You may be living in any part of the world, but would have got some exposure or interest in the UAE Real Estate market analysis, given the cosmopolitan mix of people from more than 130 nationalities residing out here . Having observed the volatile nature of this market since the time freehold property was introduced in UAE, a question in mind of everyone who is following the UAE real estate market is: Where are we heading towards?
Well, the kind of the dynamism with which the real estate market in UAE operates, this question is if but obvious bound to arise. None of us would have a conclusive answer on as to where we are heading towards, but looking back on how the trends have emerged in 2014, we have herein tried to analyse on where is UAE real estate market headed towards in 2015 and beyond.
To begin with, let us do a recap of how the year 2014 was for UAE economy and real estate sector. Based on IMF projections, the GDP growth in the UAE is estimated at 4.4 per cent for 2014, which is lower than 4.8 per cent achieved in 2013. Inspite of this marginal reduction in the overall GDP growth, most sectors of UAE economy continued to show moderate to strong levels of growth performance during 2014. The real estate sector which had been instrumental in driving the strong levels of GDP growth in 2012 and 2013 started showing signs of stabilisation in 2014, with the pace of growth of sales prices and rentals across all the three major emirates i.e. Dubai, Abu Dhabi and Sharjah slowing down. While the impact of this slowdown has not yet materially impacted the other sectors, but if this continues for long, then the other sectors of the economy will also start feeling the pressure. Breaking down the UAE real estate market into two major emirates – Dubai and Abu Dhabi will give a more clear picture of how the trends have emerged in 2014.
As we have observed over the last decade or so, Dubai is the trend-setter for real estate sector for the whole of UAE, so the year 2014 has not been any different. Continuing on the momentum built in 2012 and 2013, Dubai real estate market began 2014 on a positive note and the uptrend in prices continued in the initial few months of 2014 as well. However, as we started approaching the summer months of 2014, the market saw a welcome levelling-off. The broad based recovery witnessed in the Dubai over 2012 and 2013 began to gradually slow down in 2014, as rental prices and sale values started stabilising in most locations. While new project’s continue to be announced, these have no immediate impact on supply as they are phased over a longer time frame. With unsustainable price and rental growth witnessed in Dubai’s real estate market from 2012 to Q1 2014, increasing cost pressures and return of speculative activity, there was a concern amongst market participants that Dubai will experience another bubble. However, the stabilisation in the sales prices and rental rates that started from the second quarter 2014 onwards has, in a way, been a respite for all those who had fears of another bubble building up. Although the price and rental growth that the Dubai real estate market witnessed from 2012 to the first quarter of 2014 was certainly alarming, but there were many differences this time around in this growth trajectory than what was witnessed in the growth journey that led to a bubble in 2008. Some of these differences are that majority of the property buyers this time around are investors rather than speculators who are more cautious while regulations are better, and property landscape is changing with larger projects being phased in line with demand, less reliance on pre-sales etc. All these are enough indications that Dubai real estate market is maturing and the market participants are becoming ‘smarter’. In terms of new projects announced in 2014, Dubai has seen a number of projects announced towards the South of the city with Dubai World Central, which includes the Expo 2020 site and Al Maktoum International Airport, driving this trend. There is also a notable trend towards developments closer to central Dubai, in filling some of the gaps left by the previous scattered developments. Mohammed Bin Rashid City, Dubai Harbour Creek project and Dubai Wharf are good examples of this trend. This is a key aspect of the recently approved Dubai Urban Planning framework. While there was a lot of excitement building up to the successful bid for Expo 2020 at the end of 2013, there has been a very limited direct impact of it which was observed in Dubai real estate sector in 2014. Further analysing the performance of real estate sector into its various components, as expected, the residential sector has seen the biggest impact of slow down, with both the number of residential transactions and prices falling slightly in 2014. Dubai’s office sector performance in 2014 was a mixed bag, with prime central business district (CBD) rents remaining stable throughout 2014 as demand remained strong for Grade A office space, while rents in secondary locations witnessed some downward pressure. Dubai’s retail sector performance in 2014 remained relatively strong, with retail rentals showing growth, inspite of new retail supply through projects such as Discovery Gardens community centre, Jumeirah Park community centre etc hitting the market in 2014. Dubai’s hospitality market is saturated with some of the most high profile hotel products in the world. Dubai’s hotel sector saw a bit of softening up in 2014 from the high growth momentum it had witnessed over past few years. Although, there was not a significant decline in the key performance indicators of Dubai hospitality market, but a slight softening of occupancy and available daily rates (ADR) was observed in most of the hotels due to the new hotel supply hitting the market in 2014, re-opening of tourism in a few of the other Arab countries like Egypt and decline in tourism into Dubai from countries like Russia due to the political crisis out there.
Compared to Dubai, the year 2014 saw a relatively moderate growth in the Abu Dhabi real estate sector. Most segments in Abu Dhabi real estate market witnessed slight growth in 2014, with prices in the residential market continuing to gradually grow, and a limited improvement in the hospitality, retail and office sectors. Residential sector remained the strongest performing sector in 2014 in Abu Dhabi, driven by positive investor sentiment, population growth and potential under supply. The office market witnessed moderate growth for the first time in 2014 after being stable for the past two years. Vacancy rates reduced slightly due to increased market absorption and a reduction in speculative supply in the pipeline. Retail rents for malls in Abu Dhabi also witnessed stable to moderate growth during 2014, with footfalls in malls outside Abu Dhabi main island showing significant growth. Abu Dhabi’s hospitality sector also witnessed moderate growth in 2014, with most of the hotels having a gradual improvement in occupancies resulting from increased tourism. However, the last few months of 2014 saw growth across all real estate segments in Abu Dhabi also witnessing slow-down.
After analysing the way the trends have emerged in UAE real estate sector in 2014, which indicates an overall stagnation phase, the most likely direction is a correction in prices in the locations where the prices have reached near their peak levels of the current cycle, which will gradually attract the investors who are waiting on the sidelines for the right time to enter the market. Another important thing to note is that for a sentimentdriven market like UAE, the slow-down not only has an impact on the prices, but it also on the number of transactions taking place as this kind of a stagnation prompts the investors or end-users in line to purchase property, to adopt a ‘wait and watch’ approach, as the real estate prices teeter around an emerging plateau. Therefore, in short to medium term, the real estate market in UAE is expected to see either a status quo or a downward pressure in prices as well as volumes in most of the locations. However, over the long term, the UAE economy as well as the UAE real estate sector is expected to continue on its growth journey, buoyed by the continued expansion of manufacturing, trade, tourism, services and retail sector. Expo 2020, Al Maktoum Airport, Abu Dhabi Vision 2030 and other initiatives taken by the UAE leadership are likely to have a positive impact on the UAE economy and real estate sector with hospitality, logistics and retail being the major winners. The overall upturn in the building and construction activity in the lead up to Expo 2020 is expected to add further impetus to the UAE economy and real estate sector’s performance. Based on demand-supply gap analysis, the segments within the real estate sector which are expected to do well in 2015 and beyond are affordable housing, Grade A office space in prime CBD districts, retail space across prime malls and established community centres, hotels, serviced apartments and warehouses close to key logistic centers. Joint ventures, pre-sales of residential inventory, sale and leasebacks, real estate funds, IPO’s and last mile financing from mezzanine financing institutions are likely to become increasingly popular options for funding real estate projects in 2015 as banks in UAE remain cautious to enter into new relationships.