Real estate mogul Louis Glickman once said the best investment on earth is earth. And buyers in Dubai seem to be in agreement.
The UAE’s resilient emirate continues to house the GCC’s strongest property market despite a stagnant three years caused mainly by economic slowdown, regional uncertainty and a rising US dollar.
In the first half of 2017, sales of the city’s completed properties rose 13 percent from 6,100 last year to 6,900, according to data from the Dubai Land Department, with real estate consultancy JLL predicting that residential sale prices will see a marginal increase over the next 12 months.
Dubai’s hotel occupancy levels also remain the highest in the region, at 84 percent in the year so far to May, with the second quarter seeing the addition of 2,500 keys, taking the total to over 80,000.
Dubai also holds its place as the leading retail location in the region, with 3.4 million square metres of retail space, putting it ahead of major cities such as Abu Dhabi, Jeddah and Riyadh.
Moreover, the city’s GDP growth is expected to rise from 2.2 percent year-on-year in 2017 to 2.5 percent in 2018, with employment forecasted to grow by 1.6 percent in both years, according to real estate consultancy Knight Frank.
Notwithstanding these positive figures, the market may not be in the clear yet. While average sales prices in Dubai’s residential sector saw a decline of less than one percent in the year to Q2 2017, rents continue to see single-digit year-on-year declines of 4.2 percent and 6.5 percent for apartments and villas respectively, according to JLL. Rents in the retail space also showed single-digit declines during Q2, while average office rents fell 4.5 percent in the year to Q2 2017.
As a result, many potential buyers seem to be indecisive, according to a survey by property experts Core Savills. It showed that only 34 percent of those questioned believed the market would recover in the next few months, as opposed to 50 percent who stated the same last year. Core Savills chief executive David Godchaux, however, says the signs point to a maturing and therefore slower growing market.
“These are not people who became pessimistic. These are people who became uncertain. The reason is discrepancy between the perception and reality of the market. People in Dubai were used to an emerging market. When property was going up, it was going up by double digits every year. When it was going down it was really crashing. The market has softened a lot in the past four years, but it hasn’t crashed.
“People last year were optimistic thinking that it’s going up again; there were a lot of signs of improvement and the market today has improved significantly from where it was a year ago. But because the perception was that it would grow again by double digits, people are probably a bit disappointed, thinking, ‘Is it that healthy? Is it really working well?’ People just have to adjust to the fact the market is going to grow slower,” he says.
Godchaux says only a few locations in the mid-segment residential market have seen gains, such as Jumeirah Village, Dubailand, JLT and The Lakes, but he is “cautiously optimistic” that sales prices will increase in the next three years, with some districts having seen a recovery of five- to ten percent over a span of 12 to18 months since January 2016.
When it comes to rentals, core locations including Dubai Marina, Downtown Dubai and DIFC have bottomed out, he says, with less than five percent marginal softening expected to take place over the next 24 months.
The importance of pricing
Godchaux says the majority of units anticipated to be delivered by 2020 will be below the AED1.2m ($327,000) price point. Though he expects some of these units to be well absorbed, he is concerned about a large share being acquired primarily by investors looking to achieve “high yields and short-term profits on the back of difficult mortgage access for the lower income bracket end users. These occupiers are forced to stay in the rental market and hence contribute to yields that are artificially high.”
While attractive payment plans have allowed more renters to switch to ownership, it remains a difficult market to access due to strict mortgage regulations, attracting more investors than end users.
Godchaux says the primary target for affordable units should be end users, who would constitute a healthier and more stable long-term ownership. While he predicts future changes to mortgage regulations that will attract more end users, he says there has been a strong revival of the off-plan market in the past six to 12 months. “[This] means people are confident, because it’s always scarier to buy off-plan than a ready unit. We’ve seen a lot of end-users moving back to the off-plan market, because developers have adjusted their pricing.”
He points to a number of competitive deals that are even cheaper than the secondary market, with payment plans that are more attractive than they were a couple of years ago. “This shows the willingness of developers to attract end users to their products. Investors, on the other hand, are typically less in need of these incentives, and are able to come to a product with a less attractive payment plan.”
One such project is Damac Properties’ Just Cavalli villas, designed by the eponymous Italian fashion house. The affordable luxury community comprises 100 three-bedroom villas with a starting price of AED1.3m ($354,000) and a three-year payment plan.
Niall McLoughlin, senior vice-president at Damac Properties, says the firm has started to offer differentiated products that cater to the needs of the market, including golf course-facing apartments and value-driven family homes priced according to market demand.
“Today, as more end users show an interest in home ownership, Damac is responding by offering the right product, in the right location and for the right customer,” he says.
Supply and demand
Despite over 36,000 units being announced by developers for 2017, McLoughlin believes there is an undersupply in the Dubai market. And the figures are backing him up, with just 17,800 units expected to be delivered this year, according to Core Savills. Over 6,600 units were delivered in H1 2017, while 11,200 units are expected in H2 2017.
But the real estate consultancy says the trend is not new to Dubai, where a 50 percent annual shortfall has been the norm for the past five years. However, Core Savills’ Godchaux believes these shortcomings are in the developers’ best interest and also reflect a healthy market.
“We are in a country where the regulation for developers to bring units late to the market is less strict than in some other parts of the world. While it could have negative effects [elsewhere], it’s quite healthy in Dubai because it means the market can self-adjust to the demands. Developers are very careful in only delivering what the market is able to absorb. It’s a healthy sign that the market is adjusting to the demand.
It has helped developers address oversupply concerns by aligning demand and delivering products at realistic prices, aiding absorption – albeit in the mid- and prime segments,” he says.
The prime market performance, Godchaux says, is still lagging behind, with room for marginal price softening still expected, despite it being close to stabilisation. The reason? “Prime players are typically owners with deeper pockets so they tend to react slower when the market goes down. It was doing better than other sectors when the overall market started softening three and a half years ago… so the recovery typically comes a little bit later too, because these buyers are here for the longer term and they take time to look at the overall trend before entering again,” he says.
But the chief executive is positive buyers will put their money back in Dubai. “We also found that one third of the potential buyers who are considering buying in Dubai over the next few years already own at least one property in [the city]. That’s a very high number. That means you still have a leap of faith in Dubai.
“It’s not a fully emerging market anymore because it’s scary for many people, but if you’ve done a leap of faith once, it’s easier to do it a second, third and fourth time. If you bought once and everything went fine, you’re more likely to buy again,” he says.
With positive figures and experts backing its case, it is safe to say buyers will continue to bank on Dubai.
How the other sectors are holding up this year
The fall in average room rates (five percent compared to June last year) resulted in an 84 percent occupancy rate across Dubai hotels, according to JLL’s head of research for MENA, Craig Plumb. While he predicts occupancy rates will continue to be relatively healthy, he says average room rates are expected to drop further given the rise in mid-market and affordable products. Currently, there are around 40,000 additional hotel rooms scheduled to be completed by 2019. According to Chestertons MENA, the relaxation of visa policies and addition of theme parks is also expected to further boost market performance.
While Dubai’s retail property sector is the strongest in the region, the market faces a number of challenges including a slowdown in the rate of spending, the growth of e-commerce and the introduction of VAT resulting in higher prices from January 2018. However, JLL predicts there will be little change in rents experienced in popular and new malls, which are under pressur to offer rent reductions to attract retailers in a market believed to be moving further in tenants' favour.
With a flat office property market, JLL’s Plumb expects a relatively modest amount of new supply over the next two to three years, adding he does not expect to see major shifts in rent prices for Grade A space in the central business district. However, he does predict a drop in prices for poorer quality space in less attractive locations, which might then impact demand for space in mixed landlord buildings, which are less attractive to occupiers concerned about the quality of future maintenance and management.
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