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Another challenging year ahead for realty?


How will the real estate sector perform in 2017 – or which way will the property market move? Will it continue to go south, or recover and rebound? These are million dollar questions. One could guess and predict backed by a lot of data and analytics. There are market intelligence reports and economic reports on the demand-supply situation to back up claims.

The real estate sector has become one of the key economic barometers for the GCC region’s growth. The market is one of the fastest growing sectors across the world and is likely to remain resilient and register growth at a slow pace by the end of 2016 and beyond, despite oil price fluctuations.

The Dubai residential market is showing early signs of improvement with the sales market expected to recover ahead of the rental segment in 2017, according to CBRE.

The real estate consultancy said that while negative growth was apparent, average prices declined by less than one percent underlining the gradual improvement in investor sentiment in recent quarters.

According to Knight Frank, UAE’s real estate outlook in the long-term remains positive due to government’s commitment to infrastructure spending and development projects, stronger growth forecasts, and the UAE’s safe haven status making it a favourable real estate destination.

In the UAE, most analysts shy away from giving a negative view or feedback. That’s why every year market projections show a very positive view of things, except for a few reports.

In this article, Gulf Property tries to offer a fair view of how things might shape up in the next twelve months. While doing this, we are depending on a number of sources and market reports - that might confuse our readers.
However, while most market reports focussed on the demand-supply situation, they did not factor in a few things – that might reflect in the year as we move on.

One of them is the slowing down of the economy. The UAE’s gross domestic product (GDP) growth rate has come to the lowest level in the last five years. The International Monetary Fund (IMF) reports show that the real GDP growth rate might have declined to 2.3 per cent in 2016, down from 3.1 per cent in 2015 and might marginally grow to 2.5 per cent in 2017.

The Economist Intelligence Unit (EIU)  forecasts real GDP growth in the UAE to average 3.6 per cent per annum between 2015 and 2019, marking a decline from the 4.6 per cent growth experienced in 2014. This forecast decline is largely due to a significant fall in global oil prices, along with wider global economic factors, such as a slowing Chinese economy and sluggish growth in the Eurozone economies.

It is likely that GDP growth specifically for Dubai will outperform the wider UAE in 2016, largely due to the fact that Dubai’s economy is considerably less dependent on oil revenue compared to other emirates. Nevertheless, lower oil revenues are likely to drive lower bank deposit levels and greater withdrawals to support potential funding gaps, which may result in tighter liquidity and an increase in the cost of borrowing.

Secondly, how the hydrocarbon sector perform, is to be seen. Oil price has been hovering around $55 per barrel, which is higher than the previous years, due to a deal by the Organisation of Petroleum Exporting Countries (OPEC) to cut output to boost prices, that might help the economies of the oil-exporting GCC countries to grow further and reduce budget deficits. However, if the oil price pushes further, the investment in fracking and shale gas extraction might pick up in the United States – that might push the oil price down.

That’s why, OPEC might be forced to maintain the oil price at the current level, so that fracking and shale gas extraction remain on hold.

The UAE’s current account surplus declined sharply in 2015 to 3.3 per cent of GDP from 10 percent in 2014, due to lower oil and gas prices, IMF said in its annual report on UAE economy.

“The main external risk is a further sustained drop in oil prices, with export and fiscal revenue losses remaining the most significant transmission channels,” IMF said.

The third factors involves massive job losses in the small and medium sector (SME) due to lack of growth in this. A large number of SMEs are reducing operations or closing down due to lack of lending by banks. This will force many families to leave the country.

So, in view of the increased supplies in the residential sector and the job loss, the vacancy rates might go up and, as a result, might push the rents and prices further down.

The fourth factor is the digitisation of public services in the UAE and the GCC – that might force many smaller businesses to close shutters – such as the typing centres, document clearing, courier and messenger services. Most road-side companies will close down due to digitisation and smart application-based service deliveries. This will result in further job loss and might weigh in the overall demographics.

These will also affect the money exchange houses – as mobile remittance has picked up over the last two years. This means, some of the remittance houses might have to close branches and reduce operations – a process that has already started.

Some of the remittance houses have already started outsourcing services and started firing people.
Most research reports have not taken these factors into consideration. Therefore, we urge the readers to think of the harsh ground realities that might not be as rosy as these market reports might indicate.

Let’s see how the research reports have reflected on the ground realities while making the projections.

IMF Forecast

Real estate prices have continued to decline, but the quality of the real estate loan portfolio has remained resilient, IMF said in its report.

“Structural measures taken in 2014, such as the tightening of industry self-regulation, higher real estate fees, and tighter macroprudential regulation for mortgage lending, have helped contain speculative demand for real estate and led to declining prices,” it said.

This trend has continued with Dubai’s real estate average residential prices falling by 11 per cent in 2015, also reflecting oversupply and strong headwinds on demand. In Abu Dhabi where the supply growth slowed, they fell by 0.8 per cent.

“However, these developments do not appear to pose systemic risks for the financial sector, as the nonperforming loans (NPLs) for construction and real estate development declined from 12.3 per cent in 2013 to 7.5 percent by end-March 2016,” the IMF report said.

Similar improvements have been experienced for loans to households with NPLs ratio down from 10 to 4.9 percent over the same period.

Several Government-related entities (GREs) actively managed their debt, making early repayments and lengthening maturity profiles. Nonetheless, the GREs debt servicing capacity remains limited with an average interest coverage ratio (ICR) of 2 as of end-June 2015.

In addition, total public debt in Dubai continued to be significant at 126.2 per cent of Dubai GDP in 2015, large maturities are due by 2018, and net debt of GREs with an ICR lower than 1.5 was estimated at about $20 billion at end-June 2015. In Abu Dhabi, GREs have substantially reduced their debt.

Dubai megaprojects, if not implemented prudently, may create additional macro-financial risks to GREs and banks, and ultimately to the fiscal position in light of the debt overhang from the 2008/9 global financial crisis.

Oversupply Looms

Dubai residential sector is likely to experience sustainable growth in supply, with the year-on-year increase in residential supply from 2017 to 2019 expected to average 4 per cent per annum, compared to an average of 3 per cent per annum in previous years, said a co-authored report by Jones Lang LaSalle (JLL), a global real estate advisory and Dubizzle, a Dubai-based online portal having a large pool of real estate listings.

The completion of 5,400 residential units during the third quarter of 2016 marks the highest quarterly completion since the fourth quarter of 2012 (when approximately 6,200 units came into the market).

Apartment units comprised the majority (63 per cent) of total residential units completed during the past quarter, with Wasl Oasis II (a 13 building project in Muhaisanah, near Sharjah’s border) releasing approximately 690 units. The largest completion of villas was the 400 units completed and delivered in Rahat Villas (the second phase of the Mudon project in Dubailand).

The supply pipeline remains active, with a further 11 thousand units scheduled to enter the market in Q4 2016, although not all of these projects are likely to be delivered on schedule. Completions scheduled for Q4 include approximately 2,500 townhouse and apartment units in the Akoya project by Damac on Al Qudra Street.

JLL predicts a further 30,000 units coming up for delivery in 2017 – that might put further pressure on the rental market.

As in previous years, there are far more projects announced than are likely to be delivered, with the materialisation rate likely to remain low as many announced projects have not commenced and those that have commenced experience delays.

With 1,600 units estimated to be completed in Dubai South by 2020, more residential projects are expected to be announced in 2017, as preparation for Expo 2020 gains momentum.   

Craig Plumb, Head of Research, JLL MENA, commented: “Developers have traditionally over estimated levels of completions of homes in Dubai, with only around 30 per cent of all announced projects actually being delivered on schedule over the past few years. We continue to see developers phase out the release of units to dampen the opportunity for oversupply. However, it is vital that developers remain conscious of this concern as we draw closer to Expo 2020, which could see a lot of new projects unveiled.”

The modest improvement in performance in 2017 is predicated on several factors: increased investor confidence as they recognise that the market is close to its cyclical trough; improvements to the regulatory environment and increased transparency in the market; the gradual recovery of oil prices; continued government investment in hospitality, aviation, healthcare and other growth sectors; and increased employment and construction activity in the lead up to Expo 2020.

According to Ann Boothello, Senior Product Marketing Manager for Property at Dubizzle, “We expect that most of the upcoming residential projects will be in the form of apartments. where even, the newer communities such as Al Furjan, once perceptive as a villa community, will  grow to offer more apartments within the mid-market segment in the next few years. dubizzle search volume data highlights an increased popularity amongst online property buyers in more affordable and mid-market communities like Al Furjan, JVC, JVT and Sports City; where JVC received 9.7 million searches for properties by dubizzle property seekers in the last quarter alone.”

The greatest threats to the anticipated recovery in 2017 would be a further slowdown in the Dubai economy or a major improvement in the materialisation rate, which could lead to oversupply, the report said.

“With over 11,000 units currently scheduled for delivery in the final quarter of 2016 and more than 30,000 units under construction for planned delivery in 2017, there is definitely the potential for oversupply if all these projects progress on schedule,” the report said.

According to Real Estate Investment Development Information Network (Reidin), The Dubai Residential Property Sales Price Index for all residential decreased by 0.02 points, from 260.48 to 260.46, which represents a decrease of 0.01 per cent in November 2016. On the other hand, prices decreased 0.3 per cent year-on-year (y-o-y). Apartment sales prices remained constant in November 2016 but decreased  per cent0.8 y-o-y.

Villa sales prices registered a decrease in November 2016. Prices decreased 0.02 per cent month-on-month but increased 1.5 per cent y-o-y.

Residential property prices in Dubai rental market decreased by 0.7 points, from 96.5 to 95.8, which represents a decrease of 0.70 per cent in November 2016. On the other hand, prices decreased 6.0 per cent y-o-y.

Apartment rental prices registered a decrease in November 2016. Prices decreased 0.54 per cent m-o-m and also decreased 5.6 per cent y-o-y.

Villa rental prices registered a decrease in November 2016. Prices decreased 1.57 per cent m-o-m and also decreased 8.2 per cent y-o-y.

The Abu Dhabi Residential Property Price Index for all residential decreased by 0.2 points, from 81.8 to 81.6, which represents a decrease of 0.22 per cent in November 2016. On the other hand, prices decreased 1.9 per cent y-o-y.
Apartment sales prices registered an increase in November 2016. Prices increased 0.05 per cent m-o-m but decreased 1.4 per cent y-o-y. Villa sales prices registered a decrease in November 2016. Prices decreased 1.04 per cent m-o-m and also decreased 3.6 per cent y-o-y. Residential property prices in Abu Dhabi rental market decreased by 0.7 points, from 64.2 to, which represents a decrease of 1.15 per cent in November 2016. On the other hand, prices decreased 2.8 per cent y-o-y.

Apartment rental prices registered a decrease in November 2016. Prices decreased 1.38 per cent m-o-m and also decreased 3.4 per cent y-o-y. Villa rental prices registered a decrease in November 2016. Prices decreased 0.44 per cent m-o-m and also decreased 0.3 per cent y-o-y. 

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