers to buy freehold real estate in many parts of the city. “These regulations date back more than 15 years now and this is providing increased confidence among foreign investors in the long term stability of Dubai,” Plumb says.

While the volume of real estate sales to foreign investors peaked in 2014, it has fallen back over the past 2 years, says Plumb. “Data released by the Dubai Land Department (DLD) shows there was a total of 6,300 sales (with a total value of some AED 18bn) in the first 5 months of 2016, compared to 8,600 sales totalling AED 26bn in the same period of 2015.”

In terms of source countries, Erik Volkers says UAE citizens were the biggest real estate investors in 2015 (AED 26 bn), followed by Indian (AED 21bn), British (AED 10.8bn) and Saudi nationals (AED 9.5bn). From the foreign investors (non-GCC and non-Arab) the list further includes Pakistanis (AED 8.5bn), Iranians (AED 4.6bn), Canadians (AED 3.8bn), Russian (AED 2.8bn), Chinese (AED 2.6bn) and United States citizens (AED 1.9bn), according to data provided by the DLD.

With the recent relaxation of sanctions one investor group is however expected to increase this year: Iranians.

In 2015, Iranian investors into Dubai real estate accounted for around 5% of all investment, and with the lifting of sanctions earlier this year, “we would expect the level of investment from Iran to increase significantly during 2016 as should the percentage of total investors sourced from Iran,” says Plumb.

Iranians investing in Dubai is not a novelty however, as they have been investing in Dubai property for years, adds Volkers. The difference is that now, “with some of the UN, EU and U.S. sanctions on energy and banking lifted or eased in January 2016, the country is set for a prospective increase in oil production and exports, lower cost of trade and financial transactions, access to foreign assets and increased foreign investment,” Volkers comments, which should ultimately translate into more investments into Dubai being the region’s business hub.

While CBRE expects the further opening of Iran to have a positive impact on Dubai property investments by Iranian citizens going forward, Volkers also points out that downside risks remain high which include a potential snapback of economic sanctions, further falls in oil prices, and regional conflicts. “Hardliners remain a considerable force both politically and in their economic interests, despite policy-making that is expected to improve,” he says.

Market maturity & institutional capital

Experts agree that the Dubai market has become ‘smarter’ and more mature since the property crash, following several successful regulations and measures implemented by the government.

“In light of the challenges uncovered during the previous cycles, the government has worked hard to better regulate the real estate market, with the creation of RERA instrumental in this process,” says Volkers, adding that “the market now offers greater protection to investors through the introduction of Escrow Accounts, and through better regulation of developers.”

However, while Dubai attracts large levels of foreign investment into real estate from wealthy individuals and private companies, more institutional investors continue to be wary of the market, says Craig Plumb. “There are signs that this is beginning to change, with Brookfield (one of the largest global developers of office property now undertaking a major new tower within the DIFC), but a number of barriers or hurdles remain,” the JLL expert says.

Both Plumb and Volkers agree that limited transparency and lack of available investment-grade product are the major factors that hinder the Dubai market from becoming more attractive to international institutional investors.

“One of the greatest challenges is the relatively low level of transparency and market data in Dubai compared to more mature global markets. This has been highlighted by JLL’s recent Global Real Estate Transparency Survey (GRETI) which shows that Dubai remains in the middle of the global league table (ranked 47 out of 108 markets covered globally),” says Plumb.

“While Dubai is ahead of other MENA markets in terms of transparency, more needs to be done in this sector to attract more institutional investors. The single most important measure that could be taken would be the creation on an index of real estate performance (combining both rental and capital returns) along the lines that are available to investors in more mature markets. The Dubai Land Department is known to be looking at the possibility of establishing such an index for Dubai and this would definitely increase the attractiveness for institutional investors,” Plumb adds.

Lastly, Plumb mentions the relatively short commercial leases and the sale of many commercial assets on a strata title basis as further hurdles that inhibit the attraction of the Dubai market for institutional investors.

CBRE’s Volkers adds that another reason why the Middle Eastern investment market continues to see low investment volumes, is that there continues to be a disconnection between the price expectations of current building owners and that of the potential investors.

“‘Opening up’ the region’s real estate capital markets – be it through a controlled wave of sales of governments’ owner-occupied stock, or by relaxing some of the foreign ownership rules – will stimulate local real estate capital markets and open them up to both local and international players. In turn, this will lead to real estate capital markets becoming a much greater component of the region’s economy,” Volkers says.

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