A RISING PHOENIX

UAE, Dubai 2015 | CONSTRUCTION & REAL ESTATE | REVIEW: REAL ESTATE

The rising population of Dubai is producing a new set of problems for the Emirate and its population, as the government looks at different ways to provide ample affordable housing for its citizens and workers.

The current slump in oil prices is likely to slow down investment in the short term; however, due to the diversification of Dubai's economy it is unlikely to dramatically affect the real estate market, as it is less vulnerable to oil price fluctuations. The outlook for 2015 is positive, largely because of increased government spending, which saw planned spending and revenues increase by 9% and 11%, respectively. This boost in spending is predicted to spur business activity in the sector. Still, while the future looks rather rosy, after a number of uncertain and cloudy years, a few people are still wary that pressures on the cost of living as inflation tops 4% in November 2014—in addition to the rising house prices and utility costs—could slow the market, making it harder for a family to find that extra cash to buy a new home. Another problem for 2015 is the 15% reduction in infrastructure spending, which will likely slow down the construction sector. Yet, while there are some possible bumps on the road, the general atmosphere in Dubai is positive, with new megaprojects under way and stabile period forecast.

RESIDENTIAL

The residential sector ended 2014 on a quiet note overall, with rental and sale prices stabilizing recently. The price of sales and rentals stayed flat at 0% from 3Q2014 to 4Q2014 for an apartment, while between 4Q2013 and 4Q2014 sales prices rose by 23% and rental prices by 18% according to JLL. In terms of villas, again rental prices remained flat at 0% while sale prices fell slightly by 1% between 3Q2014 and 4Q2014 according to JLL. In YoY terms, however, sale prices rose by 12% and rental prices by 5%. In terms of current supply, there are 377,000 residential units in Dubai as of 4Q2014. In 2015, a further 25,000 units are expected to come online with 13,000 more in 2016 and 12,000 more in 2017. In 2Q2014, occupancy rates in Dubai stood at 85% according to Colliers International, which represents a healthy market. Yet, high demand and a falling supply over the next few years is likely to lead to an undersupplied residential market.

Steady prices and an increase in supply will come as a relief to some, as the Emirate is looking to address the situation of a lack of affordable housing for the middle and lower classes. According to Colliers International, 50% of households in Dubai earn between $2,450 and $4,100 per month, which means they would be able to afford an apartment in range of $8,700 to $14,700 per annum. The average household spends 30% of its income on housing; however, this is likely to rise as rental prices increase. In the US and Australia, the governments have set the affordable housing benchmark at 30% of income, while in the UK this is lower at 25%. In areas where affordable housing exists, such as Jumeirah Lake Towers, Discovery Garden, International City, and Deira, according to Colliers International rental prices have increased by some of the highest rates of 30-35% between 2Q2013 and 2Q2014, somewhat above the average for that period of 22%. Ironically, the high demand for affordable housing is making it more expensive and putting it out of reach for some. Currently, those earning around $3,200 a month are not only limited by location, mainly International City, Deira, Qusais, and Al Nahda, but also by size according to Colliers International. It is only International City where a someone could afford something larger than a studio; however, if someone were to earn $6,800 a month, then their options become much more open in both the size of apartment and its location.

OFFICE SPACE

Dubai is a globally known for being one of the business centers of the world; hence, when it comes to office space there is ample. As of 2014, there was 7.6 million sqm of office stock in the Emirate of Dubai, up slightly on 2013 when there was 7.2 million sqm of office space according to JLL. Over 2015, there is expected to be a significant jump in the total capacity as a further 1.2 million sqm of stock will come online; however, over 2016 and 2017 this drops considerably as an only 455,000 sqm of space will open up over the two years. This massive upcoming of new office space is likely to affect vacancy rates and in turn rental prices. In 4Q2014, vacancy rates in the Central Business District (CBD) stood at 29% and fell slightly to 24% in 4Q2014 according to JLL. The rental price per sqm remained steady over the year between 4Q2013 and 4Q2014 from $503 to $509 representing a 1% rise in YoY terms. With the predicted arrival of 1.2 million sqm of further stock throughout 2015, demand is expected to remain strong, especially for single-owned buildings in already established locations where rental prices and occupancy levels will remain stable. However, the influx of new office space will likely apply a down force on rental prices overall as tenants seek to consolidate there operations and optimize their use of space in one location. In addition, across the CBD vacancy levels will most likely rise as more Grade A stock comes online. Still, one of the main trends in the market currently is that pre-leasing interest is strong as upcoming projects, such as the Dubai Trade Center District and the Dubai Design District, edge closer to becoming fully operational. This shows a willingness of tenants to commit and hold out for high quality, Grade A office space despite the existence of secondary offices on the market. Key sectors that are likely to affect the market are IT and technology. The Dubai Multi Commodities Center (DMCC), masterminded by Astro Labs and Dubai Investment Development Agency, is a new hub that is specifically targeting new technology start-ups. Average monthly rental prices per sqm are between $400 and $800. The DMCC provides new business with all the required modern amenities for a new company as well as guidance and a close proximity to Jumeriah Lakes Towers, located less than 10 minutes away. The free zone is already home to over 9,800 businesses from SMEs to large corporate entities and looks set to continue rising.

RETAIL

Dubai is world renown for its retail sector and the figures look strong for 2014. In 2014, there was 2.9 million sqm of gross leasable area (GLA) in Dubai, a figure that is set to continue to rise over the next few years. In 2015, a further 267,000sqm of GLA will come online, while in 2016 more than 330,000sqm of GLA is set to hit the market. This trend continues in 2017 with a predicted 219,000sqm of GLA opening, which will bring the total to an expected 3.7 million sqm of GLA according to JLL. Vacancy rates in the Emirate have fallen recently from 12% in 4Q2013 to 8% in 4Q2014. This relative lack of supply has forced rental prices up quite considerably over the same period from an average $1,080 per sqm per month for Grade A rental space in 4Q2013 to $1,377 in 4Q2014, which represents a 28% increase. The same can be seen in Grade B rental where prices rose from an average $470 in 3Q2013 to $605 in 4Q2014, again representing an increase of around 29% according to JLL. However, market experts predict that because of the increased supply planned over 2015, rental prices will likely remain stable. This trend can already be seen in the fact that rental prices between 3Q2014 and 4Q2014 did not show significant increase and nothing like the rise seen over the year. Vacancy rates will also likely remain stable even though there is a considerable amount of stock entering the market. The demand for space is strong and set to remain this way as a number of foreign brands look to enter the market. Any new stock will be snapped up as shops reorganize and new companies enter the market allowing the vacancy rate to remain around its current 8%.

When people think of Dubai, they naturally think of its megaprojects and iconic skyline. There is a considerable amount of new real estate in works across all fields as the Emirate leaves the consequences of the financial crisis behind it. A testament to this is the fact that the Emirate currently has $240 billion worth of megaprojects set for completion over the next six to 12 years. The largest of these projects is Meraas Holding's Jumeirah Garden City, which is estimated to cost an eye watering $89.5 billion. The new city will regenerate 9 million sqm of land and was developed during the Dubai Strategic Plan 2015. Once complete, the development will consist of 12 districts and a built-up area spanning 14 million sqm. The city will have a population of between 50,000 and 60,000, who will be able to travel to Dubai central via a new light-rail system. Projects such as this are key indicators that Dubai's real estate sector is back on track.

Reza Bijani
REZA BIJANI
Managing Director, RBA Real Estate
The laws in this country are strict. That is why we will not do sales or introduce a project unless it has proceeded to at least 50% of completion. That way, we are sure that we can deliver the project. It has been a successful model because most of the developers that enter the market wanting to sell off-plan are sacrificing profit. They are putting their prices down to secure future construction, which is wrong because you don’t make enough money, and if the market crashes, then you won’t have enough money to complete your projects.