2020 is an year full of challenges, also for the real estate sector of Dubai, given the difficulties to travel and also the postponement of Expo 2020 that included 25 million attendances. In any case, unlike other countries in the world here there are encouraging signs of a future recovery. Interesting views were collected by arabianbusiness.
The UAE’s real estate sector is set for a long climb back. But after the challenges of 2020, but there are glimmers of hope. Despite being among the many driving forces for the UAE’s economic growth over the past two decades, the real estate sector was already battling sluggish market conditions long before Covid-19 arrived. But the pandemic, in combination with the postponement of Expo 2020, long positioned as a major catalyst for the sector since its announcement in 2013, have added further instability, characterised by projects delayed, demand in decline and both values and rental yields reflecting the unfavourable climate.
There is also material uncertainty in the sector’s investment market performance, and experts believe this scenario is likely to remain well into 2021.
The questions now being asked, for what seems like the third or fourth time in last three years: have we found bottom? The answer continues to be “possibly”.
According to real estate digital platform Property Finder, residential sales transactions grew by 64 percent from May to June as restrictions across the country eased. Dubai alone registered real estate transactions worth AED4.72bn ($1.3bn) in the month, which plunged by 12.92 percent year-on-year from AED5.42bn ($1.5bn) in the same period last year. The total number of units sold stood at 2,327, compared to 2,721 in June 2019, registering a 14.48 percent fall.
“If you looked at the trends from H2 2019 into January, February and early of March this year, transactions were increasing month-on-month. It wasn’t until the crisis hit where we started to see transactions decline with the lowest amount being at the end of May,” Lynnette Abad, director of research and data at Property Finder, tells Arabian Business.
Dana Salbak, head of MENA research at JLL, is in broad agreement. “In the UAE, particularly in Dubai, the market was already in the late downturn stage of the cycle for all asset classes. Even before Covid-19, rents were bottoming out for residential, office, retail and hospitality segments. Particularly, for the residential sector we assumed that we are close to the bottom.
“Our assumptions were that the market was expected to stabilise in the first half of 2020, ahead of Expo 2020 Dubai, purely on the sentiments, traction and the movement, whether commercially or from a retail and hospitality perspective,” she adds. “Where we stand right now, many of the markets have moved back in the cycle, and they are now in the rents falling quadrant, which is what we expect.”
That much-needed stabilisation is now expected to be delayed by a year as Expo and the easing of the pandemic combine to positive effect by the middle of next year.
Covid-19 dictating the market
A report by Chestertons MENA underlined the challenges Dubai’s residential sector faced in Q2 as the market was impacted the pandemic’s near-total closure of the economy and its accompanying safety measures. In total, 5,233 units were sold in Q2 2020 valued at AED9.06bn ($2.5bn), registering a plunge of 40 percent year-on-year and a quarterly drop of 45 percent.
“While we expect residential prices and rents to decline further over the second half of 2020 – a result of challenging economic conditions and a declining expatriate population – there are positives to draw from Q2 that will support Dubai’s residential sector moving forward,” says Chris Hobden, head of strategic consultancy at Chestertons MENA.
The report further revealed that over Q2 2020, developers abstained from launching new projects for sale, which in turn left total off-plan sales launched in the first half of the year at 4,458 units, compared to 12,222 and 21,435 in the same period in 2019 and 2018, respectively.
According to Hobden, “a significant drop” in new projects/units launched for sale off-plan in H1 2020 bodes well for supply and demand dynamics in the long-term. Property Finder’s Abad notes that the off-plan sector in June 2020 was relatively unaffected by the crisis.
“If anything, there were delays in transfers of properties due to the lockdown, but otherwise the transaction levels stayed consistent with over a thousand transactions month-on-month,” he says.
Supply vs demand
Since the financial crisis of 2008, the issue of supply versus demand has been ever-present in the sector. Finding the right balance between supplying only units the market needs, and thus maintaining real estate values, and the build-it-and-they-will-come philosophy that has characterised Dubai’s exponential growth since the 1990s, was the stated the goal of Higher Committee for Real Estate Planning when it was launched by Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, in 2019. Among its mandates is the ongoing study of the market to ensure that duplication of projects is avoided.
“The trigger has been that lower oil prices have required governments to impose fiscal control, because their revenues have fallen,” says Dr Christopher Payne, chief economist at Peninsula Real Estate. “While these fiscal controls have been necessary, they have had an impact on the level of economic growth, which has had a knock-on effect on market demand.”
Despite more than 75,000 new units being completed in 2018 and 2019, the recent drop in rents and prices is, according to Payne, the result of falling demand. “It has really been a demand problem and not a supply problem,” he adds. “The current crisis has had an impact on job and that has inevitably led to some people leaving the country, which will always reduce demand in a market with a heavy proportion of expats.”
Reduced salaries and furloughs
Weaker demand isn’t simply a product of departures, of course. Many companies have asked staff to take salary cuts, unpaid leave or both as they try to navigate the unprecedented impact of the health crisis. Industries such as hospitality, entertainment, events and travel and tourism have been particularly hard hit, and impacted employees have in turn sought discounts on their rent or, at the end of a contract, a cheaper alternative – both of which have created downward pressure on the market.
According to a survey conducted by Peninsula Real Estate in July, 75 percent of renters who had renegotiated their lease in the last six months reported a fall in rent. More than 30 percent said that fall was by at least 10 percent.
Hobden of Chestertons MENA says that it’s important for “landlords to demonstrate flexibility on rents and payment terms” in order for rental transactions to get back on-track over H2 2020. This includes shorter lease lengths and an increase in the number of cheques.
One positive result from this, says JLL’s Salbak, is “more dialogue between landlords and owners and their tenants. This is something new and is a sign of maturity that the landlords are responding to what their tenants want.
“Before, the market was very immature, it was very much like ‘take it or leave it’, whereas what we are seeing now is that there is a lot more leeway for negotiation.”
In terms of sales, the picture is gradually beginning to improve as discounted properties become more attractive to prospective buyers.
While the number of registered transactions dropped 42 percent in April, Sidharth Mehta, head of building, construction and real estate at KPMG Lower Gulf, reports some signs of life. “Residential market sales in the UAE are gradually picking up compared with April and May when the pandemic had a significant impact on sales activity,” he says, with June witnessing “an upward trend” even if it is still some way short of pre-pandemic levels.
Lack of immunity
\As the world moves closer towards a post-Covid era, a number of challenges will persist in the local real estate market into 2021. “Economic contraction due to the pandemic will largely result in a ‘wait and watch’ approach among buyers. This is partially attributable to pressure on disposable income and investor sentiment,” says Mehta. “Developers and contractors are not immune to the impact of Covid-19.”
Mehta adds that “any potential project delays will further impact contractors’ execution cost, in addition to supply chain disruption, enhanced safety costs, and reduced productivity. Developers will need to carefully manage obligations, as there is an expectation that contractors will now have to enter price renegotiations”.
Meanwhile, Payne says developers can expect a “difficult balancing act” from here. “It’s a challenging time for developers,” he says. “[It will be] a difficult line to walk, wanting to release units in order to generate cash flow, but also understanding that now is not the time to do so.”
A broad economic recovery
So, the search for bottom might well go on, but in a year’s time, it’s not unreasonable to suggest the sector will look back on the summer of 2020 as the market’s nadir, a moment when there really wasn’t any further it could fall.
Even though Covid-19 uncertainties will continue to impact the market, Hobden of Chestertons MENA, is looking at near-term silver linings. “Assuming a broad economic recovery next year, we expect to see greater stability in residential rents and sales prices over 2021,” he believes.
That is something at least to build on.
Lewis Allsopp, CEO of Allsopp & Allsopp, on why the current environment ought to present an unparalelled opportunity to buy
Every crisis presents an opportunity for those with adequate means. There is no clearer example than real estate, in which assets of universal utility and appeal are still subject to the whims of the market. As such, people who have been considering buying in the UAE probably ought to see the current environment as providing a perfect storm of factors.
We’re now in a situation where prices have declined for six years, we’re coming through something the world has never experienced before, the upfront money needed to enter the market has dropped to the lowest level needed for six years, and mortgage and interest rates are as low as they have ever been,” says Lewis Allsopp, CEO of Allsopp & Allsopp. “Clients have come round to the thinking that if now isn’t the right time to buy then when will it be?”
Timing the market is always difficult, and people who bough
Timing the market is always difficult, and people who bought in, say, 2016, maybe feeling that potential returns are still a long way away. But for buyers entering the market now, the indicators for the medium-term look extremely positive. “In the last couple of months, we have seen a huge demand for properties that are in great condition and at an attractive and competitive price, but these properties are becoming few and far between and some buyers are now willing to pay a little extra to get the property they desire,” says Allsopp.
“In my opinion, prices are unlikely to drop further, but rather level out and in some cases incline slightly as the demand for homes rises in certain communities. The Dubai property market, like other property markets around the world, is cyclical and in my experience, the prices always bounce back.”
Future of office space
Office space will see demand driven by remote working, workplace design, technology and commuting patterns.
The commercial real estate sector has endured its own complications due to Covid-19. Not only were people not allowed in malls and restaurants in Q2, they were also prohibited – or at least discouraged – from going to their office.
As such, remote working has become increasingly common and accepted in the UAE, which might impact office space long into the future.
In a market performance report for the UAE, JLL stated that the future of office space will see demand driven by remote working, workplace design, technology and commuting patterns. The big, multi-floored, one-company office building may be at an end.
“With demand for office space intrinsically linked to economic performance and growth in employment, we expect this trend to continue in the short-to-mid-term,” says JLL’s Dana Salbak.
Additionally, she says corporates will now begin to adopt a hybrid work culture, with some of their employees based in head offices, while others continuing to work from home, or in flexible office spaces. “The game is changing and evolving rapidly, and we expect to see companies apply their own philosophy and ways of working based on business needs and staff comfort levels,” she adds.
Despite this, a report by KPMG revealed that Dubai’s commercial gross leasable area (GLA) is forecast to increase to 9.18 million sq m by 2021 – which begs the question, what kind of enterprises will be making use of it all?