How is construction affecting UAE real estate?

As the UAE’s real estate market exhibits signs of ‘bottoming out’, we investigate how the country’s construction sector is likely to be affected

Intrinsically linked: The construction and real estate sectors enjoy a symbiotic relationship, especially in the fast-moving UAE market.
Intrinsically linked: The construction and real estate sectors enjoy a symbiotic relationship, especially in the fast-moving UAE market.

There appears to be a common consensus within the UAE’s real estate community at present: namely, that the market is ‘bottoming out’. Earlier this month, Asteco highlighted a “continued focus on affordability” in Dubai. Prices in the emirate, the company noted, have fallen 5% year on year, and transaction levels have declined by 17%.

John Stevens, managing director of Asteco, commented: “This market has moved favourably towards the buyer as prices drop and cash investors and end users find themselves in a strong negotiating position. Buyers are definitely considering their investment options as the market appears to be bottoming out, and sellers seem prepared to take a more realistic view on pricing.”

In late-May, property specialist Core, UAE associate of Savills, announced its real estate ‘winners and losers’ for H1 2016. The company’s report, Dubai Investment Outlook H1 2016, noted that residential, office and warehousing locations performed strongest during the first six months of the year, while grade-B secondary location offices, affordable residential developments, and four- and five-star hotels proved less attractive investment options.

Core UAE’s researchers found that prices in most of Dubai’s established, ultra-prime residential areas had demonstrated “relative resilience” in H1. Interestingly, however, even some of the best-performing areas underwent average price declines during this period.

For example, while prices in Dubai’s Jumeirah area increased by an average of $1,900 (AED7,000) from Q1 2015 to Q1 2016, average prices in Emirates Hills fell by $1,100 (AED4,000) and in Palm Jumeirah, by $1,630 (AED6,000) year on year.

David Godchaux, chief executive officer of Core, UAE associate of Savills, also agreed that this is a buyer’s market. He explained: “The realisation that the market is ‘bottoming’ seems to have stimulated interest from investors and end users, who have been waiting for several years for ‘deals’. [This has prompted] renewed enquiries for better-value-for-money products, especially in the prime residential segment.”

Ian Hollingdale, sales director at real estate firm Chestertons’ Dubai office, concurs with this assessment. Speaking in late-May at the company’s Q1 2016 market talk in Dubai, he said: “The trick for buyers is to know when to step into the market, and not to miss that bus. I think we can confidently say that at the moment, that bus is moving out of the terminal and we need to be on it.

“In terms of the outlook for Q2 2016, [the residential sector] is really encouraging. Prices have yet to move, and rental levels are correcting. But the signs are good and we’re seeing a change in attitude among investors and owner-occupiers alike. Tenants are clearly weighing up the benefits of owning property rather than renting, and this will inevitably lead to more realistic and sensible [returns on investment] for investors,” he told attendees.

The real estate market appears to be witnessing similar trends outside of Dubai. Drica Rodrigues, sales director at Chestertons’ Abu Dhabi office, argues that the UAE’s capital city is undergoing a correction of its own.

“Abu Dhabi’s [real estate] market, in all sectors, has undergone a correction. The market has reshuffled,” she explained, adding that this has resulted in a healthier real estate segment for the emirate.

“The market today is much more real,” she commented. “[Leasing periods of] three months and six months; [payment across] three cheques and four cheques – that’s more like it.”

Rodrigues expects rental prices to continue to ‘correct’ during the summer months due to uncertainty over oil prices. Abu Dhabi’s apartment segment, meanwhile, is witnessing a moderate price correction, villa prices are likely to remain stable due to steady supply, and affordable housing is expected to perform well, she continued. These factors, combined with a tightening regulatory environment, spell good news for Abu Dhabi, according to Rodrigues.

“I strongly believe this is like taking medicine,” she noted. “It’s good for [Abu Dhabi]. With the rental cap removed, some landlords actually raised rents by up to 15%. That’s crazy; it’s not healthy at all. So prices went up, and they’re going to come back down to what is really the value of those properties.

“I predict a very good 2017 with a much more regulated market […] and that’s all very positive for everybody involved,” said Rodrigues.

Although real estate and construction are distinct markets, the two are intrinsically linked. Regardless of geography, each of these segments has the capacity to affect its counterpart, both qualitatively and quantitatively. What’s more, owing to the rapidly developing nature of the UAE’s real estate and construction markets, the effects of this special relationship are often particularly impactful, and even farther reaching than in other countries.

Daniel Xu, senior legal consultant at law firm DLA Piper, believes that the trends currently being witnessed in the UAE’s real estate market will influence the trajectory of the country’s construction sector, and indeed, vice versa.

“What happens upstream at a construction level tends to have an impact on the downstream real estate market,” commented Xu. “A typical characteristic of the construction sector is that it’s capital intensive, and there is always a long return on investment. So there’s a symbiotic, supply-and-demand relationship [between construction and real estate]. Real estate demand drives the construction process itself – the supply.”

Consequently, the bottoming out that is taking place within the UAE’s real estate market is likely to have a hand in shaping the types of project that are built in the future. Conversely, the challenges and trends being faced by the country’s construction community will influence the decisions of developers.

Xu identified five contemporary trends within the construction sector that will affect the UAE’s real estate market: a challenging landscape for money and capital; the resurrection of previously stalled projects; a reduction in new projects being awarded; increased competition for fewer contracts; and the changing nature of disputes.

“We can see that there is a changing landscape for money and capital,” he observed. “Liquidity is becoming increasingly important in markets like [the UAE]. There are now cash-flow constraints within the construction sector.

“We also see trends in terms of disputes. In the past, disputes related to construction projects often involved massive delays and huge price increases in terms of changes and scope. But right now, we are seeing an increasing trend for disputes to centre on late or non-payment – again, a reflection of how liquidity is becoming squeezed in the market.”

But how do these trends relate to the real estate market? Xu suggests that the three price indices for construction – steel, cement, and labour prices – must all be taken into account when making predictions about the UAE’s future project pipeline.

“Steel prices are declining, cement prices are stable, and the labour market has seen a [slight cost reduction],” he explained. “If you put all that together, [the likely impact] on real estate is that it will remain stable.”

Xu also highlighted an increasing tendency among property developers to base their corporate strategies on market factors rather than in-house preferences.

“Developers are becoming increasingly led by the market,” he explained. “The mere action of building a project and expecting the market [to accommodate it] is no longer the main driver. Developers are increasingly looking at cost control.”

As developers look to reduce construction costs, Xu predicts cheaper materials and specifications. In turn, buyers can expect a lower quality of construction, higher maintenance costs and depreciation speeds, and reduced returns, according to Xu.

“There is definitely a [shift towards] affordable housing [in the UAE],” he explained. “Developers are moving towards this [segment]. Making a project affordable often means a reduction in construction costs, which can result in lower specifications.

“Typical investors will incur a higher level of risk, especially in less established areas,” Xu added.

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