SIGHTS SET ON SUBURBIA

Dubai 2018 | REAL ESTATE & CONSTRUCTION | FOCUS: SUBURBAN FLIGHT

Real estate developers are finding that the devil is in the details, especially when it comes to the market in Dubai, as a close look at the market reveals the importance of the middle-income, suburban segment for developers and overall stability.

Dubai's skyscrapers are known the world over, but their very fame has begun to shift the residential housing market out to the suburbs. Growing masses of middle-income renters, once drawn to the economic opportunities of the city, have begun looking elsewhere for affordable housing options. As the sector continues to mature, continued growth in all segments will be central to a stable residential sector.

Dubai's housing supply rates have been growing in proportion with the population over the past several years. A report from consulting firm GDP Redin found that the stock of available housing grew at a constant annual growth rate of 7.7% from 2008 to 2016, while over the same period the population has grown by just under 6% annually. The global financial crisis in 2008 led to a dip in occupancy rates, but the Emirate rebounded well thanks to its diversified economy and status as a hub for regional tourism and industry. Occupancy rates peaked in 2014 at 92.7% and have fallen slightly during the slowdown of recent years but still remain in line with historical averages. In early 2017, occupancy rates stood at 88%, on par with pre-slowdown numbers.
While demand has continued to increase, the sector is still seeing prices decline slightly due to the glut of new supply that entered the market before the recent slowdown. Real estate consulting firm JLL reported that average sale prices for villas and apartments fell between 5 and 10% from 2Q2016 to 2Q2017, but the general mood in the sector is that prices have bottomed out and should start a gradual move upward fueled by rising demand.

A more careful examination of real estate trends, however, reveals that demand has not remained constant across sectors. While some high-profile downtown locations saw prices fall by more than 20% in 2016, sales declined much less in the suburban locations that were previously afterthoughts in the market. Affordable properties such as Discovery Gardens, Dubai Sports City, and Jumeirah Village Circle (JVC) all saw decreases in the low single digits, making them among the most stable properties in the sector.
This reflected a new kind of demand arising in the Emirate in which the growing stock of middle-income residents, both Emiratis and expats, have reacted to the downturn by looking for affordable options in less centrally located areas of the Emirate. Driven by tighter economic conditions that have led employers to cut housing allowances, this large cohort of workers are looking for the best combination of location and revenue.
Developers, well aware of the shifting trends of the market, have begun to adapt. Fewer than 5,000 homes targeted at the middle-income sector were constructed in 2015, but the suburbs were the sites of the bulk of new construction in 1H2017. Suburban neighborhoods such as Silicon Oasis, Dubailand, and International city saw more than 6,500 new units in 1Q and 2Q2017, with the majority of these focused on the middle-income sector.

While the overall Dubai housing sector is expected to show more signs of growth in 2018, industry analysts expect movement to the suburbs to continue. New projects coming to the market should keep supply growing at pace with demand, and improved infrastructure in these suburban regions means that the distance from the heart of the Emirate is no longer as daunting a proposition. On a larger scale, this move towards more affordable areas has meaningful lessons for the future of the Emirate. Part of building a stable and diverse economy is including options across all income levels, and increasing the stock of affordable housing today will help mitigate the negative effects of the next cyclical downturn in the real estate market.