Cost-effective real estate options in Dubai

Tighter budgets as a result of a protracted period of low oil and gas prices and global economic slowdowns, could well turn the mid- to low-range real estate market into a new haven for investors in Dubai, with many now looking for good-quality, affordable property. Indeed Dubai’s real estate market has been witnessing a shift away from the most luxurious apartments, hotels and villas towards the mid- to low-range options in recent years. This has meant more emphasis on projects such as new-build estates on the edge of the city, to increasing activity in the three- and four-star hotel market.

This move has also been supported by better regulation of the sector. “The speculative environment that plagued Dubai’s real estate eight years ago has practically been eradicated,” PNC Menon, group chairman of the Sobha real estate development company, told OBG. “New regulations now ensure compliance and control over developers. Increasing property registration fees to 4% and restricting property sales until 50% of its value has been paid are factors that have helped enhance investor safety.”

Rental Rates

In the residential segment, the most affordable areas of the emirate include Downtown Jebel Ali and Residential City on the southern outskirts, along with Discovery Gardens. To the northeast, Al Warqaa and International City also fall into this category, while in the old centre, Deira and Bur Dubai offer lower prices. North of the airport, Al Nahda, Al Qusais and Muhaisnah are all affordable.

Historically, average sales prices and rents have both been low in these areas. Discovery Gardens, for example, had an average sales price of Dh1250 ($340) per sq foot before the crash in 2008, with this stabilising in the range of Dh720-1000 ($196-272) per sq foot by the third quarter of 2015. In comparison, a high-end area, such as the downtown Dubai International Financial Centre (DIFC), saw average sales price range of Dh1600-2100 ($436-572) per sq foot for the same period. Mid-priced areas, such as Business Bay, had figures in the range of Dh1000-1600 ($ 272-435) per sq foot by the third quarter of 2015. These numbers show an important set of vulnerabilities and strengths. Comparing the 2008 high with the top end of the range in the third quarter of 2015, Discovery Gardens is 20% down, while DIFC and Business Bay were both around 22% down. This would indicate that some lower-end developments were somewhat less vulnerable to the crash than some medium- or high-end areas. When looking at more recent movements in sales prices, the affordable end holds up well, too. Comparing the third quarter of 2014 with the third quarter of 2015, Discovery Gardens was down 3%, Business Bay down 4% and DIFC down 10%. Yet, between the second quarter and third quarters of 2015, Discovery Gardens was up 4%, Business Bay had risen 8% and DIFC down 1%.

Affordable Options

When comparing rental rates, the lower end of the market also does comparatively well. Gulf News reported in January 2016 that average rents for apartments in the Discovery Gardens district were up 3% from mid-2015. Meanwhile, Business Bay saw average rental rates rise 2.7% during the same period. A one-bedroom apartment in Discovery Gardens rented for Dh60,000-75,000 ($16,300-20,400) per year by January 2016, while the same-sized apartment in Business Bay went for Dh80,000-105,000 ($21,800-28,600). Indeed, according to Asteco, the affordable segment outperformed the rest of the market in the third quarter of 2015, although there were some exceptions. While it clearly varies from area to area, overall, there is certainly potential in the affordable market. “We have seen the emergence of a flight to affordability,” Chris Hewett, associate director at management consultancy TRI Consulting, told OBG. “The strong real estate market put increasing pressure on household budgets, resulting in residents relocating to more affordable areas of the city.” Indeed, the appreciating dollar – and thus the appreciating dollar-pegged dirham – sluggish growth in Europe, sanctions against Russia and the declining rouble, along with China’s slowdown and low oil prices, are all adding pressure to spending power. These factors are especially pronounced given that the emirate is so globally connected, serving as a major international hub for logistics and finance, as well as a headquarters for many prominent oil and gas giants.

Travel On A Budget

While the factors noted above affect the residential market, they also have an impact on the hospitality segment, with a shift towards greater affordability expected to appear in the emirate’s hotel pipeline. Dubai is renowned for its luxury establishments, with a concentration on the high end producing an “inverted pyramid” of hotel supply. This is all too apparent in the average cost of staying a night in the emirate. Dubai also saw its average daily rate fall 11.6% to Dh833.78 ($227) in early 2016, according to STR Global.

Given that development of the tourism sector is one of emirate’s priorities, particularly in the run up to Dubai Expo 2020, this has led to a rethink by the government, which now provides a package of incentives for the construction of three- and four-star hotels.

Over the next few years, there is expected to be a surge in the number of hotel rooms available, with the mid-priced options expanding. Figures from JLL real estate consultancy show a total supply of 65,000 keys in the emirate as of the second quarter of 2015, with an additional 3000 keys by the year’s end. In 2016, 8500 more rooms are due to be added, followed by 10,100 in 2017 and 9300 in 2018.

According to JLL, of the 65,000 keys available in the second quarter of 2015, 44% were five-star rated, with around 29% three-star or less. The Department of Tourism and Commerce Marketing had earlier set a target of 35,000 new keys in the three- and four-star segment, a target that was approximately 70% fulfilled within the first seven months of its announcement in late 2013. Of the remaining hotel keys coming on-stream in the second half of 2015, around 50% are in the three-star-or-less segments.

Accommodating Options 

The flight to affordability may already be having some results. During the first eight months of 2015, Dubai slipped to fourth place in the global room rate index, at $223, with Hong Kong nabbing third place. In terms of revenue per available room, however, the rate was still the highest in the world in May 2015, at $228, given high occupancy rates – 85.7% in the first quarter of 2015.

One concern that accompanies this new hotel building, however, is that it stimulates demand for even more affordable housing. Most of the people working in the new hotels will be low-income expatriates, with this market segment also requiring accommodation. Indeed, given the total number of new rooms currently under construction or in the pipeline, an additional 20,000 employees will need to be hired, according to some estimates.

“The low end is where there are accommodation shortages,” John Allen, Asteco’s director of valuation and advisory, told OBG. “Rental demand in this sector is extremely strong and likely to remain so with the increase in construction activity related to the new airport and Dubai Expo 2020 and the increase in the supply of schools, hospitals and hotels projected in the next few years.” This dovetails with another development in the residential segment, namely affordable housing further out from the city centre. In recognition of the growing need for this, Dubai Municipality has ordered the construction of housing aimed at those earning Dh3000-10,000 ($817-2720) a month in three areas: Muhaisnah 4, and Al Quoz 3 and 4. These should accommodate up to 50,000 people, while further areas for low-income tenants are also planned. At the same time as making this announcement, the municipality also defined “affordability” for the first time, saying that it meant housing aimed at those earning between the above figures.

Unique Challenges

Other areas expected to see take-up in new affordable housing include developments around the new Dubai World Centre airport, the Dubai Expo 2020 venue site and the new theme parks due for construction in the Jebel Ali area. Developing affordable housing in these areas does pose some challenges, however. First, there is the issue of whether developers will construct such housing on land allocated to them. The municipality has stated that its role is only to allocate land and set guidelines, rather than to enforce particular developments. The market itself will thus likely present the biggest challenge to developers, as demand for affordable housing – and its profitability – determines construction. A second challenge is in making sure that the housing doesn’t jump too far ahead of the infrastructure.

This is as true at the affordable end as at any other, with investment in this longer-term view also a key part of Dubai’s continued and future market success.