Dubai encourages investment in the construction sector and first-time homeownership

 

Although Dubai’s real estate sector has experienced some downward pressure and declining returns for developers and contractors since the fall in oil prices that began in late 2014, the investment prospects associated with Expo 2020 and a raft of regulatory reforms aimed at attracting foreign investors have helped to stabilise the market, and many industry players are optimistic that the period of lower growth levels is coming to an end. The authorities are confident that Expo 2020 will not only stimulate real estate activity, but also the wider economy, with the event estimated to attract 25m visitors.

While the lag in growth may have made international investors more cautious about entering the market in recent years, a fall in prices in the residential segment has translated into more affordable housing options for locals. With overall housing demand rising as a result of a growing population, the prospects for increased growth of the real estate sector over the medium term are bright.

Structure & Oversight

Following the global financial crisis in 2007-08, the authorities have sought to significantly restructure the regulatory framework that governs the emirate’s real estate sector. Much of this work is being undertaken by the Dubai Land Department (DLD), which was founded in 1960, and is in charge of overseeing all real estate transactions in the emirate. The DLD is primarily responsible for the registration and promotion of real estate investment in Dubai, while the Real Estate Regulation Authority (RERA), the regulatory arm of the DLD established in 2007, oversees property exchanges and contracts between different parties.

In a bid to crack down on fraud, RERA raised transaction fees on properties from 2% to 4% in 2013. While still lower than the average across the Middle East, the higher fees seek to discourage flipping, a practice whereby investors buy a property with the intention of selling it for a profit. More recent measures aimed at mitigating fraud include the development of a smartphone app that allows prospective buyers to access information on property ownership and a database listing the transaction history of real estate brokers. Such an initiative helps to improve transparency across the sector, which in turn has buoyed buyers’ confidence.

Improvements to the smartphone app led to the creation of the Real Estate Self Transaction (REST), an online platform launched by the DLD in 2018 that, in addition to allowing buyers to access information on property, reduces procedures for brokers by eliminating paper documents from property transactions. “REST allows landlords to trade and sell their properties at any time from anywhere in the world, expediting the transaction process,” Sultan Butti bin Mejren, director-general of DLD, told international media in May 2018. “We have developed advanced technologies and real estate systems based on a deep understanding of the needs of property owners. By enabling customers to directly manage all elements of the transaction process online, the platform helps them save considerable time and effort.”

While innovative solutions have helped improve transactions across the emirate, others have pointed out that so far they have had a subdued impact on the sector. “Though such new property technology initiatives represent an improvement, there are still impediments to purchasing property without physically coming to Dubai,” Craig Plumb, head of research for the MENA region at JLL, an international real estate investment management company, told OBG. “While these digital developments make it easier for people to buy real estate, they do not generate a large number of additional buyers, so the impact on the sector is moderate rather than game-changing.”

Performance & Size

Although real estate activity has slowed since 2014, positive indicators are beginning to emerge. In the first four months of 2019, for example, 6360 new homes were sold off-plan – an increase of 6% on the same period in 2018 – while 4436 units were sold as ready property. Rising property sales have come on the back of an increase in demand for off-plan purchases, as well as attractive payment schemes that stretch beyond five years. This has attracted first-time homebuyers into the Dubai market, with Emiratis purchasing a growing number of residential units.

While Dubai has traditionally been a strong city for property investment, the market has adjusted to the lower-price environment and is now targeting end users rather than investors. Specifically, the real estate sector seeks to encourage people from the rental segment to invest in their first property by offering post-payment plans and rent-to-buy schemes, whereby the rent paid on a property is converted as equity towards buying a home. “The attractive payment terms aim to attract end users over investors, which is part of a series of measures carried out by developers to attract people from rentals to homeownership,” Plumb told OBG. “The majority of expatriate families rent, so developers see significant potential in convincing them to buy.”

Investment Incentives

Despite the shift towards attracting end users over investors, however, the delivery of some 50,000 new residential units by the end of 2019 suggests underlying developer confidence in property investment. Expo 2020, in particular, is acting as a catalyst for the market. The event is projected to contribute to an upturn in the overall GDP growth level of the emirate, from 1.9% in 2018 to 3.6% in 2019 and 4.2% in 2020.

Moreover, major changes to the UAE’s visa regulations and the allowance of 100% foreign ownership to companies based outside free zones in 2018 is a welcome step that is expected to attract expatriates to invest and settle in Dubai. According to the new rules, expatriate professionals with assets in the UAE can apply for a long-term, 10-year residence visa, while retirees who own property in the country can apply for a five-year retirement visa. The loosening of regulations on foreign companies and visas will pave the way for the large expatriate community – which in 2018 made up 92% of Dubai’s 3.2m population, according to official statistics – to invest in property. The existing regulations may soon encourage the significant expat community in place to build roots in the emirate and attempt to adopt a more long-term perspective for their future.

Residential

According to JLL, 9800 residential units were built in the first quarter of 2019, bringing the total residential stock across the emirate to 530,000, with a further 50,000 units expected to be completed by the end of the year. While the stock is forecast to reach 652,000 units by the end of 2021, JLL remains cautious and anticipates some delays to large-scale developments, noting that signs of oversupply are encouraging developers to shift their priorities away from launching new projects, to selling completed products.

Property prices also appear to be faring better than in previous years, with indications that the market is beginning to bottom out. “In the residential segment, market prices have dropped by roughly 25% since 2014. In the first quarter of 2019 prices fell by about 10% year-on-year (y-o-y), and by 2% quarter-on-quarter, so the market is getting closer to the bottom,” Plumb told OBG. “To some extent the Dubai government has been quite happy that prices have fallen in the residential market, as it has made Dubai a more competitive city to live and work in.”

In the first quarter of 2019 sales of apartments and villas dropped by 10% and 9% y-o-y, respectively. Rental prices also dropped, by 12% for apartments and 5% for villas over the same period. Despite such downward pressures on the market, there were signs that the rate of decline was moderating: quarter-on-quarter comparisons showed that sale and rental prices for both types of residential units fell marginally, by 2% and 1%, respectively.

The market used to be dominated by more profitable, luxury-end properties; however, there has been increased demand for mid-range options in recent years. “As the luxury property market becomes flooded, developers have increasingly looked towards the affordable housing segment, where demand is currently stronger,” Plumb told OBG.

A large part of this shift can be explained by the changing demographics in the buyer’s market in Dubai. While European and Russian buyers used to comprise a large share of the market, Asian investors are becoming increasingly active in Dubai’s property market. Indians were the top foreign investors in the UAE real estate market, accounting for 6.7% of all transactions, or Dh10.8bn ($2.9bn), during the first nine months of 2018, according to statistics released by the DLD. However, the greatest upturn in interest comes from the Chinese market, which invested Dh1.7bn ($462.7m) over the same period. While the figure represents just 1% of all real estate transactions in the country, China went from being the 15th-highest foreign investor in 2017 to the fourth highest by the end of September 2018. This trend follows an increase of 53% in the number of Chinese expatriates living in Dubai over the 2013-18 period, and as of early 2019, 230,000 Chinese expatriates were based in the emirate.

To further accelerate this trend, Dubai-based real estate agencies have begun to promote Dubai as an investment destination by establishing offices in China. For example, in late 2018 Emaar Properties begun construction on two new offices in Shanghai and Beijing. The UAE government is actively trying to attract Chinese investors in a myriad of ways. For instance, Chinese has been listed as the third major language in more than 100 schools in Dubai, while plans are afloat to develop the Middle East’s largest Chinatown in the retail district of Dubai Creek Harbour. China’s rising interest in the Dubai property market has been noted by Firas Al Msaddi, CEO of local real estate company fäm Properties, who predicts that 50% of the firm’s sales will come from Chinese investors in 2019.

The recent activities targeting Chinese interest have meant that the residential segment may soon see a recovery. In addition to growing investment from Asia, Dubai’s rising population growth – which is forecast to increase to over 5m by 2027 – is expected to stimulate demand across the sector and boost investor confidence over the long term.

Office

As in other areas of Dubai’s real estate sector, the office space segment witnessed a contraction in recent years. According to property consultancy Knight Frank, average grade-A rents fell by 3.6% in the third quarter of 2019 compared to the same period in 2018, from Dh145 ($39.47) per sq foot to Dh140 ($38.11). Vacancy for prime office properties remains relatively low when compared to the wider Dubai market, which currently stands at 19% as of the third quarter of 2019. Average office rents across the emirate fell by 9.2% in the year to September 2019 to Dh110 ($29.94) per sq foot.

With the completion of a building in Dubai Internet City, the total office stock in the emirate rose to 8.6m sq metres of gross leasable area in the first quarter of 2019, with forecasts predicting that this could increase to 9.2m sq metres by the end of 2021. By 2021, Knight Frank expects almost 793,000 sq metres of office space in Dubai to be delivered.

While there has been demand for office space, 75% of it has been for floor space of up to 5000 sq feet, suggesting that demand is primarily coming from companies looking to consolidate their operations. As a result of the fall in rental prices, landlords are offering attractive terms to their clients, such as covering other costs for those willing to sign longerterm leases. Rent-free periods of up to three months are also being offered more frequently across the market to incentivise occupiers. The new regulations allowing 100% foreign ownership of companies in the UAE, in addition to the lowering of charges in the country’s free zones as part of efforts to improve regional competitiveness, is also expected to stimulate demand for offices in the long run.

Retail

Much like the office segment, the retail segment is facing the challenges of oversupply and lower rent prices. According to JLL, average retail rents in primary and secondary malls dropped by 15% and 22% y-o-y, respectively, in the first quarter of 2019, while the overall vacancy rate increased from 12% to 16% over the same period.

With the completion of a souq at Culture Village, total retail stock stood at 3.8m sq metres by the end of March 2019. JLL projected that supply could reach 5.8m sq metres by the end of 2021, with a number of major developments, such as Dubai Hills Estate Mall, Deira Mall and Meydan One Mall, coming on-line.

As a result of the current market conditions, landlords have begun to offer favourable lease terms to attract new tenants, while some mall firms such as Majid Al Futtaim are attempting to integrate new technologies to increase sales given the global trend towards online retail. “E-commerce accounts for 12% of all retail sales globally, while in the UAE this figure lags at 6%,” Plumb told OBG. “There will be significant growth in the e-commerce segment across the region over the near term, which will soften demand for physical stores while increasing appetite for logistics and distribution centres in Dubai.”

Hotel

Unlike other areas of the market, Dubai’s hotel industry has continued to perform strongly due to Expo 2020 driving confidence in the segment over the near term. Some 25m visitors are expected to visit over the course of the six-month event.

In the first quarter of 2019, 1700 rooms were added to the existing stock, with a further 14,000 expected by the end of the year. Looking forward, the current supply of 91,200 rooms is expected to rise to more than 114,000 rooms by the end of 2021.

While Expo 2020 has led to an increase in highend hotels – 61% of hotel deliveries in the first three months of 2019 were 5-star hotels – there has also been a gradual increase in interest in mid-range alternatives. This is partly because of the rise of Chinese tourists, who have in the past preferred these options and amenities.

“Since the luxury sector has been flooded, developers are looking towards the affordable sector, where demand is rising,” Plumb told OBG. “In the context of hotels, China is now the fourth-largest source of tourists in the emirate, and their preference is for mid-market products.”

Dubai was ranked the fourth-most attractive destination by Mastercard’s 2019 Global Destination Cities Index in terms of visitor spending, which stood at $15.9m. While the average daily rent across the emirate decreased by 11% y-o-y in the first two months of 2019 to $182, occupancy rates continued to fare well at 85%, down only 0.8% over the same period.

Mortgage & Housing Finance

With the increasing number of end users entering the property market, mortgage-based transactions have increasingly risen in recent years. While mortgage transactions covered approximately 60% of overall property sales in Dubai in 2016 and early 2017, this share had increased to more than 70% in 2018.

For property deals worth Dh10m ($2.7m) or more, 15.6% of total transactions were paid using mortgages in 2018. The increase in mortgage-based transactions indicates a gradual shift away from an investors’ market, as first-time buyers and families take advantage of low interest rates and softening prices to get a foot on the property ladder. While these mortgage figures are positive, Dubai’s mortgage cap presented an obstacle for those hoping to borrow money to finance their home purchase. Under the policy, Emiratis need to provide a deposit of 20%, while expatriates must front 25% for properties under Dh5m ($1.4m). Though the cap was originally introduced in 2013 to provide banks with security and curtail irresponsible lending, many argue that it has had the effect of pricing out first-time buyers. In line with efforts to remove roadblocks to economic growth, the central bank abolished the mortgage cap in late 2018.

Dubai banks have begun to offer deals on existing mortgage loans, whereby the interest rate charged is reduced for a one-year period. This is being offered as banks are keen to pass on recent cuts in interest rates to their existing customers. In September 2019 the central bank cut interest rates by 25 basis points, following a similar move by the US Federal Reserve.

While mortgage-based sales continue to rise, interest rates and the steep down payment terms mean that post-handover payment plans offered by developers continue to be the preferred method for property buyers. “The down payment requirements [for post-handover payment plans] are low, which is why more buyers are looking to developers as a viable alternative to banks,” Uzair Razi, chief investment officer at Global Capital Partners, a Dubai-based private equity company with interests in real estate, told local media in August 2019. “There have been calls for interest rates to be reduced further, as well as for the down payments to be relaxed. But until such time, post-handover payment options are the instrument of choice for buyers.”

However, while the payment plans are helping to attract potential buyers, some industry experts note the risk developers are being exposed to. “Payment plans that have acted as a means to stimulate further demand in the housing market have been somewhat effective; however, more scrutiny must be applied as some of these plans have the potential to become a burden on the cash flow for developers,” PNC Menon, founder and chairman of Sobha Group, a real estate development company based in Dubai, told OBG.

Outlook

The global financial crisis of 2007-08 and the falling of oil prices beginning in late 2014 has dampened Dubai’s real estate market, with both sale and rental prices continuing to soften in the first three months of 2019. Considering the market’s heavy reliance on foreign investment, the emirate’s recovery strategy sought to encourage stability and long-term growth. The increase in transactions by end users, supported by the rise in mortgage-based transactions, underlines a gradual shift whereby more residents are entering the property market.

Developers have sought to attract more of Dubai’s renters to buy property by offering attractive post-payment plans. While this strategy has helped to encourage first-time buyers, government initiatives such as the new visa rules have generated renewed interest among foreign investors. Growth of the real estate market is expected to be sustained by developers shifting from luxury units to mid-range options in response to domestic and foreign demand.

The boost of Expo 2020 in October of that year is also expected to offer a stimulus to the real estate market. S&P Global has projected that the spending and economic activity related to Expo 2020 will increase Dubai’s GDP by 2.5% a year until 2022.

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The Report: Dubai 2020

Construction & Real Estate chapter from The Report: Dubai 2020

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