Dubai Investment Outlook 2018
Core Savills flagship report Dubai Investment Outlook-2018 analyses core asset class dynamics and performance, and outlines the potential or upcoming alternate asset classes.
The report highlights, “As 2017 came to a close, a clear trend in residential sales prices remains elusive. In 2018, a variety of economic parameters in Dubai are beginning to face headwinds, with the real estate market facing its own particular challenges. Further rental declines, the ongoing strength of the US dollar and the imminent—albeit probably limited inflationary effects of the introduction of VAT in the emirates are all expected to compress investment yields.”
Residential investment market
Over 2014-2016, the prime segment saw a combination of weakening prices but comparatively stable rents encouraging a share of tenants to shift towards ownership. This effect, drove down rental demand and gradually caused prices to the stabilise over 2017.
“The residential market continues to see further downward adjustment in rents, resulting in yield compression in several areas, although the underlying fundamentals for this compression vary significantly by segment. In the near-term we expect prices to continue stabilising in the prime and upper mid-market segment while the current decline in rents is anticipated to decelerate, allowing yield compression to slow down,” said David Godchaux, CEO Core Savills.
In the affordable and lower mid-market segment, the stronger decline in sale prices and only a slight weakness in rents over 2014-2016 allowed yields to rise and in turn increase buyer demand, similar to the prime segment. However, most of this buyer demand was led by investor buyers as opposed to end users; who could not afford to shift to ownership due to continued affordability issues.
Godchaux added, “Investor buyers continue being drawn to the affordable segment due to the current high yields and easier payment plans while a few developers see robust off-plan transaction volumes as an encouraging sign and continue bringing more stock to the market. Given that affordable segment’s supply pipeline is looming with substantial off-plan deliveries in the run-up to 2020, the high yields expected by many investors post hand-over, are unlikely to be sustained. If rental demand of these projects is insufficient at handover, this supply surge is expected to exert considerable downward pressure on rents, leading to faster yield compression. Eventually, this contraction in yields will reduce investor demand, in turn pulling sales prices down over the mid-term.”
Commercial – Grade A
Dubai’s office market encompasses the key characteristics of an attractive destination for global commercial investment. Occupancy levels of Grade A office stock in core locations are notably high due to strong demand from blue-chip occupiers choosing to locate their regional headquarters in Dubai and the current limitation in stock. Additionally, lease acquisition costs remain low alongside high but steady yields.
“Investment activity in this segment was previously limited due to the lack of opportunities, however, a few large acquisitions by institutional investors in recent times finally underpins the strong underlying demand for Grade A tenanted assets–albeit, investors should note that strong Grade A office pipeline over the next three years is forecast to apply downward pressure on rents and yields,” said Godchaux.
Warehousing and Logistics
With the ongoing slowdown in trade volumes and continued lull in oil prices, this market segment has seen dampening levels of demand and widespread rental softening. Consolidations amongst logistics operators are also creating an upsurge in supply levels that is expected to further adjust rents downward.
According to the report, “However, potential investment opportunities do exist in certain segments due to a gap in the market. International grade stock is witnessing relatively steady absorption, higher levels of occupancy and steady yields in the range of nine to 12 per cent, reflective of the relatively higher risks compared to other assets classes. Despite more public and private entities offering competitive purpose-built facilities for long-term tenants, acquisitions of such assets remain limited.
Younger population driving social change and underpinning the education sector
Dubai is expected to have one of the highest Generation Z to generation X ratio over the next 10 years amongst global cities. Cities with a youthful population are more likely to be centres of higher education, magnets for skilled migration and catalysts for innovation–Dubai acts a bridge between east and west, attracting businesses from a range of international and Middle Eastern markets.
“This continued shift in demographics stems the need for quality education, both in entry levels and higher education; strengthening Dubai’s position as a regional knowledge hub and supporting the ongoing investment activity within the education segment,” said Godchaux.
According to the report, “REIT’s in UAE are increasingly becoming an instrument of investment, both for institutional and retail(individual) investors. The UAE’s REIT sector saw expansion accelerate over 2016-2017 including a number of high profile acquisitions such as the purchase of The Edge, Uninest and South View School by ENBD REIT.”
Godchaux added that given that REIT’s currently represent a notably small share of the UAE’s listed real estate market compared to other global hubs, the sector is expected to continue expanding over the mid-term. By further integrating real estate and capital markets, REITs will potentially increase funding avenues for developers as well as provide smaller investors access to diversified property investments.