MENA Real Estate Predictions H1 2016 update — Deloitte

Deloitte’s real estate advisory team issued a Real Estate Predictions Report in January 2016, which looked at trends and prospects for Dubai’s real estate market.

Now that we have moved into the second half of 2016, we have compared the predictions we made for Dubai’s residential and hospitality markets with actual performance in the first half of 2016.

Our Real Estate predictions for Dubai’s residential and hospitality market prospects in 2016 were based on an assessment of macroeconomic factors, data on supply, demand and performance metrics, in addition to consultations with key industry players.

Residential Predictions

One of the key macroeconomic factors shaping Dubai’s residential market identified in January 2016 was low oil prices, which we forecast would dampen demand from regional investors.

We predicted that this would be compounded by the declining purchasing power of international investors in Dubai’s residential market, given the ongoing strength of the US Dollar (to which the UAE Dirham is pegged) relative to the currencies of key external markets such as India, the UK and Russia.

Overall, we predicted that average residential sales prices in Dubai would continue to fall in 2016, reflecting a transition to a more mature market as well as an increase in more affordable stock and discounting in emerging locations. Assessing data for the first six months of 2016 shows that residential sales prices have continued to decline in Dubai.

The largest price declines have been in Palm Jumeirah (apartments) and Downtown, where prices declined by approximately 10% between Q1 2015 and Q1 2016. On average, residential sales prices in Dubai declined by 4.4% between Q1 2015 and Q1 2016.

Another key prediction made by Deloitte in January 2016 was that construction delays and a squeeze on liquidity, as banks re-assess their exposure to residential real estate development, would result in fewer than the 40,000 units of new residential inventory forecast by key market stakeholders would be delivered.

In the first six months of 2016, fewer than 5,000 residential units were delivered in Dubai, which is in line with our prediction that approximately 10,000 units will be delivered throughout 2016.

Hospitality Predictions

One of the key macroeconomic factors shaping Dubai’s hospitality market in January 2016 was ongoing growth in key source markets (particularly KSA), longer average lengths of stay in this segment and increasing demand for better value accommodation. We forecast that these macroeconomic factors would drive strong levels of demand for serviced apartments in Dubai.

In the first half of 2016, data from the Dubai Department of Tourism and Commerce Marketing (“DTCM”) shows that serviced apartments experienced the highest occupancy of any category, at 83%.

At the beginning of the year, we predicted that supply growth would be slightly ahead of demand growth in Dubai’s hospitality market in 2016 and that as such, occupancy levels at around 70% to 75% were likely to represent the “new normal” in Dubai.

Average hotel occupancy in Dubai in the first six months of 2016 was 77%, slightly ahead of our forecasts. Looking at the data in more detail, it is clear that hotel operators in Dubai continued to discount Average Daily Rates in an effort to maintain occupancy, with a decline in Average Daily Rates noted in the first six months 2016.

We anticipate that this trend is set to continue in the second half of 2016.

Conclusions

Overall, Dubai’s residential and hospitality markets have rebalanced towards a “new normal” in the first six months of 2016.

We predict that residential sales prices will decline further in Dubai for the balance of 2016 but that this rate of decline will slow, as value and affordability returns to the market. We predict that Average Daily Rates at Dubai’s hotels will decline further in 2016 before stabilising mid-to-late 2017.

Rather than being a negative, this can be viewed as a positive, as this will help Dubai to become a more affordable destination. As Average Daily Rates decline slightly this should encourage the growth in tourism volumes which will be required to support the investment in tourism infrastructure being developed over the coming years.

Dubai Economic Overview

The Economist Intelligence Unit (“EIU”) forecasts real GDP growth in the UAE to average 3.6% per annum between 2015 and 2019, marking a decline from the 4.6% growth experienced in 2014. This forecast decline is largely due to a significant fall in global oil prices, along with wider global economic factors, such as a slowing Chinese economy and sluggish growth in the Eurozone economies. It is likely that GDP growth specifically for Dubai will outperform the wider UAE in 2016, largely due to the fact that Dubai’s economy is considerably less dependent on oil revenue compared to other Emirates. Nevertheless, lower oil revenues are likely to drive lower bank deposit levels and greater withdrawals to support potential funding gaps, which may result in tighter liquidity and an increase in the cost of borrowing.

Global oil price and UAE budget balance forecast, 2015 to 2019

global-oil-price-uae-budget-balance-forecast-deliotte

The downturn in global oil prices is forecast to prompt fiscal reform.2 In 2015, fuel subsidies were removed across the UAE which, together with inflation forecast at 3.4% in 2016 and generally stagnant salaries, is likely to lead to lower disposable incomes for some households. Despite the UAE’s forecast budget balance of -0.9% of GDP in 2016, any significant scaling back of key infrastructure projects should be eased by Federal reserves and the new Law No. 22 regarding Public Private Partnerships (“PPP”), passed in November 2015, which aims to boost private infrastructure investment and drive development.

GDP growth UAE and World 2014 to 2019

gdp-growth-uae-world-2014-to-2019-deloitter

In H1 2015, strong economic growth was experienced in Dubai’s restaurant and hotels sector, at 9.2%, whilst Dubai’s transport, storage and communications sector achieved 5.7% growth. With significant infrastructure projects underway in these sectors, including the expansion of Dubai’s airports and the construction of Etihad Rail, we predict that these sectors will further strengthen in 2016.

Any lifting of sanctions on Iran also presents potential opportunities for Dubai in 2016. The release of capital currently in Iran is likely to prompt an influx of investment to safe haven markets from which Dubai may benefit. Dubai may also be able to position itself as a gateway for business into Iran.

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