How have externalities affected Dubai real estate?

Amid global uncertainty and low oil prices, Dubai’s real estate market exhibited signs of a downward trend in Q2 2016, reports Paromita Dey

ANALYSIS, Business, Brexit, CBRE, Cluttons, Developer, Dubai, Dubai real estate, Emaar, Global real estate market, Low oil prices, Q2 2016, Uae, Uae real estate, Valustrat

The UAE real estate sector has started to reflect the ongoing uncertainty over oil prices, which have remained consistently low for more than 18 months. Various reports suggest that while Dubai’s economy has continued to outperform its neighbours – buoyed by its diversified economic base – the devaluation of major currencies against the US dollar, spurred by global economic uncertainty, impacted investor sentiment in the emirate’s real estate market in the second quarter of 2016.

Real estate consultancy CBRE mentions in its Q2 2016 Dubai MarketView report that residential sales and rentals have witnessed downward pressure, while the mid-market segment remained resilient.

The report says: “Dubai’s residential prices fell for the sixth consecutive quarter during Q2, with average sales rates falling by 2% quarter-on-quarter, resulting in a 12% decline year-on-year, as higher-end and luxury residences witnessed the most significant drops during this time.

“Prices within the mid-market segment in Dubai have proven to be far more resilient to this downward rate trend, reflecting the current demand for affordable accommodation in freehold communities. Having said that, they have also faced some downward rental pressures.”

Sales rates are expected to drop further, by an additional 3% to 5% in the coming quarters, although this may vary in some locations. During the quarter, average residential rental rates have declined by around 1% and 2% year-on-year, respectively.

Mat Green, head of research and consulting UAE, CBRE Middle East, says: “It is estimated that around 48,000 new residential units (apartments and villas) could enter the Dubai market during the period 2016-18, provided that construction delays are at a minimum.”

Dubai, which boasts one of the most transparent real estate markets in the region, is typically susceptible to external factors. Global real estate consultancy JLL predicts that as the Brexit brings slight uncertainty into the market, the Q2 2016 rent values in the office and residential sectors in the emirate will continue to follow a downward trajectory.

Craig Plumb, head of research at JLL MENA, commented: “Even though it is too early to predict the long-term implications, overall there is a slight probability of British investors being negatively impacted by the devaluation of the British pound following the UK’s decision to exit the European Union (EU). If we dissect the market further, particularly for residential, we notice that expatriates in Dubai are most likely to continue renting their homes instead of switching to ownership, resulting in sales being more negatively affected than in the rental sector.

“If external factors stabilise over the rest of the year, we expect the Dubai residential market to easily recover in early 2017.”

Apparently immune to this challenging real estate scenario, major developers in Dubai have posted encouraging numbers so far in 2016. Real estate giant Emaar Properties recorded an increase of 12% in net profit to $674m (AED2.4bn) in the first six months of 2016, compared to $600m (AED2.2bn) during the same period last year. Emaar recorded total sales of $2.8bn (AED10.44bn) during the first half of 2016 and now has a backlog of $12.5bn (AED45.9bn), to be recognised over the next three to four years.

Its contemporary, Nakheel, announced a net profit of $803m (AED2.95bn) for the first six months of 2016, representing a 4% increase, from the net profit of $770m (AED2.83bn) in the same period of 2015. The Palm Jumeirah developer handed over 1,177 units to customers during the first six months of the year, with its retail, residential leasing, and hospitality businesses all performing strongly and contributing to the results, which are in line with the company’s forecast.

In addition, Green Community developer Union Properties’ quarterly profits increased to $19.5m (AED71.7m) in H1, up from $5.2m (AED19.3m) a year ago, while Deyaar reported a net profit of $30m (AED111m) in the first six months of 2016, ending 30 June, 2016.

A Q2 2016 review by local consulting firm ValuStrat revealed that after 12 relatively stable months, its residential price index displayed further indications of an early recovery in some of the areas it measures, signalling possible signs of a bottoming-out in property values across its coverage locations during the course of 2016.

The report says: “The Q2 2016 price index displayed an overall 1.1% annual decline in values. However, the monthly growth rate of residential values has been broadly stable since July 2015. Statistical analysis has shown further indications of an early recovery in some areas, signalling possible signs of a bottoming-out in property values across the price index coverage locations during the course of the year.”

Commenting on the outlook, Haider Tuaima, ValuStrat research manager, says: “With a clear 12-month trend of relatively stable sales prices, the general sentiment has been cautiously optimistic towards a recovery commencing in the second half of this year. Evidence from the market also indicates that both investors and end-users are now doing deals on well-located and correctly priced properties.”

The report suggests that for 2016, the latest estimated total supply of residential apartments and villas to be completed amounts to 16,326 units. Compared to data reported in the first quarter of 2016, just over half of the scheduled units will be delivered this year.

Nine off-plan residential projects were launched in Dubai in Q2 2016 to add more than 2,500 units to the residential pipeline by 2020.

KPMG’s review of the emirate’s property market predicted that while 2016 may be a challenging year due to numerous internal and external factors, the market should see an upturn in 2017. While certain areas of Dubai have felt the impact of this more severely than others in terms of declining prices, the overall magnitude of the decline has been tempered.

Sidharth Mehta, partner and head of building, construction, and real estate at KPMG Lower Gulf, concludes: “While oil prices remain well below the long-term average, which is clearly having an effect on market confidence, Dubai’s improved regulatory environment, broader investor profile, and increased maturity are all indicators that its real estate market should eventually self-correct. When preparation for Expo 2020 picks up, we expect to see a demand for residential real estate.”

Money trail

Dubai Land Department (DLD)’s transactions report, issued by its Real Estate Research and Studies Department, revealed that the total real estate investment transactions for the first half of 2016 reached $15bn (AED57bn), which was invested by 26,000 investors comprising 149 nationalities. Citizens of the GCC contributed $5.9bn (AED22bn) to the Dubai property market, a figure that encompasses 8,000 transactions.

Emirati investment constituted the majority share of this figure, with total transactions reaching $3.9bn (AED14.5bn), which was acquired from 4,543 investments. Citizens of Saudi Arabia came in second place, with transactions reaching a combined figure of $1bn (AED4bn) originating from 1,946 investments. In third place were Kuwaiti nationals, with 743 investment transactions worth more than $272m (AED1bn), followed by nationals from Qatar, Oman, and Bahrain.

Arab investors from outside the GCC contributed more than $1.9bn (AED7bn) to the real estate market in the aforementioned period, with 7,577 investments made by 16 different nationalities. The total value of foreign investment in the Dubai real estate market reached more than $7.6bn (AED28bn), drawn from 14,314 investments belonging to 149 nationalities.

Indian nationals came in top of this investor field, making more than $1.9bn (AED7bn) worth of property transactions arising from 3,656 transactions. The British were listed second, with a total of $1bn (AED4bn) worth of property transactions resulting from 2,010 transactions. Pakistani investments came in third with $816m (AED3bn), which was gained from 2,073 transactions.

Commenting on the results, HE Sultan Butti Bin Merjen, director general of DLD, said: “The Dubai real estate market has managed to maintain its robust appeal and is now emerging as one of the foremost property investment destinations in the world, bolstered by the decline in some regional economies and serious challenges faced by other countries around the globe.

“The diversity of the investor base reflects the extensive range of different products offered by the real estate sector in Dubai, along with the quality and trust that investors place in us,” he added.

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