We expect the Dubai real estate markets in 2019 to fare no better than in 2018, wrought with supply demand imbalances, economic slowdown, US dollar appreciation and lower population growth.
Additionally market sentiment is weaker due to volatile oil prices. While Dubai’s GDP growth does not directly depend on oil, the indirect effects of lower oil prices could include diminishing purchasing power and weakened investor sentiment leading to reduced interest in the region and slowing business activity of non-oil companies.
In Dubai, the residential real estate sale prices dropped an estimated 12 per cent - 14 per cent in the last 12 months, according to Asteco’s Q3 2018 report on the emirate - a trend we expect to continue in the absence of positive triggers. Residential prices first weakened in 2015 in line with the drop in the price of oil, and the trend did not reverse even though oil prices recovered and stabilized earlier this year. More recently, the demand for residential units was affected by slower economic growth and heightened geopolitical risk in the region. The number of new under-construction units has significantly increased in the last two years as developers announced incentives such as payments after handover and service charge discounts. This means there will be significant new stock delivered in the next two to three years, constraining price and rental growth.
In the office segment, we don’t believe rents have bottomed out yet. While the expected new supply is limited, the emerging popularity of co-working space is acting as a disruptor for those offering traditional office space. For the hotel segment we expect to see lower average daily rates (ADRs) as supply continues to increase faster than demand. We understand 25,200 new hotel rooms will come onto the market until 2020 as per JLL’s Q3 2018 report on the sector in Dubai. The increased competition and squeeze on profitability will likely keep the hotel sector under pressure in 2019. The retail real estate sector is also expected to face pressure on the back of a sluggish economy which impacts disposable income, the growth of online shopping, and tourists becoming more cost-sensitive. We expect occupancy and rentals to deteriorate especially as new supply in the tune of 1.1 million sqms of gross leasable area (GLA) is expected to be delivered until 2020, according to JLL.
Despite the challenging market conditions, our negative rating actions for the GCC-based real estate companies currently rated by S&P Global Ratings remained limited in 2018, given market derived volatility had already been factored in to our ratings. Most companies rated by S&P Global Ratings in the sector also benefit from a high share of relatively stable real estate rental activities that helps to mitigate the development exposure.
During 2018, governments across the Gulf have introduced several initiatives to support real estate markets. Notably, the UAE has reduced government fees down to 2.5 per cent of the annual rent of commercial establishments from 5 per cent and relaxed regulations around foreign ownership in businesses located outside of free zones. It has also approved a long-term residency visa program, which, amongst other schemes, offers 5 to 10 year resident visas for foreign investors who invest between AED 5 million to AED 10 million ($1.4 million -$2.8 million) in real estate projects.
In 2020, the sector may also see some benefit from the potential increase in economic activity and positive business sentiment resulting from the Dubai Expo 2020, which is expected to attract 25 million or more visitors to the emirate. Whilst these schemes and events are likely to be positive for real estate demand, rental and price developments are likely to be driven more by the pace of new supply coming in to the market.