Last year was a relatively tough year for real estate players across the UAE, as the market adjusted to lower levels of economic growth.
This ‘new normal’ is a reflection of oil prices well below their peaks of 2014 and 2015. While the average oil price declined dramatically during 2015, the decline was much more modest in 2016 and it is important to recognise that oil prices have actually increased significantly over the year.
The worst of the oil price correction now appears to have past, with most forecasters expecting some recovery in prices during 2017 (the US Energy Information Administration is forecasting a modest recovery in average oil prices, with West Texas Intermediate expected to increase by around 15 percent to average $50 per barrel in 2017).
The rate of economic growth is also expected to see some (albeit tepid) recovery, from 3.1 percent in 2016 to 3.4 percent in 2017. While the UAE economy may be close to turning the corner, real estate markets tend to lag behind economic cycles and the prospects for 2017 are therefore subdued.
The residential market acts in many ways as a bellwether of conditions in the overall real estate market. Having seen a modest decline (around 15 percent) since its last peak in mid-2014, the Dubai residential market is now poised close to the bottom of its current market cycle with virtually no change in average prices over recent months.
The level of sales activity in the market has declined by more than prices (down around 30 percent year-on-year), but has started to increase over the past couple of months, and sales activity or volumes are usually a good leading indicator of future price trends.
Part of the reason for the increase in sales has undoubtedly been price driven, with developers reducing prices and offering more attractive payment terms as they adjust to the more subdued market conditions.
While overall demand is at lower levels than between 2012 and 2104, there are signs that some sectors of the market are seeing stronger sales than over the past two years.
It is always difficult to pick the precise bottom of any market cycle until after the event, but JLL believes there is only limited further downside in this cycle and that prices and rentals will finish 2017 at higher levels than at the beginning of the year in most locations. The high levels of potential supply that could be released to the market and the subdued nature of the expected economic recovery, lead us to predict a relatively modest recovery in 2017, with price increases being limited to single digits in most locations.
While oil prices and the state of the world economy remain important and to some extent unknown influences, the big ‘elephant in the room’ for the Dubai residential market is the level of future supply. There are currently around 30,000 units scheduled for delivery in 2017. If all these projects were to be delivered on schedule, the market would certainly experience an oversupply that would push prices down still further.
Based on the experience of previous years, we do not believe that developers will deliver all the units they are currently promising to deliver this year. Our analysis of delivery levels over the past five years suggests a materialisation rate of between 30-40 percent and we see little reason why this would change significantly in 2017.
This would suggest an additional supply of between 10,000 and 12,000 units in the Dubai market in 2017, which is broadly in line with demand levels over recent years and would not represent a serious oversupply.
In summary, 2017 is poised to be a marginally stronger year than 2016, but we do not expect to see strong levels of price or rental growth. As always, Dubai does not operate as one unified market, with significant variation between different locations and product types.
Similar to 2016, we expect to see strongest demand for smaller and more affordable units, with the emergence of new locations such as Dubai South. Even in more established locations, the current trend towards smaller units is also likely to continue, as developers seek to perform in what will remain a highly competitive market.
Craig Plumb, Head of Research, JLL MENA
