Dubai – Decypha: The United Arab Emirates’ (UAE) capital of Abu Dhabi saw a decline in its capital values across its residential investments in 2016 by 6% on average.
The weakness in sales has been passed on to 2017 which saw a declination with a further 1.9% during Q1 2017, according to Cluttons report that offered an outlook on the Abu Dhabi’s property market.
Nonetheless and amid the economic uncertainty the UAE is currently experiencing, the mid-market focused housing options have demonstrated greater resilience to the ongoing downward market pressures, against more declines for premium residences, according to CBRE’s report.
Rents in more affordable off-island locations have remained relatively stable. It reflects the ongoing shift towards affordability amid the economic uncertainty and downsizing across various business sectors, CBRE continued in its report
The broadening effect of the economic uncertainty has encouraged a more pragmatic approach from tenants, with 1 bedroom and smaller studios being the highest in demand.
The villas communities in Abu Dhabi experienced a decline of 5%, with the steepest year-on-year decline in sales prices in Q1 2017 witnessed in Golf Gardens villas and Raha Beach villas dropping 11% and 8% respectively, according to a joint report by real estate expert JLL and UAE-based property platform dubizzle.
Cluttons report suggested that buyers remain rather cautious from close deals, compared to two years ago, reflecting nervousness in the market. Furthermore, the report highlighted that the time required to close deals is currently longer than before; thus some developers have begun to adjust their residential offerings to match the market demands. They are additionally open to rediscussing and renegotiating lease terms.
The lag emergence in Abu Dhabi’s market.
Abu Dhabi’s property market experienced a major upswing from 2013 to 2014, led by a recovery in the residential sector. Prime residential prices jumped 25% per annum, while prime residential rents averaged 14% growth over the same period.
The residential market has started to soften late 2014 following the drop in oil prices, and a JLL report suggested that any improvement is unlikely to happen before late 2017.
“This level of growth was unsustainable and growth rates subsequently declined following the drop in oil prices,” says David Dudley, the International Director of JLL MENA.
“The impact on government spending also led to a softening in the market,” he said, adding that many of Abu Dhabi’s government entities are going through a period of restructuring in response to tougher economic conditions. Also, various mergers and job cuts have led to a decline in property demands and a drop in rents.
Reasons of the dropdown in residential property sector
Ahead of the UAE’s Cityscape real estate exhibition, analysts pointed out that lower government spending, job cuts, and reduced housing allowances have contributed to the decline in property rents and sales price in Abu Dhabi.
On a different note, the ongoing erosion of corporate leasing packages, housing allowances and overall take-home salaries, many Abu Dhabi residents are downsizing and relocating to lower cost areas of the city, noted CBRE in its report of Q1 2017 Abu Dhabi Market View.
Consequently, leasing activities during Q1 2017 have remained relatively subdued, adding further pressure to market rental levels, CBRE stated.
Among the reasons that have led to the dropdown of the residential sectors as well is that the UAE’s government , along with Saudi Arabia, Qatar and other countries, have been curbing their spendings, adopting austerity measures since mid-2015 due to the low prices of crude oil that pressured their economies.
The deep and shock collapse on global oil prices took its toll on the UAE’s economy. Cluttons says that this drop has a debilitating impact on oil dependent economies around the world. However, it was relatively delayed in Abu Dhabi based on the fact that its oil revenues account for about 50% of its total Gross Domestic Product (GDP).
It added, “Wide-ranging redundancy programs in both the private and public sectors stemming from the weaker economic conditions are adversely impacting overall buyer demand levels.”
Citing anecdotal evidence, the report claimed that organisations are trimming senior level executive positions, who are a key source for demanding luxurious homes that is the particular sector that is struggling.
Rising inflation and higher cost of living, exacerbated by the constant downward readjustment of energy and utility subsidies are adding to the financial pressures from the widespread reduction, or even removal of housing allowances.
Rating agency Fitch said that the government spending have been reduced by about 10% last year, following an 18% decline in 2015, which slowed down the non-oil sector growth to 3.5% in 2016, from 7.6% in 2015.
The aforementioned economic conditions have not only impacted the residential sales market, but the rental market as well. The removal of housing allowances in some organizations has prompted an upturn in households, hence affected those seeking personal loans to fund their rented accommodation.
The problem may further exacerbate by the beginning of 2018 when the UAE starts imposing the Value Added Tax (VAT).
UAE’s Ministry of Finance announced that leasing of residential properties will not attract VAT and they are likely to be treated as “exempt” supply. However, VAT will be imposed on commercial leases. SPF expected that it may be possible that landlords may try to pass the VAT onto tenants, hence increasing the rental cost, according to SPF, real estate agency.
Dubai’s showing different resilience
Unlike Abu Dhabi, Dubai has shown a relatively better performance in terms of the property market in Q1 of 2017. However, the performance in prime areas continues to straggle, real estate advisors at Core Savills said in the firm’s residential market update.
Lifestyle and affordability are central to Dubai’s resilience, according to a report by Cluttons. Victory Heights (AED 1,125 psf), Arabian Ranches (AED 1,115 psf), and Emaar developments in Downtown Dubai (AED 2,100 psf) prices have been steady over the past 12 months.
The perception of a good value and entrenchment of existing communities has aided the market’s stability. The report added that the lifestyle and destination living appeal have, in a way, protected Dubai’s market from the general fall out of global geopolitical events.
Cluttons asserted that Dubai’s residential market has been showing resilience. It, however, was also affected by the declination that hit the capital. Values at Victory heights and Arabian Ranches have declined by 19.1% and 10.3 respectively.
A slowing rate of decline across all sectors of the Dubai real estate market suggests increasing stability, with the expectation of the market ‘bottoming out’ before the end of 2017 likely as the ‘Expo 2020 effect’ filters through.
Increasing supply, changing demand for executive positions in the employment market and increasing rent moderation are all expected to continue to impact the Dubai’s residential market during 2017.
Fitch ratings announced earlier this month that Dubai real estate prices and rentals will remain under pressure for the rest of 2017, but the performance is likely to be fragmented.
Suggested Solutions
Chestertons expected in its report that the sales prices will further worsen due to redundancies attributed to the shrinkage of the oil and gas sector.
Lukman Hajje, Chief Operating Officer for real estate portal propertyfinder.ae told Gulf News that there are several factors that affects the property market. Hajje believes that the UAE’s new visa-on-arrival granted to Russian and Chinese nationals can boost tourism sector, hence trigger real estate sector. He further added that India’s roaring economy has enriched its middle class, hence they are searching for opportunities in the UAE.
In her interview with propertyfinder.ae, Jane Irvine, CEO of LLJ property said that what she could do to improve the real estate market in Abu Dhabi is to bring legislation, so the market can be fairly governed and allowed to develop into a real market, guided by the dynamic principles of market-driven pricing, demand and supply, quality and location.
To promote investment in real estate, Abu Dhabi should modernize its related legal frameworks, increase transparency by introducing reliable and available real estate indices, regulate real estate professions, and increase spending on real estate investment promotion, among other things, according to a pepper and rogers report
The International Monetary Fund (IMF) predicted back in 2015 that the economic growth of the UAE’s overall economy from lifting sanctions imposed on Iran, as it accounted in 2013 about 12% of the UAE’s non-oil exports.
The EXPO 2020 is also expected to stabilise the current fluctuation in residential property market, according to Cluttons.
Faisal Durrani, head of research at Cluttons said: “In Dubai, we believe that the residential market will start to stabilise by the end of 2017, largely due to the ‘Expo 2020 effect’ and this in turn will influence the demand for real estate in Sharjah, but until then, further slight softening is expected in Dubai. Our forecasts, however, remain unchanged and on track, with Dubai likely to see residential values end the year down by between -5% for apartments and -7% for villas.”
Expo 2020 is expected to benefit the residential real estate sector, it will capitalise on an improved infrastructure in the region around the Expo site, hence increasing the value of residential developments in its vicinity and making investments there more attractive.
By Toqa Ezzeldin
