Staying in the black
Why an oil price drop is unlikely to shock Dubai's property market
A sustained period of lower oil pricing will clearly have some major negative impacts on the Middle East, a region that is driven by the proceeds of the hydrocarbon industry. Ultimately, lower oil prices in the long term could mean lower economic growth and thus fewer new jobs.
This, in turn, will directly impact upon all sectors of the real estate market, from new housing requirements to office leasing, tourism, retail and industrial. During the past six months, we have already witnessed a slump in Russian tourism – a situation brought about by the current EU sanctions, the subsequent collapse of the rouble and the decline in oil prices.
Many Russian tourists are now instead seeking more affordable vacation options, with Egypt very much back in favour. And it is not only restricted to Russians visitors. There has also been a slight dip in tourism from right across Europe, although hotel occupancies still averaged around 78% during 2014 – down from over 80% in 2013.
One of the key factors in this whole situation is actually the negative impact on sentiment. With uncertainty surrounding the length of any oil price slump, investors have become more cautious. This was mirrored in the slowdown of residential transactions during the second half of 2014, with transaction numbers down over 26% on the same period in the previous year.
While there has yet to be any noticeable slowdown in the office sector, major occupiers in oil & gas and finance are likely to be more restrained given the current situation. Similarly, uncertainty is also likely to lead some consumers to be more prudent in their spending patterns – potentially cutting back on non-essential items until more clarity on the economic situation emerges.
It seems 2015 is likely to be a more testing year for the Dubai market as a whole, with a combination of lower demand, global economic uncertainty, low oil pricing and significant new supply across virtually every asset class.
The two sectors that appear most exposed are residential and hospitality. This is due to their position in their respective real estate cycles, the volume of upcoming supply and slowing demand. During 2015, over 10,000 new hotel keys and serviced apartments are set for delivery, which is close to 10% of existing supply.
The residential sector will see handover of around 23,000 new units, compared with approximately 14,000 and 16,000 units during 2013 and 2014 respectively. These figures are significant and will clearly have some form of dampening effect on the market, continuing on from trends that emerged during the second half of 2014.
Demand will be further suppressed by the current situation in Russia, and across Europe generally, with lower visitor numbers expected and further declines in investment volumes from a key source market.
However, despite a more challenging economic outlook and the likely drop in oil revenues, the 2015 UAE budget has been set with an increase in public spending over 2014.
This sends out a positive message about the strength of the UAE economy and further underlines the importance of the country’s fiscal buffer that has been built up during a period of relatively high oil pricing in recent years.
This will effectively allow the government to spend budget surpluses in order to help insulate and stimulate the economy during a period of fresh local and global uncertainties.