A ROOM OF ONE'S OWN

Dubai 2017 | CONSTRUCTION & REAL ESTATE | REVIEW: REAL ESTATE

Dubai's real estate sector has slowed in recent years due to regional and global economic circumstances, but new growth in the affordable housing sector and the city's well-diversified economy have kept it in an enviable position.

If the strength of a city's real estate sector were measured by the height of its buildings, Dubai would be the envy of the world. Home to over 900 completed high-rises, the wave of development that began in the 1990s has transformed the city's skyline and brought it to the forefront of the global architectural scene. Skyscrapers like the Burj Khalifa, (the tallest manmade structure in the world) and Marina 101 (the tallest residential building in the world) are just a few of the iconic buildings that have made the city's skyline the tallest in the world. Yet the wider real estate sector is not without its challenges. Global economic uncertainty has led to a slowdown over the past two years, with declining property prices dating back to 2016. A host of economic causes have combined to generate an increasingly fragmented market, but industry and government officials remain confident in the long-term health of the sector.

The general sentiment when looking at the data for the Dubai real estate market in 2016 was that the city has moved past the worst of the economic slowdown. Real estate research firm JLL noted that Dubai's GDP grew at a rate of 1.8% from 2015 to 2016, well below the heights of its recent boom but a better performance than Abu Dhabi, which saw its GDP decline by 4.2%. This comes from Dubai's diversified economy and position as a central figure in the MENA tourism and finance industries, which have allowed it to weather drops in the price of oil better than surrounding Emirates.

RESIDENTIAL

According to JLL, 14,600 residential units came onto the Dubai residential market in 2016, the largest influx since 2012, which saw 16,000 new units. This speaks to the glut of supply on the market, which has fueled falling rental prices. Residential property prices declined overall in 2016, but at a slower rate than in 2015. Phidar Advisory's Dubai House Price Index reported that prices for apartments, which account for 90% of all residential real estate transactions in Dubai, fell 6.8% YoY in 2016. Significantly, lower-priced apartments performed better than the luxury market; low-and medium range properties actually saw prices rise by 15% and 2.8% in 4Q2016, while standard apartment prices declined by 1.3% in the same timeframe. Rizwan Sajan, Chairman of DANUBE Group, told TBY that the growth in this sector was due to the industry recognizing the new opportunity for growth. “People are focusing more on the mid-range segments," Sajan told TBY. “Everybody has realized that there is a huge vacuum and big market that can be capitalized on. Previously the market focused on huge towers and apartments worth AED2,000 per square foot, with an average apartment cost around AED4 million, but now people are focusing on apartments worth AED1 million or less."
The swelling supply combined with the fallout from low oil prices led Standard & Poor's to predict that residential prices in Dubai would continue to fall through 2017 for a third straight year. Another key influence on housing prices is the fall in the UK pound; according to the the Dubai Land Department, UK nationals are the fourth-largest investors in Dubai real estate, and the drop in the pound since the UK voted to leave the EU is expected to slow a key source of investment in the sector. Still, opinions on the housing market are not uniformly negative. The financial strength of the sector remains strong, with S&P reporting that it does not expect to lower any ratings on UAE companies over the coming year. And there is some belief that housing prices will start to rise again in 2017 due to increased infrastructure spending and a rise in economic activity during the run up to Expo 2020. Going forward, the low- and medium-range sector looks to be an essential part of the continued development of the sector, providing a base of steady growth while luxury apartments recover from the economic slowdown that has beset the region.

RETAIL

Dubai added 260,000sqm of retail space in 2016, the largest total since 2010. The bulk of this came from the completion of The Avenue in City Walk and an expansion to Dubai Festival City, the Middle East's largest mixed-use development. As with the residential sector, the retail market is projected to add a significant amount of space over the next few years; JLL projects that over 700,000sqm of new retail space will come on the market through 2017, an expansion that raises similar oversupply concerns as in the housing market. Still, average retail rents remained stable in primary malls in 2016, with rents in secondary malls actually rising 9% over 2015 in 4Q2016. Vacancies increased slightly, rising from 8% in 4Q2015 to 9% in the same time frame in 2016, though industry analysts do not expect any significant changes in the sector's performance in 2017. The possible oversupply of space remains a cause for concern, but Dubai's status as a global shopping center has kept confidence high.

OFFICE SPACE

As with retail, Dubai's office rents remained fairly stable throughout the year in the face of slightly weaker demand. Over 120,000sqm came to market, and continued development in 2017 is expected to boost the available supply by 300,000sqm. This new development represents a shift of sorts to new areas of the city and away from the Central Business District that has traditionally been the epicenter of the city's office space. While rents remained steady, industry analysts expect rents to fall slightly in 2017 due to the downward pressure from the influx of office space. Sector-wide, the office real estate sector has been marked by a new emphasis on smaller units, and several sites have seen a consolidation of available space. This likely comes from a combination of downsizing due to the slowdown and a new adjustment to the structure and of modern companies, and developers have been quick to adapt by offering smaller subdivisions. The strategy has been successful thus far, as the sector saw vacancies fall throughout 2016 to 15% in Q32016, down from 22% in the same period in 2015. However, this is expected to rise slightly in 2017 due to the influx of new office space expected to hit the market.

SECTOR REFORMS

Dubai's government has implemented new regulatory measures in recent years intended to reduce volatility and reckless investment. In the midst of the 2008 financial crisis, the government founded the Real Estate Regulatory Agency (RERA), which all development and brokerage companies were required to register with. RERA has set limits on allowable maximum property rent increases and required that all projects have a monitored escrow account, which helps international investors limit their risk. More recently, Dubai's Land Department raised transfer fees for property transactions from 2% to 4%, an action designed to prevent speculative transactions and “flipping." While still below the rates for France (6%), Japan (5.8%), and the UK (up to 15%), this move brings Dubai's fees closer to regions with more developed real estate sectors and should help prevent the overly speculative moves that can led to damaging bubbles and collapses in the sector. Other recent regulations designed to calm the market include limits on the amount buyers can mortgage and borrow. The establishment of the Al Etihad Credit Bureau in 2012 was designed to give both lenders and borrowers more complete information, preventing the ill-advised decisions that, en masse, can create a housing crisis. Industry participants are by and large supportive of the government's recent regulatory measures. Vijay Doshi, Managing Director of Vincitore, believes that the current structure is conducive to stability. “[Investors] feel very safe," Doshi told TBY. “[RERA's] regulations have built a lot of confidence in investors from all over the world; they know that their money is safe and in escrow." Still, Doshi and other industry participants expressed a desire for more clarity in some regards. Rizwan Sajan, for example, expressed a desire to see the mortgage cap lowered but acknowledged that the DANUBE group understood the reasons for the current structure. “I would prefer if the mortgage cap of 50% was reduced to 25%, as that would allow the market to be more bullish," he said. “But at the same time, the government is trying to protect the market in the event of a downfall."

NEW GROWTH POTENTIAL

Going forward, the future of the real estate sector looks likely to center around two key trends: affordable housing and Expo 2020. The need for more non-luxury housing options to support the city's rapidly expanding middle class is recognized by many participants as one of the sector's most important trends, with significant repercussions for the future of Dubai. While Dubai's luxury skyscrapers have become iconic symbols of the city, developing the real estate infrastructure needed to support a stable middle class will be essential for the city's sustained economic and cultural well-being. Rahail Aslam, CEO of Select Group, told TBY that the sector has been somewhat overlooked in the past, but is entering a new era. “[The sector] has been extremely underserved in the past since developers focused on big margins and high-income developments," he told TBY. “In any city or country, the middle class is usually the biggest segment, and Dubai is no exception. The middle class has been developing and growing… A lot of developers are now producing or building mid-income housing and we are no different."

“Real estate goes in cycles," Kleindienst Chairman Josef Kleindienst told TBY, a sentiment shared by just about everyone involved in the sector. Participants know that fortunes ebb and flow as global economic trends and regional circumstances shift, a long-term perspective that has the sector well positioned to succeed in the long run. The buildup to Expo 2020 is expected to be the event that will spur a new wave of real estate growth and bring the Dubai economy out of its momentary slowdown. For Expo 2020, Dubai announced in January that it would award more than USD3 billion in construction projects in 2017 in an effort to finish most of the construction more than a year in advance. As the Expo draws closer, the surge in jobs, visitors, and economic activity is expected to produce a new rise in residential and retail prices. Confident in the long-term health of the sector due to the city's diversified position, industry participants are eager to begin a new cycle of success.