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DUBAI – HEALTHY STABILISATION UNDERWAY

UAE
OVERVIEW EGYPT KUWAIT QATAR SAUDI ARABIA TURKEY UAE

December 2015

Following two years of strong price growth, the Dubai real estate market has experienced a slowdown in 2015, a process which had already started in in the second half of 2014.

This is according to Erik Volkers, Senior Consultant, Research and Consultancy, CBRE Middle East, who says that the slowdown “in part can be attributed to lower oil prices, but in reality is more of a combination of global economic and political conditions that have negatively impacted investor sentiment, including the sharp drop in oil prices, sanctions on Russia, the migrant crisis in Europe, regional unrest, weaker capital inflows from other oil-intensive economies and the stronger Dirham, which has made local property more expensive for overseas investors.”

CBRE expect no major reversal of these trends over the medium term. As a result of the reduced investor sentiment the firm has observed a direct impact on sales and rental performances in the residential market, particularly during the first half of 2015. “However, against the strong growth achieved during 2013 and 2014, we consider the current period of stabilisation to be healthy for the market, which is a reflection of Dubai’s maturing status,” Volkers says.

Volkers adds that the overall market conditions have also impacted on hotel performance in Dubai. “The currency devaluation in some of Dubai’s primary source markets has directly impacted on demand, which in turn has resulted in an ADR decline of around 7%-10% year-on-year. This has consequently resulted in a drop in hotel room revenues, which was further suppressed by lower occupancy levels.”

The office segment however has witnessed relatively steady rental conditions of the past 18 months, amidst limited supply growth and pending market maturity, says Volkers.  “Single-held quality office assets continue to generate the highest demand from corporate occupiers, although the market is still being held back by the lack of quality supply being delivered.  This will start to change from 2016, with projects such as One JLT, Trade Centre District Phase 1, and D3 all coming to the market offering high quality Grade A accommodation,” he explains.

Dubai is the Middle East’s leading retail destination and with the positive growth in tourist arrivals to the emirate, it is no surprise that the sector is performing well. “Major shopping malls are demonstrating high occupancies, alongside stable lease rates, despite the impact of current US dollar strength and the emergence of a weaker hotel market.  Dubai is now home to 56% of the world’s retail brands, ranking second only after London in terms of global brand coverage, with more and more retailers choosing the emirate as their entry point into the region,” says Volkers.

AFFORDABILITY ISSUE

With escalating rental and sales prices over the past three years, affordability has emerged as a keyword in the Dubai residential sector. As of today demand for low cost housing far out-strips supply, says Volkers, with significant population growth exceeding 6.5% per annum over the last five years in the low to mid-end population brackets.

“Existing ‘affordable housing’ in freehold areas such as International City, Discovery Gardens and Dubailand has experienced sustained growth in demand, despite the slowing conditions in many prime developments, pushing rates up to levels well beyond the reach of many low to mid-income households,” Volkers explains.

The rising cost of housing in Dubai has consequentially driven a flight to affordability, with many residents choosing to relocate to the border areas of Dubai and Sharjah and even into parts of the Northern Emirates in search of more affordable accommodation options. CBRE expect this trend to continue in the short term which will drive more and more developers into the affordable market.  The main challenge however is that the market, which is often driven by speculation, actually ensures that these properties remain affordable, Volkers says, adding that the provision of affordable housing may not be possible without government support.

OUTLOOK FOR 2016

Despite weaker oil prices, the outlook for economic growth remains reasonable and arguably more stable than before, according to CBRE, with the UAE economy expected to expand by around 3% during 2015 and 2016.  “The banking sector certainly looks more robust and less exposed than during the last cycle, with the authorities more aware and more proactive to alleviate potential risks.  However, the outlook for the property market could still benefit from faster legal reforms and greater policy certainty,” Volkers comments.

The residential market is expected to remain subdued over the first half of 2016, with weaker demand leading to stabilisation or further declines in both sales and leasing rates.  “With around 20,000 new units set to enter the market before the end of 2016, landlords could face increasing competition in securing tenants which could accelerate deflationary effects on the market in the coming quarters,” Volkers concludes.

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