Attending the recent release of the International Monetary Fund’s (IMF) latest ‘Regional Economic Outlook’ for the Mena (Middle East and North Africa) Region at DIFC (Dubai International Financial Centre), I felt a sense of change in the air. The key question facing the UAE real estate market as we head into 2016 is how it will adjust to the ‘new normal’ of lower oil prices and reduced government spending that now looks likely to be here for some time to come.

According to the IMF, the Middle East is facing two major economic challenges: increased fiscal pressures from a combination of lower oil prices and increased defence and security spending, and the ongoing need to create more employment (with the IMF estimating 10 million new jobs required across the region by 2020).

Before we become overly concerned, it is worth pointing out that both the region and the UAE continues to experience economic growth in line with the global average. The pace of global growth has slowed over the past six months, largely due to uncertainties in China and other emerging markets. This has resulted in the IMF revising down its forecast of global GDP growth for 2015 to 3.1 per cent (from its previous estimate of 3.5 per cent in May).

The IMF expects the rate of growth of the UAE economy to moderate from 4.5 per cent in 2014 to 3 per cent this year, with similar levels of growth forecast for 2016. Faced with lower oil revenues and higher expenditure on defence and security, GCC countries are expected to use some of their significant official reserves (estimated to be worth 15.1 per cent of GDP at the end of 2014) to cushion some of the impact. The IMF estimates this will provide a five-year window in which to restructure their fiscal position on a more sustainable long term basis.

For the moment, the UAE is seeking to maintain a balanced budget, with the federal cabinet recently setting a spending target of Dh48.5 billion for 2016, down by just 1 per cent on 2015 levels. This represents a more conservative approach from that adopted in recent years. There are two major components to the fiscal restructuring we can expect to see over the next few years — reduced government spending and increases to government revenue through taxation — and both have implications for the real estate sector.

While details of the planned government spending in 2016 are yet to be released, the continued priority on social welfare (which accounts for over 50 per cent of UAE government spending) and increased spending on regional and domestic security will inevitably mean that spending on other areas will be reduced. While many of the announced infrastructure projects are likely to proceed, they may be scaled back or rescheduled over an extended time frame with future projects being curtailed.

This is likely to result in knock-on affects for the local real estate sector.

The other side of the fiscal balance involves raising additional government revenues across the non-oil sectors of the economy. The Saudi government appears to be moving ahead quickly with proposals for a new ‘white land tax’ on undeveloped sites in urban areas across the kingdom, with details of this being passed to the Shura council within the past month.

While no new taxes have yet been announced in the UAE, some form of sales tax is currently under consideration. This would have clear implications for the retail and hotel sectors of the market.

While JLL remains positive on the long term outlook for the UAE real estate market, there is little doubt that the rebalancing of the fiscal position will result in headwinds and challenges over the next 12 months. Lower oil prices have dampened investor sentiment and resulted in a softening in some sectors of the real estate market over the past six months, marking the beginning of a period of more stable conditions that provide an opportunity for end-users to enter the market, as opposed to speculative investors.

In summary, the region certainly faces short term economic pressures, but the availability of sizeable financial reserves provides the UAE with the opportunity to restructure its fiscal position in a manner that will support sustainable long term economic growth. While 2016 may be a slower year for the local real estate market, the long term outlook remains positive.

The writer is the Head of Research at JLL Mena.