70% of planned UAE real estate 'will fail to materialise in 2016'

Project delays named among JLL's top trends likely to shape the UAE real estate market this year
70% of planned UAE real estate 'will fail to materialise in 2016'
By Sarah Townsend
Wed 27 Jan 2016 09:20 AM

An estimated 70 percent of the UAE’s pipeline real estate schemes scheduled for completion in 2016 will fail to be delivered on time, according to consultancy JLL.

A combination of factors including contractual disputes, financing delays, licensing and approval delays and developers holding back plans as market conditions slow, will result in low ‘materialisation’ rates over the coming 12 months, the company said.

According to JLL estimates, the average materialisation rate for residential schemes in 2015 was 30 percent, and for commercial schemes it was between 40 and 45 percent.

The company did not provide an exact figure for the total number of pipeline commercial and residential units for this year, but it said around 23,000 residential units are planned for Dubai alone in 2016. Of those, only 6,900 are likely to be delivered on time.

JLL made the forecast as part of its annual ‘Top Trends’ list for UAE real estate released on Tuesday.

The report said: “Over the past five years, the materialisation rate of proposed projects has been relatively low, with only 30 percent of proposed residential projects and 45 percent of proposed office space completing on schedule.

“The materialisation rate is expected to remain low with further project delays in 2016, which in effect will reduce oversupply risks.”

However, Craig Plumb, JLL’s head of research, Middle East and North Africa (MENA), said that this would represent “something of a blessing in disguise”, helping to stablise the market and avoid excessive oversupply.

Apart from anticipated project delays, JLL identified seven other trends likely to shape the UAE real estate sector in 2016. These are:

1) Tightened liquidity – continued low oil prices means national revenues are constricted and the government has less scope to inject liquidity into the financial system, resulting in a general tightening of liquidity. Banks are becoming more and more cautious with real estate lending, JLL said, while global bond markets are nervous and developers will have to look for alternative funding mechanisms such as joint ventures, refinancing, public private partnerships (PPPs) and co-investment vehicles.

2) Increase in ‘Build-to-Suit’ and ‘Sale &Leaseback’ – These are two potential solutions as conventional capital-raising becomes increasingly difficult. Build-to-suit involves developers building schemes according to the specifications provided by corporate tenants, which then commit to either lease or purchase the premises upon completion. Sale and leaseback is when existing occupiers sell real estate space to free up capital for reinvestment in their core business. Both concepts are prevalent in more developed markets, and signal evidence of growing maturity in the UAE real estate market, Plumb told reporters.

3) Reduced outflow of capital: Middle East investment in global real estate is likely to decline from $11 billion in 2015 to $10 billion or less, as investors tighten the purse strings in a low oil price environment, according to JLL’s forecast. Also, the sovereign wealth funds that have traditionally dominated the overseas real estate investment market are likely to retreat, with most of the buying done by family and private businesses. There is likely to be more selling activity among Middle East real estate investors instead.

4) Buildings that work: There will be a new focus on “functional rather than fancy” buildings, according to Plumb. While overall demand for office space is expected to be lower than in 2015, occupiers will increasingly seek buildings that offer efficient floor plates, high quality lifts and other services, sufficient parking and access to public transport, rather than buildings that look striking, but are inefficient inside.

5) Adding value to existing buildings: Retrofitting existing buildings is likely to become more just as, if not more, important than developing new buildings, as occupiers examine fit-outs in a challenging economic environment where construction costs are expected to remain roughly the same.

6) Changing hotel landscape: The UAE’s hospitality sector will continue to undergo a shift from a business-focused to resort and entertainment-driven offer, due to increased demand from younger customers and the impact of ‘disruptive’ technologies such as Airbnb and other non-traditional marketing platforms, said JLL.

7) Emphasis on building safety: A spate of building fires in 2015 culminating in the New Year’s Eve fire at The Address Downtown Dubai has turned the spotlight on building safety and substantial investment is likely to be made in upgrading buildings across the emirates. Due to increased overall awareness, there will greater demand for well-maintained buildings with better fire safety and other systems. “This is likely to remain a hot issue as stakeholders seek to reduce the reputational risk to their brand from accidents and incidents relating to building safety,” JLL said.

Alan Robertson, CEO of JLL MENA, said: “2016 is expected to see more challenging conditions in the UAE real estate market as we begin to feel the impact of the continuing fall in oil prices and ongoing geopolitical tensions leading to reduced liquidity and pressure on government budgets.

“However, the UAE real estate market is now better equipped to deal with such challenges than it has ever been. With subsidy cuts, reduced spending and the potential introduction of a [Gulf-wide value added tax], the government is already realigning its strategy to further reduce its reliance on oil revenues.

“Meanwhile, the overall economy is still expected to grow at around 2.7 percent, so there remain opportunities as well as challenges.”

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