PROPERTY MARKET OUTLOOK

Transcription

1 cluttons.com Dubai, Winter 2017/18 PROPERTY MARKET OUTLOOK RESIDENTIAL MARKET Capital values drop to lowest level since 2013 Dubai s residential market remains in a state of flux, with segments of the market, depending on location and price band, varying in performance. Like many other global residential markets, confidence levels amongst buyers remain subdued, particularly for property at the top of the price spectrum. It is perhaps no surprise that residential capital values continued to recede across the city during the third quarter. Overall, residential prices slipped by 1.9% in the three months to the end of September, following on from the 1.5% drop in Q2. The annual rate of change as at the end of Q3 stood at -5.6%. Villa values experienced their weakest performance in almost two years, with prices falling by 2.8% in the three months to the end of September. Apartment values on the other hand experienced a drop of 1.3% on average, taking the change during the first nine months of the year to -5.5%. No submarket registered growth during Q % AED 1,246 psf Fall in residential capital values during Q3 Average residential capital values as at the end of October 2017

2 The weakest performing market segment was Jumeirah Village, where villas registered a 12.3% decrease in average capital values to AED 833 psf, from AED 950 psf during Q2. This was followed by apartments at the Green Community in DIP (-8.2%), where prices declined to AED 817 psf. The Arabian Ranches (-7.3%) rounded off the list of the top three weakest performers across Dubai s freehold areas during Q3. These markets in particular have faced competition from surrounding developments that are newer, cheaper and often more affordable, especially for those looking for rental options. Arabian Ranches has faced stiff competition from nearby Nshama, while Al Furjan and the second phase of units at DIP have improved the amount of choice for would be buyers and investors in the Jebel Ali area. Jumeirah Village on the other hand has seen a raft of recent completions, in addition to the nearby villa community at Jumeirah Park. The weaker conditions have persisted into Q4, with overall residential values falling to 31.9% below the Q peak as at the end of October This now leaves average residential prices at AED 1,246 psf; the lowest level recorded in the market since Q International City (AED 600 psf) remains the city s cheapest area to purchase, while the Burj Khalifa (AED 2,500 psf) is still the most expensive individual submarket, despite prices in the world s tallest building ebbing by 19.7% over the course of the last 12 months. There are of course more expensive individual developments in the city. As at the end of October, property prices in the Burj Khalifa were 71.2% below the last market peak 10 years ago, leaving the building the slowest to recover since the Great Recession linked downturn in Apartments at IMPZ (-46.5%) are the next worst performer, followed by apartments at the Green Community in DIP (-41.5%). Performance of capital values villas and apartments 25% 20% Pre Expo 2020 win spike Quarterly % change 15% 10% 5% 0-5% Q Q Q Q Q Q Q Villas Apartments Dubai s residential market remains in a state of flux, with segments of the market, depending on location and price band, varying in performance

3 Performance of values since Q market peak BURJ KHALIFA IMPZ (APARTMENTS) GREEN COMMUNITY / DIP APARTMENTS) DISCOVERY GARDENS ARABIAN RANCHES THE SPRINGS JLT -71.2% -46.5% -41.5% -38.5% -35.8% -35.3% -31.4% Off plan transaction volumes remain healthy Transaction volumes have remained relatively stable, with the number of deals during the first nine months of % higher than the same period last year. The volume of villa transactions has however slipped by 1.6% over the same period to 874 deals between January and September In general, off plan sales have remained resilient; a trend we have been reporting on for over 18 months. The chief factor underpinning this trend at the moment is the persistence of favourable payment plans, stretching well beyond handover. Dubai s residential property supply pipeline forecast 35,000 30,000 25,000 This has proved attractive to buyers as it enables them to get a foot hold in the market. From experience, we are aware that off plan stock often experiences a drop in value upon handover. We have also noticed heavy buyer activity three months prior to the completion, particularly if the stock is priced below AED 1 million. Usually nervous investors, wary of unknown developers reputations and the potential for delayed handovers, are usually swayed by the imminent completion. These investors are often still able to capitalise on off plan prices. And more often than not, when schemes are within a few months of completion, they will make the cut of banks approved projects for mortgages. Number of units 20,000 15,000 10,000 5,000 Still, with Value Added Tax (VAT) likely to drive even more attractive payment plans as developers work hard to benefit from a VAT rebate should they sell out within three years of completion, this is a trend we feel is unsustainable. 0 Apartments 2018 Villas / townhouses

4 Residential transaction volumes in Dubai Number of transactions Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Apartments Villas, Reidin Is supply and demand well matched? The supply pipeline on the other hand continues to strengthen, with nearly 30,000 units announced during the three days of Cityscape Global in September. Overall, we expect 21,409 units to complete in 2018, followed by a further 26,370 in 2019 and a further 32,180 in This equates to 79,738 units in total over the next three years. The corresponding growth in population, which usually averages 5% per year, should see a further 441,000 new people added to the city. According to the Dubai Statistics Centre, the average household size in the emirate is 4.2 family members, which would translate into demand of roughly 105,000 units over the next three years. While it may appear that supply and demand are well matched, particularly as 30% to 40% of the announced supply is likely to be delayed, or rephrased, as has been the case historically, our concern remains centred on the fact that the vast majority of planned supply is designed to cater to the high-earning segment of the population. While the Expo 2020 is going to give the economy a much needed shot in the arm over the next couple of years, with job creation rates rising in tandem, we remain of the view that the vast majority of jobs will result in the creation of more middle to low income households, rather than high income ones, which will continue to fuel rental demand for homes at the lower end of the price spectrum. Affordable housing game changer The Government s recently announced plans to legislate, through planning, the provision of affordable homes in some of Dubai s core locations is something we view extremely positively and is a watershed moment for the market, which has been starved of true affordable homes for many years now. While exact details around the legislation are yet to be confirmed, we expect to see a balanced approach between the presumed establishment of quotas around the provision of affordable housing that is both built-to-rent and built-to-sell, so that both aspiring buyers and tenants, priced out of city centre locations, can benefit. Through our long term experience of this sector in the UK, we understand that there are likely social issues to be addressed with having low income workers residing in locations that have traditionally been badged as exclusive, as well as a culture shift that may need to occur amongst would be buyers and investors. Still, the change will help Dubai avoid some of the errors of more developed locations around the world and will certainly go some way to curtail the emergence of poorly connected, low income neighbourhoods that are segregated from the rest of the city, as is the case in many other global metropoles. As it stands, with nearly 1 million commuters coming into Dubai each day from other emirates, there is a clear and untapped demand segment for developers to cater to, which may appear particularly appealing in today s real estate market environment.

5 With nearly 1 million commuters coming into Dubai each day, there is a clear and untapped demand segment for developers to cater to

6 Developers becoming accidental landlords The weakness in the market, combined with the surging supply pipeline has meant that many developers are turning into accidental landlords. Developers burdened with unsold stock in completed developments are looking to the rental market instead. For developers with lingering inventory, the challenge around adjusting sales prices downwards after completion presents challenges, particularly among those investors, or end users, that have already bought property in the schemes in question. In the long run, this may well lead to the creation of small, singleowned tenanted residential portfolios, which will always remain in high demand and will be highly coveted amongst the investment community, bearing in mind of course that these portfolios will be subject to investment valuations. For now, the lettings market remains subdued, with rents weakening in most locations we monitor, underpinned by a rising volume of rental stock. The squeeze on household finances from rising inflation and the impending impact of VAT is curtailing budgets, with a distinct focus on areas perceived to be affordable. Furthermore, general nervousness around the health of the economy stemming from rising regional geopolitical tensions and job security has meant that households are looking to curb outgoings where possible and accommodation is often one of the easiest targets for households to make a saving. Rents recede For now, average residential rents have continued to weaken, falling by 2.3% in the three months to the end of September, leaving the annual rate of change at -9.1%, in line with our expectations for the year. High end apartments in Downtown Dubai, Dubai Marina, the Palm Jumeirah and the DIFC collectively registered the sharpest falls, with rents here declining by 3.4% in Q3. Low end apartments and villas encompassing the city s most affordable locations such as International City, IMPZ, Discovery Gardens, Jumeirah, Sports City and JLT, collectively registered no change in average rents in Q3, highlighting the depth of demand for more affordable rental accommodation. The weak conditions have been exacerbated by a growing volume of recently completed buy-to-let stock, which has helped supply levels edge ahead of demand. This is driving a rise in the number of vacant rental properties, which in turn is causing landlords to become increasingly flexible, with the number of cheques accepted for payment rising across almost all markets. The rental market remains firmly in the favour of tenants, which most landlords have accepted. Average rental values during Q , , ,000 AED / annum 300, , ,000 0 Studio 1 Bed 2 Bed 3 Bed 4 Bed Studio 1 Bed 2 Bed 3 Bed 4 Bed Studio 1 Bed 2 Bed 3 Bed High End Mid Range Low End Villas Low End - The Springs, Jumeirah Village, Al Reem, Falcon City, The Villa, Mid Range - Meadows, Arabian Ranches, The Lakes, Cedre Villas, Up Town Mirdiff, Victory Heights High End - Palm Jumeirah, Jumeirah Islands, Hattan at The Lakes, Hattan at Arabian Ranches Apartments Low end - International City, IMPZ, Discovery Gardens, Jumeirah Village Circle, Jumeirah Village Triangle, Sports City, JLT, Dubai Land Apartments Mid range - Business Bay, The Views, Greens, Dubai Marina (Non emaar), JLT, Green Community-DIP High end - Downtown Dubai, Dubai Marina, Palm Jumeirah, DIFC Villas Apartments

7 Complex factors to keep growth subdued The last three years have been very challenging for Dubai s residential market, with capital values dropping by 16.6% over this period. The introduction of Federal Mortgage Caps and the collapse in oil prices during 2014 have been key catalysts in shaping the market over the last 36 months, alongside the deteriorating global geopolitical backdrop, which has also spooked investors. Furthermore, the strengthening of the US dollar, to which the UAE maintains a fixed peg, has meant that Dubai and the rest of the GCC for that matter, are a lot more expensive places to holiday in, or invest in. The dollar s strengthening profile has also been stimulated by the messy Brexit negotiations in Europe. Still, despite this, the heightening of regional political tensions, driven by the recent Saudi crackdown on corruption, the ratcheting up of tensions with Iran and the lingering diplomatic crisis with Qatar, helps to elevate the safe haven status of the UAE and Dubai in particular to regional investors, which will likely result in a greater inflow of investment from Middle East based investors. Equally of course, traditional global property investment magnets like London, New York and Singapore will benefit from any regional capital flight that arises in the weeks and months ahead from the evolving regional geopolitical landscape. Finally, as we have outlined above, while the Expo 2020 is certainly likely to help lift overall demand for residential property in Dubai, we remain cautious around the true impact the mega event will likely have on the property market given the somewhat luxury-heavy supply pipeline. With these factors in mind, it is our view that residential values will end % to 7% down on 2016, in line with our expectations at the start of the year still has the potential for values to start bottoming out in the second half of the year, but much will depend on the yet to materialise Expo 2020 effect, the strength of the US dollar and a slowing in both the rate of delivery and type of new residential schemes announced, with affordable housing being key to helping the market stabilise. On balance, we expect values to decline by an average of 3% to 5% next year. The rental market is expected to mirror the performance of capital values both this year and in Dubai Marina

8 OFFICE MARKET Net effective rents continue to decline Upper limit rents in just three of the 24 submarkets we monitor declined during Q3, while all other locations have seen rents hold steady in the three months to the end of September. In particular, Dubai Marina (down AED 10 psf) and Bur Dubai (down AED 20 psf) were the weakest performers. In the case of TECOM (Dubai Internet City, Dubai Media City and Dubai Knowledge Park), upper limit rents now stand at AED 190 psf, instead of AED 220 psf during Q2. This reduction is not linked to a weakening in demand for space in this submarket, but is directly a result of the full leasing of The Edge building, which was an anomaly and commanded some of the highest rents here due to its exceptional facilities and amenities. Premium stock in TECOM remains in high demand, with limited vacancy. The Innovation Hub development is being launched at circa AED 180 psf (plus service charge), so this appears to be the new upper benchmark for rents in this area. On an annual basis, Bur Dubai (down AED 30 psf) has experienced the sharpest corrections in upper limit rents over the last 12 months. Meanwhile, Sheikh Zayed Road, the DIFC and Dubai South, all of which registered a AED 20 psf decline in the 12 months to the end of September, rounded off the weakest performing office markets. Relatively speaking, the office market has remained very stable, with 13 of our submarkets seeing no movement in headline upper limit rents during the last year. Well entrenched fragmented market A key feature of Dubai s office market landscape is its fragmented nature. Often, submarkets that are adjacent to one another can have vastly different demand and occupancy levels, with a wide disparity in rents. The DIFC and Business Bay are prime examples of this, with the popularity of the latter remaining curtailed due to the prevalence of strata-owned stock, which most large international occupiers find unattractive. Office rent ranges in Dubai s key submarkets during Q3 Dubai Science Park Bur Dubai Business Bay JLT Deira Sheikh Zayed Road Downtown Dubai DIFC TECOM DIC/DMC/DKV Dubai Design District (D3) non-free-zone Dubai Design District (D3) free-zone One Central non-free-zone One Central free-zone AED psf

9 In the DIFC on the other hand, single ownership buildings still command the highest rents in the city, which stand at between AED 140 and AED 370 psf. And aside from the limited churn of small amounts of space, core DIFC buildings maintain occupancy levels of close to 100%. Outside DIFC owned stock, beyond core DIFC buildings, rents have shown some weakness, although where vacancy rates are sub 5%, they have held up reasonably well. We expect the completion of Gate Avenue in spring 2018 to enhance the attractiveness of many of the more competitively priced peripheral buildings which will eventually be connected into the amenities around the DIFC core. This has prompted developers to move forward with plans to bring forward new space, such as the USD 1 billion ICD Brookfield Tower, which is due to complete in roughly 18 months time. The building is positioning itself as the next generation Emirates Towers, offering unrivalled amenities and facilities that are expected to aid its pre-letting. Similarly, nearby One Central continues to let rapidly, buoyed by occupier demand for larger floor plates in a low-rise, pedestrianised setting, which is unique for Dubai. Building One is fully let and phases 2 and 3 are currently available for prelets, offering a total of 600,000 sq ft. Buildings 2 and 3 are experiencing good levels of interest from prospective tenants, especially those with full floor requirements around 45,000 sq ft, which is unusual for Grade A stock in Dubai. Landlords remain flexible The somewhat static conditions have meant that landlords have had to become more amenable to increasingly demanding tenant requirements. One notable change in the market appears to be around service charges. While these remain non-negotiable, landlords are increasingly opting to split these out from rental charges. While this may allow greater flexibility for landlords who wish to make adjustments to rental rates, it may be a sign of landlords preparing for more challenging conditions ahead, or perhaps a mechanism by which they can shield themselves from the costs associated with sudden changes to building regulations that require retrofits. Where landlords have not accumulated sinking funds for major upgrade works for mature buildings, a more flexible mechanism for raising service charges could be a new emerging trend to watch. In a sign of the pressures building on rents, landlords are increasingly offering extended rent free periods of up to 10 months to attract tenants, particularly to new developments where occupancy levels are low. This has the benefit to the landlord of maintaining higher headline rents which can then be sustained through the life of the lease through fixed escalations and again at lease renewal. Performance of office rents at TECOM (Dubai Internet City / Dubai Media City / Dubai Knowledge Park) AED psf Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Lower limit Upper limit

10 As far as the VAT surcharge on annual leases is concerned, the market appears to have accepted the 5% surcharge, which commences on 1 January Should the weaker conditions persist however, landlords of single ownership buildings may well absorb the 5% surcharge as an added tenant incentive, particularly where take up is low for new developments. A healthy market? Overall market conditions appear relatively healthy at present, with activity at all levels being reported by our commercial teams, ranging from companies expanding, to some downsizing, with consolidation linked deals common across almost all sectors. As we have been reporting throughout 2017, the technologymedia-telecoms (TMT) sector remains amongst the most active at present. In fact, the recent AED 280 million sale of The Edge building in TECOM to ENBD REIT showcases the appetite amongst investors for assets occupied by this ever expanding sector of the economy. The 92,000 sq ft, G+6 building is home to Oracle, Snapchat and McGraw Hill; a very strong, internationally attractive covenant. The depth of demand from the TMT sector has also prompted the Government to announce plans for an AED 2.7 billion e-commerce free zone, Dubai CommerCity, designed to capitalise on the region s e-commerce industry, which is projected to be worth USD 20 billion by 2020, according to AT Kearney. The new free zone will be spread across 2.1 million square feet of land in Umm Ramool and is a joint venture between Dubai Airport Free Zone Authority Wasl Asset Management Group. Flat conditions likely to persist Dubai s office market has been much more resilient than its regional peers, owing to the far more diverse nature of the occupiers in Dubai, which of course is linked to the emirate s heavily diversified economy. While this has meant the emirate s office market has been shielded to an extent from the oil-collapse linked economic slowdown being recorded elsewhere in Middle East, Dubai s office market is intrinsically linked to global economic conditions. With geopolitical tensions seemingly on the rise at a global level, combined with issues such as the tense Brexit negotiations, international blue chip occupiers are increasingly reluctant to commit to new space, or relocate, which has trimmed the level of enquiries we have been recording when compared to this time last year. Still, with the market remaining fragmented and the impending introduction of VAT, office rental rates have held up reasonably well in many submarkets. We are of the view that this resilience will persist as we head to the end of 2017 and into 2018 as well, with any declines likely to be contained at 4% to 5% at most. The main upside risk for the market remains the impact of the Expo 2020 and the potential of the mega event to create fresh demand for office space as companies expand, or set up shop in greater numbers across the emirate to help deliver the city s ambitious construction and infrastructure projects in the run up to Elsewhere, the finance and banking sector remains active in locations such as the DIFC, where our corporate team has been working with an increasing number of new entrants to Dubai establishing themselves in the DIFC. The marginal recovery in oil prices has also prompted a handful of oil and gas firms to expand, suggesting we may be seeing early signs of a turnaround in the sector. The emirate s office market has been shielded to an extent from the oil-collapse linked economic slowdown being recorded elsewhere in Middle East, however the performace of Dubai s office market is intrinsically linked to global economic conditions.

11 Spread of key tech giants across Dubai Dubai South Dubai Investment Park TECOM Downtown Umm Ramool Fetchr Souq.com Apple Namshi Noon.com Uber Amazon Microsoft Twitter IBM Oracle Snapchat Google Facebook Canon 230,000 sq ft 100,000 sq ft 302,000 sq ft 19,000 sq ft 50,000 sq ft

12 For further details contact Murray Strang Head of Dubai murray.strang@cluttons.com Faisal Durrani Head of research faisal.durrani@cluttons.com Richard Paul Head of professional services & consultancy Middle East richard.paul@cluttons.com Paula Walshe Director International corporate services paula.walshe@cluttons.com Cluttons LLP This publication is the sole property of Cluttons LLP and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Cluttons LLP. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Cluttons LLP does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication. 1891