OPPORTUNITIES & OUTLOOK
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Looking at investment opportunities within the Dubai real estate market, our experts identify a number of options however one asset class seems to stand out.
“While there remain opportunities across all asset classes, the residential sector remains the most attractive of the traditional sectors, with continued opportunities to develop and hold middle income housing for rent,” says JLL’s Craig Plumb.
Erik Volkers from CBRE adds that in the residential market, the question to buy has become increasingly pertinent over the past year, with sales prices declining at a faster pace than rentals, making residential yields more attractive to investors. “At the same time finance rates remain low with some banks offering interest rates of around 3%, versus historic highs of around 7-8%,” Volkers says.
Outside of the traditional asset classes (office, retail, residential and hotels), JLL are seeing increased interest in a number of alternative real estate assets, with particular focus on the education and healthcare sectors. JLL believe that these alternative assets will attract increased investment over the next few years, as more suitable vehicles are created and the traditional sectors of the market remain well supplied and increasingly competitive.
Oil, finance and the future
While the impact of the low oil price on UAE real estate is a much debated topic, for Volkers from CBRE it presents a big challenge, if not the biggest challenge for the region and the Dubai real estate market. “Even though Dubai is not directly impacted, the oil price plays a very important role in market and investment sentiment with GCC and Arab investors still accounting for nearly half of Dubai’s real estate investments,” Volkers says.
For JLL’s Plumb, the availability of finance for real estate projects and the level of potential new supply are the two greatest challenges facing the market over the short term.
Looking ahead, JLL expect the market to soften further in most sectors – the firm sees 2016 as a year of ‘soft landing.’ “The rate of decline may be stabilising but we do not believe we have yet reached the bottom of the cycle for most asset classes,” Plumb says.
CBRE predict a similar scenario, with Volkers saying that 2016 is set to see further declines for Dubai’s residential market, with deflationary pressures to be felt across both sales and rentals due to the weakening economic fundamentals as well as rising supply levels.
The outlook for the commercial office market is however more positive, with corporate occupier demand for good quality Grade A office accommodation expected to continue as a number of large companies look to consolidate from multiple existing premises into single headquarter buildings, Volkers says.
“However, the office market does face some challenges, with the availability of good quality existing and upcoming supply relatively limited. This is likely to drive further development starts during the course of 2016, specifically in the CBD and popular freezone locations, as developers look to exploit prevailing favourable conditions to sign-up tenants on pre-lease deals for future projects,” he adds.
Lastly, Dubai’s hospitality market performance is expected to remain under pressure with further declines in occupancy, ADRs and RevPAR expected during the course of the year, according to CBRE, which is being driven primarily by the strong U.S. dollar and heightened competition caused by the significant new supply.
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