Dubai Market Summary
The vote for Britain’s exit of the European Union (Brexit) is the compelling story for the quarter. It raises numerous questions regarding its potential impact on the Dubai real estate market.
Dubai is the most open real estate market within the region and hence the most likely to be impacted by external factors. Data from the Dubai Land Department (DLD) suggests that British nationals are the third largest investors in terms of nationality in the city’s real estate. While some British investors are likely to be negatively impacted by the devaluation of sterling following the Brexit vote, we believe the impact will be muted as a significant percentage of British investors work and reside in the UAE and therefore do not source their income in GBP.
Given that sentiment plays a major part in determining the level of investment in all sectors of the Dubai real estate market, particularly across residential, we believe that many expatriates in Dubai are likely to opt to continue renting their homes rather than switching to ownership. We would therefore expect the sales sector to be more negatively impacted by reduced investor sentiment than the rental sector.
Both the office and residential segments are positioned close to the bottom of the property cycle, suggesting that rents have bottomed out (office) or are close to the trough (residential). The timing of any subsequent market recovery may be delayed due to increased uncertainty resulting from the Brexit vote.
Dubai Prime Rental Clock
Office Market Summary
The second quarter of 2016 saw the handover of only one office tower:
Westbury Square in Business Bay, which added 30,000 sq m of office GLA, taking the total stock to 8.5 million sq m, broadly in line with the figure recorded during the first quarter.
Our forecasts of future supply levels for 2017 / 2018 have been revised downwards over the quarter owing to a number of factors: (1) A number of projects which were scheduled for completion in 2017 have been delayed to 2018; (2) Al Duja Tower which was previously included as a mixed-use building has now been confirmed as largely residential (with only one floor of office space) reducing potential 2017 office supply by 167K sq m; and (3) the handover of ICD Brookfield has been confirmed for Q1 2019. Despite these changes, Dubai remains the largest and most active office market in MENA, and the preferred regional hub for many businesses.
In terms of performance, demand for Central Business District (CBD), the area from the World Trade Centre roundabout to Downtown – persists and this is evident given the relatively high rentals, currently averaging at around AED 1,922 per sq m and the low vacancy levels.
Vacancy rates within the commercial office towers in the Central Business District (CBD) are showing a declining trend, which suggests that there could be a lack of good quality office space and therefore there has been a number of “Built-to-Suit” projects and prelease agreements scheduled to be completed.
Dubai Residential Market Summary
Around 1,500 villas for Emirates Group staff were delivered in District 11 of the MBR City project in Q2 by Emirates Group. This marks the first project that has been delivered in this major development. A further 1,680 units were added across Dubai including both apartment and villa units, and taking the total stock to 462,000 units.
The REIDIN general index for rents and sales remained largely unchanged over Q2, suggesting the residential market is currently at a cyclical trough, having softened by about 15 per cent since its peak in mid-2014. While not significant in its own right, the negative perception and uncertainty resulting from the Brexit vote may contribute to a delay in the market recovery. Providing there are no major external shocks over the rest of the year, we expect the Dubai residential market to recover in early 2017.
Dubai Retail Market Summary
Three new shopping malls were added over the quarter: a community centre in International City; Ibn Battuta Mall Phase II and The Ribbon in Motor City. Collectively, they added almost 30,000 sq m of GLA. The remainder of 2016 is expected to witness the delivery of a further 150,000 sq m of GLA. Our supply pipeline for 2017 has been increased with construction having resumed on two projects, the Dubai Art Centre in Barsha and Sustainable City Mall, which increases the 2017 supply to 159,000 sq m.
Commercial investors and occupiers are impacted by sentiment and confidence, but their attitude towards real estate in the MENA region is more likely to be driven by their own business and financial situation. Those companies whose business could be negatively impacted by Brexit could delay real estate commitments.
Furthermore, the performance of retailers is largely correlated with the spending patterns of tourists coming into Dubai. With the devaluation of the British pound, Dubai and the MENA region as a whole has become a more expensive destination. Therefore, a further decline in European visitors is expected in the foreseeable future.
The retail market is currently situated at the top of the real estate cycle, suggesting that we expect rents to continue dropping for the remainder of 2016.
Dubai Hotel Market Summary
The second quarter of the year saw the opening of the landmark W Al Habtoor on the banks of the Dubai Canal, following its sister property St Regis in November 2015. Combined with other additions to the supply such as the Rove Hotel Downtown and Wyndham Dubai Marina, this brought the Dubai supply to around 72,500 rooms. Several properties announced for 2016 can be expected to see their opening postponed to 2017 which is reflected in our adjusted pipeline shown below. Among the causes are delays in construction and funding, and the overly ambitious timelines initially set by some developers.
While occupancy rates remained flat compared to YT May 2015 data, average daily rates declined 13% to USD 217 which can be attributed partially to the increased competition in the market as well as the continuing strength of the US dollar.
Dubai’s residential and office segments are positioned close to the bottom of the property cycle, suggesting that rents have bottomed out (offices) or are close to the trough (residential)
Looking into H2 2016, we expect relatively stable market conditions, with the residential market to start showing signs of improvement from the beginning of 2017
However, the recovery in the market is dependent on no major external factors or negative global events influencing its recovery
Investors are driven by sentiment, and generally speaking, investment decisions are made during stable market conditions – events such as Britain opting to leave the European Union (Brexit) could postpone investors’ decisions to buy property in Dubai’s market
Historically speaking, the Palm Jumeirah, Dubai Marina and Downtown were the booming residential areas in Dubai
At present, the booming areas in terms of announced projects include Mohammed bin Rashed city and areas South of Dubai – However, “boom” in terms of prices is still concentrated in the prime residential areas such as Downtown, DIFC Umm Suqeim
In terms of villa project handovers, the market continued to see more completions in Q2 2016. Of that, 1,500 villas were delivered in District 11 of the MBR City project
In terms of the type of villas, the market is seeing more “affordable” completions to meet the Demand-Supply gap in this segment. A recent example was the 418 unit Glamz residential project located in the Al Furjan area of Jebel Ali
Research Manager, JLL MENA