Rise of e-commerce continues to shape the Dubai retail market
Real estate investment advisory, JLL, has released its Q2 2017 Dubai Real Estate Market Overview report which assesses the latest trends in the office, residential, retail and hotel sectors.
The retail sector continues to evolve and adjust in the light of the fast pace of technological advancements, with retail brands and centres merging both online and offline experiences the lines between bricks and mortar and online retailers continue to blur.
The second quarter witnessed Dubai Chamber of Commerce and Industry signing a memorandum with Souq.com to help more SMEs and entrepreneurships in the region to gain exposure to online platforms. The move sees Dubai continuing to contribute to the rising trend of e-commerce, with the Dubai Chamber of Commerce and Industry expecting the industry to account for 10 per cent of Dubai’s total retail trade in the near future.
Amazon’s recent purchase of Souq.com represents a major advance for e-commerce in the region. Responding to this trend, Emaar Malls (Dubai’s largest retail landlord) acquired a majority stake in Namshi (a Dubai-based online retailer) during Q2.
The Dubai real estate market largely remained relatively subdued in Q2, market sentiment is however expected to become more positive in the second half of the year, according to Craig Plumb, Head of Research, MENA, JLL.
The office sector witnessed a relaxation in regulations resulting in offshore activities being permitted within the DIFC, and dual licences to allow firms to undertake both onshore and offshore activities from a single location. These new regulations will be able to expand potential demand within the DIFC, paving way for overall economic growth of the city.
The fast growth of Dubai’s tourism over the last decade following the government’s strategy to diversify the economy in the run up to Expo 2020 has opened doors to the hospitality market becoming more complex. Investors are now becoming more creative in their approach and the first hospitality focused REIT (FIVE Holding REIT) has been announced in Q2. Traditional players are now reconsidering their strategies rigorously through re-branding or de-branding properties, the report added.
The residential sector witnessed 5,400 completed properties being sold in the first give month of 2017, an increase from the 4,500 units that were sold during the same period of 2016. With little change in either sale prices or rentals recorded over the quarter, the residential market remains relatively stable as the recent down cycle nears an end.
The Dubai office market saw the delivery of around 33,000 square metres in Q2 2017 with the completion of the Tamani Art building in Business Bay, bringing the total stock to around 8,788,000 square metres. A further 190,000 square metres is currently scheduled to complete in the second half of 2017, although some projects may be delayed into 2018. Most of this space is in suburban locations such as JLT, Business Bay and Silicon Oasis, with the only completion in the CBD in 2017 being building C4 in One Central (33,000 square metres.) 2018 will see a further 90,000 square metres delivered in the CBD (buildings C2 and C3 in One Central and Gate Village 11 in the DIFC).
The commercial office sector continues to operate as a two-tiered market, with healthy demand for single owned buildings in the free zones and those offering joint licences. This has resulted in vacancies remaining stable in the CBD at 14 per cent in Q2 2017. Average rents in the CBD increased marginally (by 1.3 per cent Year-on-Year to AED1,947 per square metre during Q2). The secondary market remains weaker, with a 37 per cent decline in rental values over the past year, due to a sustained oversupply of strata office product and a general softening of demand. Although the performance of the prime office market has remained relatively unchanged over the past year in terms of vacancies and rental levels, demand has generally softened, with more occupiers delaying decisions or prioritising lower cost options.
The second quarter of 2017 saw the addition of 3,600 units to the market. Notable completions included 584 townhouses in Al Warsan Village in International City, as well as 250 villas in Al Furjan. Apartments accounted for 60 per cent of completions being spread across a range of locations including Dubai Marina, Meydan, and Al Wasl. A further 25,000 units are currently under construction and scheduled for delivery by the end of 2017, but only half of these are considered likely to be handed over to purchasers by year-end.
The Dubai residential market has around 78,000 units under construction and scheduled for delivery by 2020, indicating a 15 per cent growth from current supply levels. With a forecast population growth of 3.5 per cent per annum, this potential supply is in excess of the underlying level of demand and could therefore result in increased vacancy levels if it were all to be developed on schedule. Although many units are targeting international and local investors, the key challenge then becomes one of securing tenants and therefore achieving a satisfactory return on investment.
The Dubai residential sector has been a ‘buyers’ market’ over the past two years, with average sale prices for both villas and apartments declining between five and 10 per cent in the year to mid-2016. A year later, the picture is stabilizing, with prices declining by less than one per cent in the year to Q2 2017, as the down cycle nears an end. The next movement in price (up or down) will be dependent on how many of the potential supply of 78,000 units actually complete over the next three years. Our assumption that prices will see a marginal increase over the next 12 months is dependent on further delays to supply being experienced.
Rents continue to see single digit YoY declines of 4.2 per cent and 6.5 per cent for apartments and villas respectively. These figures relate to new lettings, with few landlords being willing to reduce rentals for existing tenants.
The second quarter saw one neighbourhood retail completion in Jumeirah Islands, which added 2,800 square metres of gross leasing area (GLA) to the market. The pipeline for the second half of 2017 includes 220,000 square metres of GLA currently under construction, with The Pointe on Palm Jumeirah and Marsa Al Seef in Al Hamriya expected to contribute more than 50 per cent of the total. Dubai Land sees continued construction, with approximately 40,000 square metre of GLA scheduled to complete in H2 2017.
Dubai is undoubtedly the leading retail location within the GCC, with 3.39 million square metres of retail malls, ahead of other major cities such as Abu Dhabi (2.62million square metres), Jeddah (1.21 million square metres) and Riyadh (1.17 million square metres). On an international scale, Dubai has approximately twice as much retail space per capita as London, indicating its reputation as a major international retail hub.
Given the soft market conditions, some delays may occur that could lead to delays and a scaling back of future retail supply. The pressure to complete and hand over projects is expected to intensify in the coming two years, in anticipation of the potential boost to retail spending around Expo 2020.
Rents in the retail space started to show single digit declines during Q2, supporting the anecdotal evidence over the last few quarters, which suggested that the market was under pressure. Landlords continue to adopt approaches to leasing which are favourable to tenants, in order to retain them.
br /> Although the short-term picture for retail in Dubai is challenging (due to the slowdown in the rate of economic growth and the strength of the US dollar), the medium to longer-term picture remains more positive.
The second quarter saw the addition of 2,500 further keys, taking the total to around 80,400 keys. Viceroy the Palm (477 keys), Dusit D2 Kenz (240 keys) and the St. Regis Polo Resort (181 keys) also contributed to the additional supply. Completions so far this year have all been in the upscale and luxury segments, confirming the city’s heavy dependence on the upper end of the market. The same pattern appears likely over the second half of the year despite the completion of the Rove Trade Centre (270 keys) and the re-branding of the Yassat Gloria Hotel into the world’s largest Mercure property.
The midscale segment in Dubai currently accounts for approximately 18 per cent of total keys in the market, with the vast majority located in areas such as Bur Dubai and TECOM. This sector is only expecting to contribute eight per cent of the total number of additional keys to be delivered by 2020, with the upscale segment expected to contribute 40 per cent.
The pressure on average daily rates (ADR) continues in Dubai. The second quarter saw ADRs at $206 versus $213 a year ago, recording an annual decline of 3.2 per cent. Occupancy levels remain largely stable at 83.8 per cent resulting in a slight decline of revenue per available room (RevPAR) from $175 YT May 2016 to $173 YT May 2017.
br /> Supported by growth in all key source markets, visitor numbers to Dubai continue to increase. South Asia accounted for 17 per cent of total visitors, with India and Pakistan recording a YoY increase of 24 per cent and 16 per cent respectively. Following the positive regulatory changes allowing them visas on arrival, visitors from China and Russia increased by 63 per cent and 108 per cent respectively as of YT April 2017. Improvements to the hospitality infrastructure (including the current airport expansion plans) and further improvements to the quality and variety of offering (with the introduction of services tailored for fast growing markets such as China) will remain at the core of the efforts to grow the sector in a smooth and sustainable way.