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Falling oil prices no danger to MENA real estate

Dubai Creek, UAE

While it is quite unlikely that any such impact from the oil price would run deep, experts say that overall investor sentiment may be affected.

March 2015

Over the past seven months, global oil prices have fallen sharply, dropping from USD 115 to USD 61 per barrel, leading many to question whether it would affect the economy and impact real estate sectors.

Faisal Durrani, Cluttons’ International Research & Business Development Manager says that there are various drivers influencing the sharp decline in oil prices, including the rapidly evolving energy sector in the U.S., with BP forecasting that the country will reach energy independence by 2035.

While the price of oil may have declined, OPEC (Organisation for the Petroleum Exporting Countries) maintains that global oil demand is estimated to have grown by 0.95 mb/d in 2014, representing an upward revision of 20 tb/d from the previous month.

For property experts there is a definite relationship between GDP and house prices and they maintain that oil prices have a major indirect impact on the real estate market.


“While there has been no close direct relationship between oil prices and residential prices in the UAE over the past few years, there is no doubt that oil prices are a major factor that underpins the overall performance of the economy,” says Craig Plumb, Head of Research MENA at JLL.

“One direct mechanism by which oil prices are likely to influence real estate markets is through the local equities market, which has fallen significantly on the back of lower oil prices in recent months.

“Unlike more mature economies, where there is often a negative or inverse relationship between equities and real estate, in the real UAE the real estate and equity markets tend to be positively correlated and a loss of income from lower equity markets is likely to have a negative impact on the residential and retail sectors of the property market,” adds Plumb.

According to Plumb another indirect impact is through investor sentiment. “There is no doubt that global investors sentiment towards the Middle East in general has softened in line with oil prices over recent months and this is likely to have a negative impact on all sectors of the economy, including real estate.”

The most obvious direct relationship between oil prices and real estate markets is likely to be through its impact on government spending. JLL notes that the UAE government has already set its spending plans for 2015 – with the Dubai budget showing an increase of 9% in government spending – but these budgets were developed before the full impact of the recent fall in oil prices.

“While major spending commitments for 2015 are unlikely to be delayed or cancelled, a more cautious approach to government spending is likely, which could result in lower spending in 2016 and beyond, if oil prices remain at current levels,” says Plumb.

Durrani agrres, whatever infrastructure projects agreed for this year will be delivered.

According to Khawar Khan, Research Manager at Knight Frank the sharp fall in oil prices in recent months have had a notable impact on investor confidence in Dubai.

“This combined with measures introduced at the end of 2013, helps to explain the 43% year-on-year drop in residential transactional volumes in Q4 2014,” says Khan.


The Abu Dhabi market will be more directly impacted than the Dubai market, as Dubai has a much more diversified economic base and is less dependent upon hydrocarbon revenues than Abu Dhabi.

According to Plumb there are two distinct sectors to the residential market, sales and leasing and these two sectors vary significantly between Dubai and Abu Dhabi. The sales market in Dubai saw a 30% decline in the volume of transactions in 2014 compared to 2013.

While prices grew by 15%-20% over the first half of 2014 they have remained relatively unchanged since July; JLL expect to see a modest (0-10% fall) in average residential prices in Dubai in 2015.

“How much of this decline is due to falling oil prices is difficult to calculate. Given the dependency of the market on overseas purchasers, who accounted for around 80% of all sales in 2014, the increased value of the dollar may be just as significant as the fall in the oil prices. The stronger dollar has clearly made Dubai a more expensive investment destination for those earning their revenue in other currencies (most notable the Russian ruble),” says Plumb.

In addition, JLL notes that the leasing market is largely driven by job creation in the UAE. While average rents in Dubai have stabilised over the past six months they have continued to increase in Abu Dhabi where the market continues to experience a shortage of good quality housing stock.

According to Durrani, Dubai’s economy has matured quite significantly in the past few years since the recession and there has been significant growth by the government in various non-oil sectors such as tourism, hospitality, leisure and real estate.

“It is still too soon to call any genuine impact. I think for the wider region, the issue that should be monitored is with regards to global oil corporations. We may start to see them scale back projects because it is no longer financially viable to pursue certain projects in certain countries. If these corporations start scaling back operations on a world-wide basis it may have an impact on demand for office space in the Middle East,” says Durrani.

Although Durrani adds that this would be the case if the price of oil continues to fall and at the moment office space demand is at an all-time high in the region.


According to JLL the commercial sector is likely to be less impacted than others by the fall in oil prices. In addition to the indirect influence – a general decline in sentiment and more cautious spending plans by corporate occupiers – the only impact is likely to be on oil and gas companies and those directly servicing this sector.

According to Knight Frank’s Khan, the region’s governments have broadly pledged to maintain spending.

“This is good news for the local real estate markets, especially those in which the public sector has historically been an important driver of demand,” says Khan. “However, some sectors are likely to be harder hit than others; unsurprisingly, lower oil prices have already prompted a number of oil and gas firms to shelve expansion plans.”

He continued: “With Dubai now a much more diversified economy than a decade ago, the emirate’s commercial property sector should be in a relatively strong position to weather the low oil pricing environment.”


Both the UAE and Saudi Arabia have built up large budget surpluses over recent years, in the case of Saudi Arabia these are estimated to be around USD 750 billion. The recently released budgets for 2015 in Dubai and Saudi Arabia show that governments are planning to spend similar or even higher levels than in 2014, even if this means running up a modest deficit (USD 38 billion or just 5.5% of GDP in the case of Saudi Arabia).

JLL’s Craig Plumb comments:

“While lower oil prices are likely to have little immediate impact on spending in 2015, with few of the currently announced projects likely to be halted entirely, some could face delays. This is particularly the case in Abu Dhabi (where more of the government revenue is generated the oil sector) than in Dubai (where a number of major spending commitments are tied to the Expo 2020 and are therefore unlikely to be reduced.)

“If oil prices remain low for some time, this could however mark the end of the period of rapid increases in government spending that have been seen in the UAE since 2008/9, which could constrain the growth of the real estate market in the longer term.”

Durrani agrees that there is a surplus that has been built by the GCC governments over the past five years. Although he adds that the comfort offered by this cushion in each country depends on how much oil they produce.


While there may be a few casualties from the falling oil prices there also winners on both a global and local level.

“The most obvious beneficiaries locally could be the airlines, with lower oil prices proving a boost to the profitability of both Emirates and Etihad. This windfall could be invested in more competitive hotel and stop over packages within the UAE, thereby offsetting some of the losses that hotels and retail operators may experience due to declining tourist numbers from non-dollar dominated source markets,” concludes Plumb.