The Dubai Real Estate Market Q3 2018 Dubai
Dubai 03 Market Summary Cityscape remains a good barometer of sentiment towards the Dubai real estate market. This year s Cityscape Global event (held in Dubai at the beginning of October) saw very few new launches, with most developers focussing on the sale of existing inventories by offering increasingly generous payment terms. The UAE cabinet recently approved the largest federal budget in recent history (AED 60.3 billion), with more than half of this total allocated to education and social development. The increase in government spending (supported by increasing oil prices) will be a positive to the real estate sector in the medium term. However, all sectors currently remain in the late downturn stage of their cycle, with further declines in rents and sale prices likely over the next 12 months. The office market has been generally subdued, with rentals decreasing, as well as increasing incentives for tenants to lease the growing available supply of new and existing (second hand) space. The growth of flexible space is an emerging trend that could disrupt the office market going forward. The residential market has continued to soften with single digit declines in both sale prices and rents during Q3 2018 despite recent government measures to inject confidence in the market by introducing 10 year residency visas for certain categories of retiree. The lack of new project launches at Cityscape reflects the subdued investor sentiment and prices are likely to decline further over the next 12 months. Retail remains the most challenged sector of the Dubai market and continues to experience a downturn in performance. More malls are now offering leasing incentives and even turnover only leases, to retain existing tenants and attract new ones. While the longer term prospects for the retail sector remain positive, this sector is likely to decline further in the face of very high supply levels over the next 2 years. Despite softening in the Hotel market, Dubai was one of the world s top 10 performing markets in 2017 (the latest period for which data is available). Dubai recorded an average RevPAR of USD177 for the full year, ahead of other major global cities such as London (USD 156), Tokyo (USD151) and Sydney (USD164). Dubai Prime Rental Clock Rental Growth Slowing Rental Growth Accelerating Rents Falling Retail Rents Bottoming Out Hotel Rental Growth Slowing Rental Growth Accelerating Rents Falling Rents Bottoming Out Hotel Residential Residential Office Q3 2017 Retail Office Q3 2018 * Hotel clock reflects the movement of RevPAR (Revenue per available room: ADR * occupancy rate) Note: The property clock is a graphical tool developed by JLL to illustrate where a market sits within its individual rental cycle. These positions are not necessarily representative of investment or development market prospects. It is important to recognize that markets move at different speeds depending on their maturity, size and economic conditions. Markets will not always move in a clockwise direction, they might move backwards or remain at the same point in their cycle for extended periods. Source: JLL
05 Office Hot Topic Following global trends, Dubai continues to see a growth in the amount of flexible office space (defined as that available on leases of less than 1 year), with around 65,000 sq m of space currently being offered in over 50 projects. This sector has been constrained by the regulatory environment (with supply in Dubai lagging behind that in other global office markets). However, the relaxation of the legislative environment could result in a rapid increase in the supply of flexible space in coming years. In May 2018, the UAE approved a new investment law that could allow 100% foreign ownership of companies in specific sectors of the economy to operate outside of free zones by end of 2018. Once implemented, this law is likely to increase FDI and demand. components of their projects on hold as current market conditions remain in favour of tenants. Notable projects expected to be delivered by the end of the year include; Amesco Tower in JLT, DuBiotech Headquarters and Phase I of Innovation Hub in Dubai Internet City. tenants trying to reduce rental costs and opting for more flexible space. With a significant amount of supply available in both the primary and secondary market, tenants have access to more choices and the market is likely to move further in their favour over the next 12 months as vacancies increase further. Supply The third quarter saw the completion of the HSBC headquarters in Downtown Dubai, along with The Opus in Business Bay and The Lynx in Dubai Silicon Oasis, collectively adding around 41,000 sq m of GLA. Although there is currently more than 138,000 sq m of office GLA under construction and due for completion by the end of the year, it is likely that some developers will delay or place the office Annual supply Stock Office 04 2020F 9.4 2019F 9.0 2018F 8.9 Q3 2018 8.9 2017 8.8 2016 8.6 2015 8.5 8.0 Consolidations are continuing across various sectors of the market, with 0.08K 0.39K 0.14K 8.2 8.4 8.6 8.8 9.0 Million sq m of GLA Source: JLL 9.2 9.4 9.6 9.8
06 07 Office Vacancy Rate (Weighted Average) 8% 10% Performance With the office market moving further in favour of tenants, landlords continue to offer more attractive terms. These include reductions in rental rates, rent-free periods, fit-out contributions and other concessions, all in an effort to retain existing and attract new businesses. As a result, rents have declined by almost 13% to reach AED 1,638 per sq m. This trend is likely to continue in the short-term, given the increased availability of Grade A stock in the market. Another sign of an increasingly flexible leasing market is the announcement of more dual licensing arrangements, allowing free zone and on-shore licensed companies to lease space in the same project. We are aware of 8 dual licensed projects, offering a combined 1.3 million sq m of office space and this is likely to increase as more projects are granted dual license status. Q3 2017 Q3 2018 Rents (AED / sq m) Q3 2017 Q3 2018 1,892-13% 1,638 Source: JLL
09 Residential Hot Topic Madinat Jumeirah Living was launched by Dubai Holdings during Cityscape. This will be the second major freehold project in the beach-side suburb of Jumeirah after the launch of La Mer by Meraas. Both projects mark the introduction of freehold projects in a traditional non- freehold location. We expect more announcements of other freehold units in non-freehold areas in the coming months. Most developers focussed on selling existing inventories at Cityscape and refrained from major new launches. apartments (300 units) in Townsquare by Nshama. Major villa completions in Q2 included the Sama community in Arabian Ranches 2 by Emaar. Al Khail Heights, Hayat townhouses in Townsquare and apartment buildings on Bluewater Island. Looking ahead, a total of 96,000 units are currently scheduled to complete before the end of 2020, but we remain cautious of their timings, with delays expected in many projects. Supply Residential stock is estimated at approximately 513,000 units at the end of Q3 2018. The majority of completions during the third quarter were apartments (95%) with the largest completions including Burj Vista (640 units) in Downtown, Damac Heights (640 units) in Dubai Marina, Glitz 3 (350 units) in Studio City and Al Zahra Annual supply 2020F 591 2019F 536 2018F 513 Q3 2018 513 2017 497 2016 480 2015 461 Stock Residential 08 250 A further 23,000 units are currently under construction and scheduled for delivery by the end of the year. Major expected completions include 40 56 23 300 350 400 450 500 Thousand units Source: JLL 550 600 650 700
10 11 Residential Apartments (% change) Performance Sales Sales Rent Rent Sale and rent prices continued to decrease over the quarter for both apartments and villas. Apartment prices have decreased by 7%, with rents decreasing around 10% compared to the same period last year. Prices and rents have also fallen in the villa sector, by 8% and 9% respectively when compared to the same period last year. According to data from Dubai Land Department (DLD), the total value of sales transactions excluding land stood at AED 12.3 billion till Q3 2018, which represents a decline of 32% compared to the same period last year. -2% Q-o-Q -7% -3% Q-o-Q -10% Villas (% change) Sales Sales Rent Rent -2% Q-o-Q -8% -0.1% Q-o-Q -9% Source: JLL & REIDIN
13 Retail Hot Topic Developers are becoming increasingly flexible on lease terms, with some offering contributions to capital expenditure to smaller retailer groups and others agreeing to turnover only leases. This represents a major shift in behaviour in the Dubai market which has traditionally been dominated by developers who have adopted a take it or leave it approach. 350,000 sq m of GLA), with notable projects including the Night Souk on Deira Islands, The Pointe on Palm Jumeirah and The Souq at Culture Village. We remain cautious of the timings of many of these projects as delays have been experienced in the past and market conditions remain subdued. Looking ahead, more than 1.1 million sq m of retail GLA is expected to be delivered in Dubai in 2019 / 2020. Notable projects in the pipeline include the Nakheel Mall on Palm Jumeirah, Al Khail Avenue Mall in Jumeirah Village and Dubai Hills Estate Mall. The majority of the future supply is in super regional malls (65%), or regional malls (26%). Supply The third quarter of 2018 saw the completion of Badrah Pavilion Community Centre in Nakheel s Jebel Ali Waterfront development (adding around 5,000 sq m of retail GLA) bringing the total stock to approximately 3.7 million sq m. The remainder of 2018 is expected to see much higher completion (around Annual supply Stock Retail 12 2020F 4.6 2019F 4.0 2018F 3.7 Q3 2018 3.7 2017 3.6 2016 3.4 2015 3.1 1.0 528K 576K 353K 1.5 2.0 2.5 3.0 3.5 Million sq m of GLA Source: JLL 4.0 4.5 5.0 5.5
14 15 Retail Vacancy Rate 12% 16% Performance With retail market continuing to be soft, discounts are being offered on existing and on new leases being signed. Rents in super regional and regional malls declined by around 5% and 8% when compared to the second quarter of 2018. Smaller Neighbourhood and Community malls have generally recorded greater declines than in the larger centres. Developers are offering shorter and more flexible lease terms to even smaller retailers taking into account the drop in sales. Luxury brands have been affected more by the drop in sales when compared to the more affordable brands. As the retail market has softened over the past year, market wide vacancies have increased from 12% in Q3 2017 to 16% in Q3 2018. Rents and vacancies are expected to remain under pressure due to the large supply scheduled to enter the market in the next two years. Q3 2017 Q3 2018 Change in Average Rents Regional Regional Super Regional Super Regional -5% to -8% Q-o-Q -17% -3 to -5% Q-o-Q -19% Source: JLL
17 Hotel Hot Topic More than 50 million transit passengers are passing through Dubai airports annually, while only 10% get out of the airport to explore the city. The latest government initiative that was introduced in July provides a free 48 hours transit visa for layover passengers with an option to extend the visa for additional 96 hours for a minimal fee of 50 AED. Hotels and tour operators are now in process of creating special packages to capture these short-stay travelers. This step will provide a boost in the hospitality industry and is expected to increase the number of travelers who are ready to discover and stay in Dubai before their final destination. enter the market by the end of the year, however some projects are likely to be delayed. Major hotels in the pipeline for this year include W the Palm, Mandarin Oriental Jumeirah and Caesar Hotels in Bluewaters Island. highest levels of hotel rooms per capita of any global city. Major global hotel chains have recognised the importance of the Dubai market as an entry point to the Region due to the city s visibility and connectivity and are increasing their presence in the city, with a further 25,200 rooms scheduled to complete by 2020. Supply A further 1,400 rooms were added to the market in the third quarter of 2018, bringing the total stock of quality hotel rooms in Dubai to almost 88,100 keys. Hotel openings included Hampton by Hilton (420 keys) in Qusais, Hilton Garden Inn (336 keys) in Jaddaf and Grand Millennium Business Bay (251). A further 4,200 keys are expected to Annual supply Stock Hotel 16 2020F 107,800 2019F 92,400 2018F 88,100 Q3 2018 88,100 2017 83,300 2016 78,600 2015 70,900 70,000 75,000 Dubai is by far the largest hotel market in the Middle East, with one of the 5,600 15,400 4,200 80,000 85,000 90,000 95,000 Number of Hotel Rooms Source: JLL 100,000 105,000 110,000 115,000
18 19 Hotel Occupancy 75% 74% Performance Hotel performance remains under pressure, with the YT August RevPAR (USD 127) being the lowest level seen in the last decade. Occupancy levels declined by 1.3 basis points compared to the same period last year reaching 74%. Similar decreases were seen in ADRs, with YT August being recorded at USD 171, a 5% decrease compared to the same period last year. Dubai is considered to be one of the top tourist destinations globally, attracting visitors from all parts of the world. According to The Department of Tourism and Commerce Marketing (DTCM), during the first eight months of 2018, Dubai welcomed 10.4 million visitors, with major source markets including Western Europe (21%), GCC (19%) and South Asia (17%). YT August 2017-1.3 bp YT August 2018 ADR (USD) USD181 YT August 2017-5% USD171 YT August 2018 Source: STR
20 21 Property Clock Definitions 9 O clock Indicates the market has reached the rental growth peak. While rents may continue to increase over coming quarters the market is heading towards a period of rental stabilisation. 12 O clock Indicates a turning point towards a market consolidation / slowdown. At this position, the market has no further rental growth potential left in the current cycle, with the next move likely to be downwards. 6 O clock Indicates a turning point towards rental growth. At this position, we believe the market has reached its lowest point and the next movement in rents is likely to be upwards. 3 O clock Indicates the market has reached its point of fastest decline. While rents may continue to decline for some time, the rate of decrease is expected to slow as the market moves towards a period of rental stabilisation. Office The supply data is based on our quarterly survey of 69 sub-markets, starting from 2009.Our supply figures exclude government owned and wholly occupied buildings. Completed buildings refer to those handed over for immediate occupation. Future supply is based on projects in the under construction phase. Central Business District (CBD) includes DIFC, Downtown, DTCD and Sheikh Zayed Road as far as Interchange 1. Weighted Average Grade A rents represents the top open-market net rent (exclusive of service charge) for a new lease that could be expected for a notional office unit of the highest quality and specification in the best location in a market, as at the survey date. Data relates to headline rents, exclusive of incentives. Vacancy rate is based on estimates from the JLL Business Office and Business Space team. It represents the weighted average rate across a basket of buildings in the CBD that make up around 80% of the CBD supply and 15% of the total current supply. Residential The supply and stock data has been updated based on data from the Dubai Government. Our quarterly survey now covers 158 sub markets (the entire Dubai market) starting from 2010. This data excludes labour accommodation and local Emirati housing supply. Completed buildings refer to those handed over for immediate occupation. Future supply is based on projects in the under construction phase. Residential performance data is based on the REIDIN monthly index. REIDIN Dubai Residential Property Price Indices (RPPIs) use monthly sample of offered/ asked listing price data and land registry price data (transaction data). Index series are set at 100 starting at the beginning of each data set. Retail Classification of Retail Centers is based upon the ULI definition and based on their Gross Leasable Area (GLA): Super Regional Malls have a GLA of above 90,000 sq m Regional Malls have a GLA of 30,000-90,000 sq m Community Malls have a GLA of 10,000-30,000 sq m Neighborhood Malls have a GLA of 3,000-10,000 sq m Convenience Malls have a GLA of less than 3,000 sq m Supply data is based on our quarterly survey of 89 sub-markets, starting from 2009. Future supply is based on projects in the under construction phase. Malls are categorized based on their turnover levels. Primary Malls are the best performing malls with highest levels of turnover. Secondary Malls are the average performing malls with lower levels of turnover. Average rents represent the top open market net rent expected for a standard in line unit shop of 100 sq m in a basket of regional and super regional centres. Given the variation in rentals, we quote % change for retail rents rather than actual figures. Vacancy rate is based on estimates from the JLL Retail team, and represents the average rate across standard in line unit shops at super regional malls. Hotels Hotel room supply is based on existing supply figures provided by DTCM as well as future hotel development data tracked by JLL. Room supply includes all graded supply and excludes serviced apartments. STR performance data is based on a monthly survey conducted by STR Global on a sample of more than 55,000 rooms across Dubai. Definitions
22 Dubai Office 403, Building 1 Emaar Square Sheikh Zayed Road PO Box 214029, Dubai, UAE Tel: +971 4 426 6999 Fax: +971 4 365 3260 For questions and inquires about the Dubai real estate market, please contact: Dana Williamson Head of Corporate Solutions & Tenant Representation, MENA dana.williamson@eu.jll.com Amr El Nady Head of Hotels & Hospitality, MENA SVP, Global Hotel Desk amr.elnady@eu.jll.com Faraz Ahmed Manager, Research, MENA faraz.ahmed@eu.jll.com John Fekete Head of Consulting, MENA john.fekete@eu.jll.com Craig Plumb Head of Research, MENA craig.plumb@eu.jll.com Ben Jackson Head of Project & Development Services, UAE benjamin.jackson@eu.jll.com Dana Salbak Associate, Research, MENA dana.salbak@eu.jll.com With MEA offices in: Abu Dhabi, Cairo, Riyadh, Jeddah, Al Khobar, Johannesburg, Nairobi, Lagos and Casablanca. COPYRIGHT JONES LANG LASALLE IP, INC. 2018. This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.