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Sun 12 Jul 2020 03:18 PM

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UAE real estate sector braced for tough recovery in wake of Covid-19

More than 12,000 units were delivered in Q1, far below the 83,000 that were expected before the pandemic

UAE real estate sector braced for tough recovery in wake of Covid-19

In the UAE, rental and sales prices have also experienced significant pressure as a result of the pandemic.

The UAE’s real estate sector faces unprecedented uncertainty amid the continued fallout from the Covid-19 pandemic, according to industry experts.

Statistics from real estate consultancy JLL reveal more than 12,000 units were delivered in Q1, far below the previously expected 83,000 units.

“In the UAE, particularly in Dubai, the market was already in the late downturn stage of the cycle for all asset classes,” said Dana Salbak, head of MENA research at JLL. “Even before Covid-19, rents were bottoming out for residential, office, retail, and hospitality segments. Particularly, for the residential sector we assumed that we are close to the bottom.”

“Our assumptions were that the market was expected to stabilise in the first half of 2020, ahead of Expo 2020 Dubai, purely on the sentiments, traction, and the movement whether commercially or from a retail and hospitality perspective,” she added.

Additionally, Salbak said that she believed that the stabilisation of the market is now expected to be delayed by a year, particularly given the postponement of Expo 2020 Dubai to begin in October 2021.

“However, where we stand right now, many of the markets have moved back in the cycle, and they are now in the rents falling quadrant, which is what we expect,” she said.

Weaker demand pushes prices down

In the UAE, rental and sales prices have also experienced significant pressure as a result of the pandemic.

Dr. Christopher Payne, chief economist at Peninsula Real Estate, told Arabian Business that the drop in prices is the result of “weaker” demand.

“It has really been a demand problem and not a supply problem. The trigger has been that lower oil prices have required governments to impose fiscal control, because their revenues have fallen,” he said.

“While these fiscal controls have been necessary, they have had an impact on the level of economic growth, which has had a knock-on effect on market demand,” Dr. Payne added.

In line with a global economy that is expected to shrink five percent or more, Dr. Payne added that the UAE may see an exodus of expat workers, which in turn will impact the real estate market.

“This kind of recession and the likely impact on job losses is likely to lead some people to leave the country, which will reduce demand for housing in a region where a significant percentage of the population are expats,” he added.

Sidharth Mehta, head of building, construction and real estate at KPMG Lower Gulf, said that in the post-Covid environment, many tenants will likely downsize and move to more affordable locations.

“Tenants affected by salary reductions and job cuts are likely to be looking to downsize and move to more affordable locations. This will increase vacancies in affected properties and apply additional downward pressure on market rents,” he said.

The face of real estate in H2 2020 and beyond

According to Mehta, the number of registered transactions dropped 42 percent in April 2020, largely as a result of movement restrictions put in place to combat the spread of Covid-19                         

“Residential market sales in the UAE are gradually picking up compared with April and May when the pandemic had a significant impact on sales activity,” he said.

In June, however, Mehta added that transactions started to witness “an upward trend compared to April and May”, although he said it would take some time to reach pre-pandemic levels.

Additionally, Mehta said that office space requirements are expected to shrink as remote working becomes increasingly common, even in the post-Covid environment.

Meanwhile Salbak noted that “Q4 is a busy period that is when the travel and tourism industry picks up, so we will need to wait and see what happens over this period. But, in terms of will the tourists come in and that is going to kind of have an impact later on, I don't particularly think so”.


Challenges on the road to recovery

A number of challenges, however, will persist in the local real estate market as the UAE moves towards the latter part of the year.

“Economic contraction due to the pandemic will largely result in a ‘wait and watch’ approach among buyers. This is partially attributable to pressure on disposable income and investor sentiments,” said Mehta. “Developers and contractors are not immune to the impact of Covid-19.”

Mehta added that “any potential project delays will further impact contractors’ execution cost, in addition to supply chain disruption, enhanced safety costs, and reduced productivity. Developers will need to carefully manage obligations, as there is an expectation that contractors will now have to enter price renegotiations”.

Meanwhile, Dr. Payne added developers can expect a “difficult balancing act” in the immediate future.

“It is a challenging time for developers,” he said. “[It will be] a difficult line to walk, trying to sort of want to release units in order to generate cash flow, but also understanding that now is not the time to do so.”

A ray of hope

Despite prolonged delay in delivering projects, the one noticeable thing in the residential and commercial real estate sector has been, “more dialogue between landlords and owners and their tenants”.

“This is something new and this is a sign of maturity that the landlords are responding to what their tenants want,” said Salbak. “Before, the market was very immature, it was very much like ‘take it or leave it’, whereas what we are seeing now is that there is a lot more leeway for negotiation.”

Salbak added: “It's probably a tenant favourable market. And landlords are being a bit more understanding, which is a trend we haven’t seen before and are seeing it now."

Looking ahead, risks of unemployment or stalling wages might put downward pressure on rents and potential values across both markets.

In March, the Central Bank of the UAE (CBUAE) announced incentives, which includes a five percent increase in the loan-to-value (LTV) ratio for first-time home buyers, and a reduction in the benchmark interest rate by 50 basis points. These measures are expected to spur market activity to an extent, according to Mehta.

“With the onset of Covid-19 and the rescheduling of the World Expo to 2021, the development of ongoing construction projects has slowed to an extent due to safety measures and supply chain interruptions. This counterintuitively provides developers with an opportunity to complete planned projects,” said Mehta.

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