UAE real estate undergoes stage of correction
Dubai - The United Arab Emirates’ lucrative real estate market, which is dominated by Dubai and Abu Dhabi, appears to be going through a transitional period of correction as prices stagnate and transactions slow down.
Dubai’s real estate market specifically continues to face a period of “volatility before stabilisation in 2018”, states a report published in March by local real estate firm Phidar Advisory.
The report highlights a dip in Dubai’s residential sale prices with apartment values dropping 3.7% and villas 3% in the first six weeks of 2015.
From the early months of the year it was clear Dubai’s real estate market was facing a difficult 2015. A combination of low oil prices, a strengthening US dollar and supply-and-demand economics were expected to play a role in the slowdown of the market.
A stronger dollar combined with a weaker euro and rouble has meant capital flow is more limited. In addition, Russian investors have dramatically slowed their activity as their currency devalued. Compounding this is the fact that the dirham is pegged to the dollar, meaning any investment in the UAE has become more expensive.
Apartment transaction volumes were down 1.5%, according to a mid-quarter report in June by Phidar Advisory. The report states that over the next five years price trends will be subject to varying supply estimates. “When only considering projects currently under construction and launched, the supply-demand dynamics are manageable.
However, in the best-case scenario, assuming an average gross domestic product (GDP) growth of 3.4% and residential demand CAGR (compound annual growth rate) of 4.6%, if all of the announced projects are completed, the market could achieve a 7% oversupply in five years.”
For Abu Dhabi, the office market in particular remains very dependent on the hydrocarbons industry, with oil companies dominating top-end office space in the capital. However, as the oil sector continues to suffer at the hands of falling global prices, the emirate’s main oil companies, many of which are state-owned, may begin to scale down operations. Analysts have projected that if crude prices remain low, with the capital unable to fully diversify its economy, 2016 may be a year in which the hydrocarbons industry dictates how rates fare in the office market.
While prime office rents have increased 3% over the first quarter of 2015 after remaining flat throughout 2014, activity has been lopsided as demand remains heavily concentrated at the top end of the market.
Faisal Durrani, international research and business development manager at UK real estate firm Cluttons, said the Abu Dhabi market is experiencing a period of subdued growth. “This is a natural cycle and something the market actually needs,” he said. “Many of the top-end office units are taken up by oil companies and if they scale down their operations, we may see a change in that segment.”
Abu Dhabi Global Market Square, the new financial free zone under development, has already started offering units for lease on the open market, at $1,000 a square metre. It is expected to attract financial institutions looking to enter the Abu Dhabi market.
Although this will give the high-end office sector an alternative market segment away from oil companies to attract, it is too early to say whether this will have a positive impact on occupancy and rates.
“But for now, it is our view that with the limited amount of Grade A space and demand persisting, rents are likely to hold steady in our central scenario, with almost no movement in rents at the top end of the market expected this year,” said Durrani. Overall, rents in the Abu Dhabi commercial sector have stagnated in the first quarter of 2015, according to a report by US real estate consultancy CBRE, but there is a marked contrast between rates in primary and secondary locations.
Average rentals for secondary office space were $306 a sq. metre a year in the first quarter, which is a 2% fall on the fourth quarter of 2014, while prime office rentals are now $517 a sq. metre a year.
Yet if some stalled projects restart the projected oversupply will further increase. According to the report, “even a more bullish scenario of 4.1% average GDP growth rate cannot absorb all potential supply expansion, including under construction, launched, announced, and stalled projects”.
Overall the outlook for hydrocarbons prices remains uncertain with many oil majors already cutting jobs and capital spending, while a currency linked with the strengthening dollar continues to make many cities in the region much more expensive place to live, work and invest in.