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UAE developers face cash crunch

|By Arabian Post Staff| UAE real estate developers will have to look for alternative funding mechanisms such as joint ventures, refinancing, public private partnerships (PPPs) and co-investment vehicles as conventional project financing such as bank lending or IPOs will become more difficult in view of the tightening liquidity conditions, real estate investment and advisory firm JLL said in a report.

A by-product of the slowing market conditions in 2016 is likely to be a continuation of the trend of project delays., JLL said. This will represent something of a ‘blessing in disguise’ and will help stabilise the market and avoid excessive oversupply.

Project delays will be attributed to a number of reasons, including financing issues, contractual disputes, construction delays and licensing/approval delays, while some developers will deliberately hold back completions to avoid flooding the market. Over the past five years, the materialisation rate of proposed projects has been relatively low, with only 30% for proposed residential projects and 45% of proposed office space completing on schedule.  The materialisation rate is expected to remain low with further project delays in 2016, which in effect will reduce oversupply risks.

2016 is expected to see more challenging conditions in the UAE real estate market as we begin to feel the impact of the continuing fall in oil prices and ongoing geopolitical tensions leading to reduced liquidity, and pressure on government budgets,  Alan Robertson, CEO, JLL MENA, said. Whilst this overall scenario will naturally impact the UAE and wider GCC region, the UAE real estate market is now better equipped to deal with such challenges than it has ever been.

With subsidy cuts, reduced spending and the potential introduction of a Goods and Services Tax (GST), the government is already realigning its strategy to further reduce its reliance on oil revenues. 2016 is likely to be a more challenging year for the UAE real estate market than 2015, but it must be recognised that the overall economy is still expected to grow at around 2.7%, so there remains opportunities as well as challenges, Alan said.

Productivity will be a key factor for occupiers selecting new office premises –resulting in demand being increasingly focussed on those functional buildings where they can operate more efficiently and productively.  While overall levels of demand are expected to be lower than in 2015, those buildings that offer functional and efficient floor plates, high quality lifts and other services, sufficient parking and access to public transport will remain in demand.  There is also an increased recognition that office premises contribute to staff productivity and high quality and flexible office space can therefore assist occupiers attract, retain and motivate staff.

Another trend that can be expected in 2016 is a renewed focus on adding value to existing buildings rather than developing new buildings. This trend is resulting in increasing demand for fit-out within retail, office and hospitality projects, as owners seek to position them to match demand patterns. In a challenging economic environment, many occupiers are re-examining their fit-outs as this may represent a more cost effective option than moving to new premises. The demand for new office fit-out is growing as occupiers increasingly seek functional, productive, spacious and affordable premises. In contrast, there is less demand for iconic or less functional buildings, the report points out.