February 12 2016
By Lookup.Ae Sales
Dubai Real Estate Market Outlook Part 2. A SWOT analysis of the Dubai Real Estate Market in 2016. Both Macro and Micro trends, developments and possibilities are explored and summarized.
1. Relatively Stable Real Estate Market
- Though the headlines shout out seemingly alarming statistics such as the 11 – 12% correction or threats of oversupply; the on-ground reality is that the Dubai real estate market has been quite stable and been experiencing a steady (and perhaps much needed) correction.
- Rental yields are still higher than what you can find in most major real estate markets in the world. (Strong rental yields).
- Prime real estate in Dubai is still much cheaper than what you find in most major real estate markets in the world. (Under-valued)
- Regulated real estate market; investors can feel more confident when purchasing in Dubai due to Government reforms and initiatives to increase transparency and investor protection.
2. The Positives of the Economy
- Dubai Government budget is increasing by 12% this year and is operating on a surplus. Compare this with other economies in the region and Dubai is in a more healthy position. Only 6% of Dubai Government revenue is oil based.1
- The busiest airport in the world – 77 million passengers in 2015.2
- Tourism continues to grow – 14.2 million visitors in 2015.3
- Dubai’s economy is built on the world’s busiest airport (77 million passengers in 2015), 14.2 million tourists last year. Hotel occupancy rates at 77.5% in 2015.4
- Dubai consumer spending in 2015 estimated at $110 billion.
3. Diversifications of Economy
- Government proactively planning to move UAE beyond oil.5
- Major tourist destinations and city revitalization taking place. This includes Dubai Parks & Resorts, Blue Waters Island, Dubai Canal, Dubai Safari Park, an Astronomy Center, IMG World of Adventures, The Opera House, Nikki Beach and more.6
- Expo 2020 construction and infrastructure to fuel further Government spending and related private sector investments.7
4. Strong Leadership
- There is general consensus that the UAE has the most progressive and proactive leadership in the Middle East.
- The Government is keen on fostering a culture of innovation and this is being done through a series of public and private partnerships.8 Major initiatives include the UAE’s space program and the Museum of the Future.
- Continued enhancements on governance9
1. Collapse of oil prices. Repercussions include:
- Decrease of Government revenues which can / will impact infrastructure spending.
- Government may introduce VAT and other taxes to make-up for loss of oil revenue
- Oil companies will likely scale down investments and shed jobs.
- Major companies that service Government & oil related businesses also scale down.
2. Weaker Financial Institutions
- Reports of banks having less liquidity and increase in bad debts.10
- Banks not supporting SMEs. Companies faced with cash-flow problems.
3. Weaker Consumer Sentiment
- According to a Nielsen survey conducted in Q4 2015: 53% of UAE residents believed they were in a recession. Only 58% of consumers feel positive about job prospects.11
- Lower consumer sentiment will impact real estate sales and ultimately lead to a continued price correction.
- Some consultancies estimate Dubai property prices will fall a further 5- 10% in 2016.12
1. Putting the current Real Estate Market in perspective and adapting to new realities
- While average freehold prices have depreciated by about 10 – 15% since Q2 2014, observers should keep in perspective that the market appreciated by an average of 50 – 60% between 2012 – 2014.13
- Real Estate investors, developers and related property service businesses will have to adapt to newer market realities.
- Widespread speculative activities previously witnessed in Dubai are unlikely to be repeated due to Government policies to prevent flipping. Almost all purchases ready and off-plan are now done with mid to long term objectives.
2. Off-Plan purchases have never been more attractive or secure
- Real Estate developers are adapting to new market realities by offering exceptionally attractive payment-plans and other incentives.14
3. Value investing opportunities
- Buyers in 2016 have negotiating power as sellers are more flexible.
- Opportunity to find real value buying propositions.
4. Move away from traditional real estate developments
- Real Estate Developers should now look beyond traditional residential & commercial developments.
- More focus on rental generating developments, educational & vocational institutions, and tourism driven projects.
- An example of a non-traditional development is MAG’s AED 7.5 billion WorldCare Wellness Village.15
5. Iran Opening Up
- Opening up of an 80 million strong population that has traditional & strategic ties to Dubai and the UAE.
- Dubai primed to serve as a hub to corporate expansion & investments in Iran.
- Reopening of trade with and investments from Iran.
6. New supply will make Dubai more affordable in the mid and long term
- Dubai supply statistics have become controversial.16
- The fact is that there is a significant amount of supply planned/under-construction - however, much of that supply continues to be delayed and will be delivered steadily through 2019. Government can help control supply releases through influence on major developments which constitute the majority of future supply.
- New supply should be welcomed. Dubai’s objective is to continue to dominate as a major business & tourism hub of the Middle East. To support an expanding population and attract businesses, affordability is important and new supply will ensure this.
1. ISIS and Regional Instability
- The well documented but less well understood ISIS threat.
- Saudi Arabia’s Government is at its weakest point in recent memory. What impact does this have for the undisputed leader of the Arab world?
- Tensions between the Gulf States and Iran.
- Wars in Syria & Yemen could escalate.
2. The uncertain global picture. In 2016, a number of events and uncertainties could make an already difficult economic picture even more troublesome:
- Quantitative tightening
- Elections in the United States
- Recession in Russia, Brazil and South Africa. Major slow-down in China.
- Currency & trade wars. Populist moves towards protectionism.
- Potential collapse of the European Union. Highly unlikely but jitters in Europe may impact global markets.
- Slowdown in global economy ima
3. Any one of these weaknesses and threats highlighted above could have an adverse chain reaction.
- This chain of reaction could heavily impact real estate prices.
The Bigger Picture
This article is meant to highlight the strengths, weaknesses, opportunities and threats that could impact Dubai’s Real Estate market by looking at both Macro and Micro factors in play.
The year 2016 is starting off as an anomaly in the sense that are so many seemingly interlinked negative unknowns (or x-factors) that could ultimately have adverse impacts on the local, regional and global economies. This uncertainty is impacting sentiment, investments and demand.
Dubai is as well positioned as any economy to deal with these challenges. Strong leadership, a more stable and mature economy as well as proactive Government investments & initiatives will most likely see Dubai emerge in a much stronger position by the end of 2017.
In terms of the real estate market, we expect:
- Softening of the rental market in 2016.
- We expect mid quality residential prices & rentals to remain quite stable. We expect high-end & luxury quality real estate to see further sale & rental declines. Prices as predicted by most observers & consultancies will probably correct a further 5 – 10%.
- Real Estate developers will offer even more attractive incentives to spur off-plan sales.
- Very little new supply will be launched
- Significant amount of supply will enter the market in 2016 & 2017. This will make Dubai more affordable.
This report was written by Gibran Y. Bham, a Co-founder of Lookup.ae
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