Dubai's real estate market poised for recovery

The trajectory of Dubai’s real estate market is expected to turn upward in 2018, after a period of slowing growth. In April 2017 global property consultancy firm Cluttons announced that the emirate’s property market would likely stabilise and potentially enter a new period of growth before the end of the year. Recent analyses by other property consultancies and management firms, including JLL, Knight Frank, Cavendish Maxwell and Asteco, have been similarly upbeat about the medium-term potential for market recovery in Dubai, albeit cautiously so. Forecasts from local real estate analysts and international players alike foresee an improving sector outlook by the end of 2018 at the latest.

Potential Turnaround Ahead

The emirate’s property market is widely understood to have reached a new degree of maturity in recent years, in large part as a direct result of the downward pressure that has negatively affected certain parts of the sector since late 2014, when oil prices began to fall. “We are broadly optimistic about the residential property market and the hotel market, in particular,” Craig Plumb, head of research for the MENA region at JLL, told OBG in September 2017. “Given long-term rising demand for housing and an expected influx of tourists and other visitors during Expo 2020 and afterwards, both of these areas will support growing supply for some time to come.”

This anticipated turnaround follows a period of declining returns for many property developers, contractors and management companies during 2015-16. Pressure in the real estate market has been largely attributed to the sector’s close ties to a range of macroeconomic forces, including the price of oil, GDP and unemployment. International oil prices have been down since mid-2014, and GDP growth in the UAE as a whole fell from 3.9% in 2015 to 3% in 2016, according to the IMF’s World Economic Outlook database for October 2017. With official data for 2017 not yet available at the time of press, the IMF’s estimate for the year drops to 1.3%. The fund forecasts renewed strength of 3.4% GDP growth for 2018, reflecting the rising price of oil and broad improving sentiment across the country.

Dubai’s real estate market has matched these macroeconomic trends for the most part. According to JLL, at the end of 2015 rents were falling in the residential and hospitality segments, and rental growth was slowing in the retail segment. By the end of 2016, residential rents were bottoming out, while retail and hospitality rents continued to fall. At the end of the third quarter of 2017, rental rates for retail had fallen further and the hotel segment had joined residential properties with rents bottoming out. However, JLL noted in its third-quarter report that market sentiment in Dubai is on the upswing, as evidenced by sales activity, multiple project announcements and presentations at the Cityscape Global event in September 2017.

Market History

For the past decade and a half, Dubai has been one of the leading real estate markets in the Middle East – both in terms of the volume and size of development projects under way, and as measured by innovation and architectural scope. The city is home to a number of iconic structures, including the tallest building in the world, the Burj Khalifa, which was completed in 2010. The skyscraper was widely regarded as a cap on a decade of ambitious growth, underpinned by strong government support and a rapidly expanding private property sector. Indeed, prior to the new millennium, Dubai was largely a closed market, with foreign ownership limited to leaseholds negotiated individually with the government, and development carried out primarily by locally owned firms for UAE nationals.

In 1999 Dubai’s leaders announced that non-UAE nationals would be allowed to purchase property on a freehold basis in select geographic areas across the city. In 2001 and 2002 the government acted on these plans, introducing a law enabling foreigners to purchase freehold property in a handful of development projects, as well as allowing non-UAE citizens to purchase 99-year leases at other locations.

The announcement jump-started both development and the property investment market, the latter of which was driven by GCC nationals and investors from several other countries, including Russia and India. Popular freehold areas in Dubai during this early period included plots in The Palm Island, The World Islands, Dubai Marina, the Al Barsha neighbourhood, Jebel Ali and Emirates Hills.

The authorities’ 2002 law was finalised and passed in 2006, enabling non-UAE citizens to purchase property in the emirate – further fuelling the entry of foreigners to Dubai and driving the property investment segment. During this period the project pipeline grew exponentially, with prices increasing apace. Indeed, between 2002 and 2008 prices in high-end areas such as Dubai Marina rose by around 180%.

The 2008-09 international financial crisis, which began with the failure of investment banks in the US, resulted in a market correction in Dubai. Indeed, property values fell by a considerable amount in the year following the crisis, and by 2010 real estate sales prices in most areas were only a fraction of what they were at the market peak of 2008. Rental prices also dropped off during this period, albeit not quite to the same extent as sales.

Recovery & Results

In the wake of the downturn, both Dubai and the federal UAE government set out to assist developers and owners who were left with devalued property, and to ensure that the emirate was better insulated against similar events in the future. The Dubai Land Department (DLD), the Central Bank of the UAE, and the Securities and Commodities Authority of the UAE set out to enact new, tighter rules and regulations for developers and investors alike. The market began to recover some of its lost value in 2011 when residential villas, in particular, registered increases in sales and rental prices for the first time since the downtown.

In 2012 the authorities introduced a range of new regulations, including the Code of Corporate Governance for Developers and the Investor Protection Law. With these relatively stringent rules in place, the market once again entered a growth phase. Steady expansion continued largely unabated until the price of Brent crude dropped off in mid-2014, putting pressure on economies around the world, but particularly in the oil-rich Gulf. Dubai is, to a certain degree, well insulated against oil price volatility, as oil revenues currently contribute a small percentage to the emirate’s GDP (see Economy chapter). Nonetheless, the regional economic decline has had a somewhat prolonged negative impact on Dubai’s real estate market, as purse strings around the region have tightened. However, indicators suggest that as of mid-2017 falling property prices and slow growth have largely run their course, with recovery expected to begin in earnest in 2018.

Oversight & Regulations

The regulations put in place in Dubai in the years since the 2008-09 downturn have worked to turn the emirate into a regional leader of real estate oversight. For instance, to dissuade investors from speculating in property before work has even begun, regulations are in force that prevent a new project from beginning until the land has been paid for in full and a 20% construction guarantee has been put forward.

The DLD, meanwhile, has taken to carefully monitoring ongoing projects, and has been given more power to intervene in the market. For example, DLD-managed escrow accounts serve to ensure that off-plan property payments from end-users are only forwarded on to developers once a contractually obligated amount of work has been completed. “Developers are paying much more attention to financing plans now,” Lynnette Abad, a partner at the Dubai office of Cavendish Maxwell, told OBG. “While before many companies aimed to flip properties, now they are focused on handing them over to end-users on time and on budget.”

Many of these new rules were put in place during the 2012-14 period. In 2013 Dubai’s Real Estate Regulatory Agency (RERA) – the DLD’s regulatory arm – raised transfer fees on property transactions from 2% to 4%. While this is still considerably lower than the MENA average of nearly 7%, it has had the intended effect of dampening the ease of transferring real estate between investors and end-users, for instance. Another key regulatory change carried out in 2013 was the decision by the Central Bank of the UAE to limit the maximum loan-to-value (LTV) ratios for both UAE nationals and foreigners. Though some market watchers expressed concerns about the impact on development activities, the central bank set the maximum LTV ratio for off-plan purchases at 50% of the value of the property (see analysis).

Dubai witnessed a surge in off-plan transactions during 2017, which suggests that the regulations have not resulted in slower real estate development or declining interest among purchasers. “Prior to 2006, the regulations were very limited,” Jimmy Haoula, managing partner of the Dubai-based law firm BSA Ahmad Bin Hezeem & Associates, told international press in September 2017. “Even in 2006 the laws that passed were not very mature. We’re in a much stronger position today than we were then.”

Investor Rights

In August 2017 the DLD and Al Tamimi & Company, a law firm that operates across the Middle East, jointly issued a document titled “Know Your Rights”, which aims to ensure that real estate investors in Dubai are aware of the emirate’s property sector regulatory framework. The document details the history of real estate legislation in Dubai, starting with Law No. 7 of 2006, which continues to serve as a foundational piece of regulation today. It further outlines Law No. 14 of 2008, which pertains to mortgages; Law. No. 16 of 2007, the establishment of RERA; and Law No. 7 of 2013, which laid out the responsibilities and functions of the DLD. The document also lists designated areas for foreign ownership, including Downtown Dubai, Old Town, the Burj Khalifa, Business Bay, Dubai Motor City, Dubai Investment Park and Jumeirah Beach Residence, in addition to those stated previously.

In September 2017 the DLD announced that it would soon issue new regulations governing timeshares and real estate investment trusts (REITs), the latter of which have seen considerable growth in recent years. Since Emirates REIT was listed on the Nasdaq Dubai in 2014, a handful of additional trusts have been set up in the emirate, and another REIT – from Emirates NBD – was listed on the local stock exchange in March 2017 (see analysis).

Investment & Financing

According to a regional survey conducted by global property consulting firm Cluttons, in 2017 Dubai overtook London to become the most preferred property investment location in the world. In 2016 more than 22,800 foreign investors from 136 countries bought property in the emirate, with total foreign investment in real estate valued at nearly Dh44bn ($12bn) for the year, according to data from the DLD. This accounts for a significant percentage of the total Dh259bn ($70.5bn) value of overall real estate transactions that took place in Dubai in 2016. Among the property buyers who purchased the most that year were Indian, British and Pakistani investors. Chinese investors have become increasingly important to the sector in recent years as well, and are expected to account for a growing percentage of total property investment in the years to come.

Despite the recent period of slow growth, real estate returns in Dubai have topped those of other major cities around the world. According to real estate information company Reidin and private equity firm Global Capital Partners, in the decade to 2016 Dubai real estate assets have returned nearly 120% in rents and capital gains, as compared to 75% in London and 63% in New York. The bulk of Dubai returns have taken the form of rental increases.

Dubai’s strong reputation as a destination for property investment has had knock-on effects across the banking and financial services sector, as evidenced by the doubling of mortgage activity as a percentage of real estate sales between 2010 and 2017. As of early 2017 some 55% of property sales involved mortgage financing, while cash-only sales – a popular option during the 2007-08 boom years – accounted for just 30-40% of total transactions. The rising use of mortgages to fund property acquisition has had the effect of slowing down the pace of transactions across the market. Indeed, while a property transfers within 15-30 days in a cash transaction, a mortgage-backed sale generally requires twice as long. Furthermore, in 2016 private developers attracted more mortgage financing than government-linked players, which was widely regarded as an indication of the good health of the private sector in the emirate. “The property market in Dubai has increasingly conformed to global norms, deploying standardised financing vehicles and catering to end-users,” Nick Carnell, a partner at the Dubai office of UK-based law firm Taylor Wessing, told OBG.

Sector Organisation

Even as the private sector has become increasingly important in recent years, a handful of government-linked players retain a considerable degree of influence over the real estate industry. Some of the large Dubai-government-owned holding companies – including Dubai Holding, Investment Corporation of Dubai and Dubai World – manage extensive portfolios of developers and properties alike. These companies are responsible for many of the large-scale projects under way in the emirate at any given time.

Similarly, the big-three property development firms – Emaar Properties, Nakheel Properties and Dubai Properties Group – are all owned by or linked to the emirate government. The close ties between the authorities and the real estate sector have allowed Dubai to continuously implement ambitious, coherent projects of a large scale over the past 20-30 years, based on a series of government-designed master plans. Early versions of these plans, such as the 1960 master plan and its successor, the 1993-2012 master plan, were focused primarily on improving transport infrastructure and housing supply, largely aimed to benefit UAE nationals.

More recently, Dubai’s master plans have become more ambitious still, and have been designed with particular events and a wide range of residents in mind. In 2012, for example, Dubai Municipality launched the Dubai 2020 Urban Masterplan, which sets new urbanisation and zoning parameters in light of population and economic growth, while ensuring sustainable development practices in construction works. The plan – which was prepared by the Dubai Urban Planning Steering Committee in conjunction with real estate consultancy AECOM Middle East – includes four phases, roughly corresponding to a period of review and analysis; a time for forecasting and planning; a period of preparation; and the implementation of legislative changes, contract issuance and awarding. Any development that has taken place since 2012 has had to account for the zoning blueprint outlined as part of the 2020 plan.

In 2013 – soon after the launch of the 2020 programme – Dubai was awarded hosting rights for Expo 2020, serving as the first Middle Eastern location for a global exposition. Consequently, much of the development planning and sector activity since then has been aimed at ensuring Expo 2020 is a success (see Tourism chapter). More recently, the emirate has begun to look beyond the event to how the resulting space will be utilised. In September 2017 the government announced a legacy plan for the Expo 2020 site, consisting of a new residential and business area to be called District 2020. Plans for the new neighbourhood include 65,000 sq metres of housing, 135,000 sq metres of office space, almost 45,000 sq metres of parks and green areas, and 10 km of bike paths. District 2020 is also expected to house new cultural, educational and entertainment facilities, all in LEED-certified sustainable buildings.

Residential Development

As of mid-2017 sale prices for apartments and villas were stabilising, according to JLL, after two years of declines. From mid-2015 to mid-2016 sale prices decreased by 5-10%, depending on location and build quality. However, in the 12 months to mid-2017, prices dipped by less than 1% – an indication of recovery. According to JLL forecasts, sales prices will rise slightly through mid-2018, though to a large degree this outlook depends on the amount of new supply that comes on-line until that time. While a number of new areas are currently under development – notably the Dubai South district encompassing Al Maktoum International Airport (DWC) and the Expo 2020 site – sales and rental demand for residential property remains concentrated in well-established neighbourhoods that are easily accessible by Dubai Metro stops, such as Jumeirah Lake Towers and Dubai Marina.

As of the end of 2016, Dubai was home to approximately 475,000 residential units in total, up from 460,000 at the end of 2015 and 450,000 the year before. In the first nine months of 2017, 12,000 new units were delivered, pushing the total supply to 487,000. According to JLL, an additional 18,000 units were expected to be delivered by the end of 2017, though historical realisation rates suggest that only about half of these will be completed on schedule. An additional 34,000 units are due to be finalised in 2018, followed by 28,000 in 2019.

The medium-term outlook suggests that Dubai may see oversupply in the coming years. Some 78,000 residential units with completion dates before 2020 were reportedly under construction in the emirate as of mid-2017. This number represents growth of 16% on the current supply, as compared to a forecast of 3.5% annual population growth over the same period. “Residential sales prices and rental rates have shown gradual but consistent declines of 14% and 18%, respectively, since the last peak in mid-2014,” John Allen, director of valuation and advisory at the Dubai office of real estate firm Asteco, told OBG. “With the increase in supply envisaged over the next two to three years, our opinion is that rental rates in particular and sales prices to a lesser extent will continue to come under downward pressure. Tenants will have an extensive choice of properties in both established and new communities, and buyers a range of both off-plan and completed properties.”

Dubai South

While low residential prices are expected to contribute to the market turnaround, it is far from the only factor at play. Another key driver that has helped reinvigorate the market has been Dubai South, a 145-sq-km master-planned city situated inland from Jebel Ali Free Zone on land that has remained relatively underdeveloped as compared to other parts of the emirate. The move south is closely related to preparations for Expo 2020 – the event site, which is currently under development, is located at the heart of Dubai South, and has been designed to serve as an important centre even after the exposition has finished.

Also driving development in Dubai South is DWC, which borders the new neighbourhood. The transport authorities are planning to shift the bulk of air cargo and passenger traffic from Dubai International Airport to DWC over the next decade (see Transport chapter). In the first seven months of 2017 Dubai South reported an increase in the number of off-plan sales of 285% compared with the whole of 2016. This is understood to be only the beginning of rising interest in the area during the run-up to Expo 2020.

Shifting Spaces

Upon completion, Dubai South is expected to house nearly 1m residents and provide office space for a 500,000-strong workforce. Since development began to take off in the area in 2014, the majority of property sales have been in the affordable segment of the market, mainly comprising one- and two-bedroom apartments, which hints at another substantial shift taking place in Dubai.

Sales of high-end residential units have remained buoyant, but this is largely because many developers have reduced the number of luxury spaces they are designing in favour of middle-income or affordable units. According to Reidin, between 2015 and mid-2017 at least 60% of off-plan sales in Dubai South were for one- and two-bedroom units within the affordable segment of the market, while 76% of the overall transactions taking place in this area were below Dh1m ($272,000). Many of Dubai’s major developers are involved in the construction of neighbourhoods and various buildings in Dubai South, including Emaar, DAMAC Properties, MAG Property Developments, Deyaar Development and Lootah Real Estate Development.

Office Space

The commercial property segment has taken a slightly different track than the residential, hospitality and retail segments in recent years. While developments in the latter areas reported falling rents, slowing demand and, consequently, lower prices, the office segment has stagnated but remained relatively stable until recently. According to JLL, over the course of 2016 rents in the central business district grew by just two dirhams, from Dh1946 ($529.70) per sq metre to Dh1948 ($530.25) per sq metre. This market stability was surprising, given the considerable downward pressures on the emirate’s economy. Indeed, many local firms have been forced to cut expenses in recent years, or to consolidate their business activities into high-value areas. Market softening began in 2017, however, when rents in the central business district fell to Dh1892 ($515) by the third quarter.

At the same time, some 129,000 sq metres of new gross leasable area (GLA) came on-line in Dubai in 2016 and another 134,000 sq metres were added in the first nine months of 2017. The fact that new space has been easily absorbed into the market speaks both to the relatively strong ongoing demand for office space in the emirate, and – more broadly – to Dubai’s reputation as a regional business centre. Some industry players have suggested that, given the forecast demand and growing reputation of the Middle East as a destination for all types of businesses, Dubai remains undersupplied in terms of office space. “Office development has not been a major focus of developers in Dubai in recent years,” Asteco’s Allen told OBG. “However, recent announcements indicate an increased level of activity from developers in this segment, which will result in a rise of Grade-A office supply in the medium term.”

As of the end of the third quarter of 2017, the emirate was home to 8.8m sq metres of GLA, up from 8.7m sq metres at the end of 2016, 8.6m sq metres the year before and 7.8m sq metres at the close of 2014, according to JLL. New GLA launched in 2017 was concentrated primarily in The Greens area, Business Bay and the Dubai World Trade Centre district. Key new completions included the two Onyx towers in the first quarter, adding 66,000 sq metres as the first office completions in The Greens since 2006. Other noteworthy additions were the Tamani Art building and The Offices 3.

A number of newly relaxed business regulations also arrived in 2017. The Dubai International Financial Centre, which has historically served as an offshore-only location for businesses, announced that it would allow locally listed firms – except those operating in the financial services sector – to set up shop in the centre for the first time. Dual licences were also granted to allow businesses to partake in both onshore and offshore activities from a single office.

According to JLL in its third-quarter 2017 report, the office development pipeline included 55,000 sq metres of new GLA coming onto the market in 2018, plus another 136,000 sq metres in 2019.

Retail Property

While Dubai’s long-standing and well-deserved reputation as a centre for high-end shopping malls and other unique retail spaces remains salient, the emirate’s retail industry has begun to move online in recent years. According to a report in local media in August 2017, this shift may finally begin to gain traction in the near future. AT Kearney, a global management consulting firm, estimates that e-commerce in the wider UAE will grow at a compound annual growth rate of 25% through 2020, and Frost and Sullivan consultants forecast that the industry could be worth as must as $10bn in 2018, up from $2.3bn in 2015. Indeed, the online retail space is widely considered to be the future of the industry in Dubai, as in many other markets around the world (see Retail chapter).

However, the bulk of retail trade in Dubai will take place in physical locations for some time to come. In fact, new amenities and innovative shopping spaces are being designed so as to ensure that customers still visit malls even if they begin to make more purchases online. “I am fairly optimistic about the future of retail in Dubai,” JLL’s Plumb told OBG. “Rents in the premier malls are stable, and the best properties have worked to become entertainment centres and places people go to dine, in addition to shopping.”

With this model in mind, a range of new retail spaces are expected to open in the coming years. As of the end of the third quarter of 2017, Dubai was home to some 3.4m sq metres of retail GLA, making it the single-largest retail centre in the GCC, ahead of its neighbour Abu Dhabi, which had 2.6m sq metres in the same period; Riyadh, with 1.7m sq metres; and Jeddah, with 1.2m sq metres. According to JLL, in mid-2017 Dubai boasted twice as much retail space per capita as London. A significant 101,000 sq metres was forecast to be added to the market before the end of 2017 – namely Phase 2 of the Dubai Mall and the Souq in Culture Village – followed by 536,000 sq metres to be added in 2018 and another 361,000 sq metres in 2019. As these figures suggest, many retail developers expect to see an uptick in goods consumption before and during Expo 2020.

Hospitality Segment

Like the retail segment, Dubai’s hotel development pipeline will be very active over the next few years, as hoteliers and other tourist operators prepare to welcome some 25m visitors during Expo 2020, roughly 70% of which will come from outside the UAE. The emirate recently surpassed the 100,000-room mark as a result of the August 2016 opening of Westin Dubai Al Habtoor City, data from the emirate’s Department of Tourism and Commerce Marketing shows. Meanwhile, according to research by financial services and research consultancy Alpen Capital, from the end of 2015 though 2020 some 57,000 new rooms – in hotels and serviced apartments – are forecast to come on-line. This compares to the addition of just over 38,000 new rooms during the 2010-15 period. Most hotel projects that are planned or currently under way are being developed for major international hospitality brands, such as Hilton and Marriot lines.

While hotel developers in Dubai have historically focused on the high-end luxury segment, new offerings are specifically targeting middle-income tourists and business travellers. According to JLL, the supply of mid-market hotels has tripled since 2007, with over 80 hotels now in the three-star category. This has resulted in a slight decline in the average daily rate (ADR) in recent years. The ADR for the year to August 2017 was $181 – 4% lower than the average $189 in the same period of 2016. Furthermore, although the revenue per available room in the eight months to August 2017 stood at Dh503 ($137), the lowest since 2007, occupancy remains at a healthy 75%. JLL notes that Dubai is still one of the top-performing hotel markets in the world.

Outlook

On a medium- and long-term basis, Dubai’s real estate market is widely considered to be poised for considerable growth, largely as a result of strong economic fundamentals and the city’s rising reputation as a key access point to the Middle East, Western Asia and the African continent. Preparations for Expo 2020, which is scheduled to take place over a six-month period in 2020-21, have moved ahead rapidly in 2017. The event will likely have a positive knock-on effect for the real estate market – particularly the hospitality and retail segments – which is expected to outlive the event.

A recent study by a researcher at UAE University showed that Dubai’s population grew by 1000% between 1975 and 2015, and by 6.5% annually in 2005-15, making it one of the fastest-growing cities in the world during the latter period. If these rates continue, Dubai will be home to around 5m residents by 2027. Rapid population growth, in addition to thriving tourism, is expected to be a key driver of activity in the real estate industry for the foreseeable future. “The market has matured a great deal since the early 2000s,” Harmen de Jong, a partner in the Dubai office of global real estate consultancy Knight Frank, told OBG. “Now developers are turning to middle-income clients, and are carrying out business on a long-term basis. This is good for the market and good for Dubai.”

This new maturity is expected to set the industry on a solid, sustainable track for the coming years, and early signs were becoming evident in late 2017. “Dubai’s economy is more diversified than many of its neighbours,” JLL’s Plumb told OBG. “Because of this and many additional reasons, we are cautiously optimistic about the future of real estate in the emirate.”