There are a number of factors that are expected to drive the demand for Dubai real estate in the long term. One of the less talked about, albeit among the most significant, is its demographic. The city is among the top 10 cities with a substantial youth population, according to the Savills Impacts report, and this creates a tangible effect on real estate demand and consumption.
“Dubai is expected to have one of the highest Generation Z to Generation X ratios among global cities over the next 10 years,” says David Godchaux, CEO of Core Savills. “Cities with a youthful population are more likely to be centres of higher education, magnets for skilled migration and catalysts for innovation.”
According to the report, Dubai acts as a bridge between the East and West, attracting businesses from a range of international and Middle Eastern markets. The Savills Z to X ratio is a forecast of the number of 15-34 year olds (Generation Z), compared with the number of 50-69 year olds (Generation X) in a city by 2027. Dubai’s ratio is 1.8:1, or 18 Gen Zs for every 10 Gen Xs.
Comparatively, the short-term outlook is defined by a combination of global and local factors. According to Core Savills’ Dubai Investment Outlook – 2018, “A variety of economic parameters in Dubai are beginning to face headwinds, with the real estate market facing its own particular challenges. Further rental declines, the ongoing strength of the US dollar and the imminent, albeit probably limited inflationary effects of the introduction of VAT in the emirates, are all expected to compress investment yields.”
The expected ratio of Generation Z to Generation X residents in Dubai by 2027
Moreover, Dubai, which accounts for a large portion of the UAE’s young workforce, is expected to perform better than the rest of the UAE. “This is partially a reflection of the 20 per cent increase in government spending announced in the 2018 budget, with a major portion of the increased spending on infrastructure and projects related to the hosting of the World Expo 2020,” the report states.
For residential investors, a further downward adjustment in rents expected this year will result in yield compression in several areas, although “the underlying fundamentals for this compression vary significantly by segment”, says Godchaux. Tenants, on the other hand, will continue to enjoy bargaining power this year.
“2017 recorded discernible contractions across all asset classes,” says John Stevens, managing director of Asteco. “However, this had and will continue to have a positive effect on tenants and investors with opportunities and value to be realised in 2018.”
Asteco estimates 23,000 apartments and 8,500 villas scheduled for handover in Dubai this year.
Prime residential
A combination of weakening prices and comparatively stable rents has encouraged some tenants to shift towards ownership in the prime segment from 2014-16. This in effect drove down rental demand and gradually caused prices to stabilise over last year, according to Core Savills’ report. “In the near term we expect prices to continue stabilising in the prime and upper mid-market segment, while the current decline in rents is anticipated to decelerate, allowing yield compression to slow down,” says Godchaux.
Sally Ann Ghai, associate director at Luxhabitat, says the sentiment seems positive for an improvement in sales volume this year, with high buyer interest and engagement. “Sellers, having had a tough year up against the high level of off-plan sales, have accepted reality and adjusted prices accordingly to signpost their serious intention to sell,” says Ghai. “Sellers have responded to market data that the end-user market in Dubai has undertaken a permanent correction.”
However, Ghai notes that buyers should not interpret the “reasonable pricing” in the market as leading to a market crash, “but rather a considered response to concrete sales data by reasonable sellers”.
Relatively affordable
In the affordable and lower mid-market segment, the stronger decline in sales prices and only a slight weakness in rents over 2014-16 allowed yields to rise and in turn increase buyer demand, similar to the prime segment. However, most of the demand was led by investors as opposed to end users, who could not afford to shift to ownership due to continued affordability issues.
Meanwhile, a combination of factors has made the market tenant-friendly. Stevens says, “These conditions have put the bargaining power firmly in the hands of tenants, who enjoyed a wider choice of properties, discounted rates and increased incentives. New properties and areas of the city are also becoming more accessible to a wider tenant pool.”
Investor buyers continue to be drawn to the affordable segment due to the current high yields and easier payment plans, while a few developers see robust off-plan transaction volumes as an encouraging sign and continue bringing more stock to the market, according to Godchaux. “Given that the affordable segment’s supply pipeline is looming with substantial off-plan deliveries in the run-up to 2020, the high yields expected by many investors post handover are unlikely to be sustained,” he says.
He cautions, though, that yields will eventually feel the pressure. “If rental demand of these projects is insufficient at handover, this supply surge is expected to exert considerable downward pressure on rents, leading to faster yield compression. Eventually, this contraction in yields will reduce investor demand, in turn pulling sales prices down over the mid-term,” says Godchaux.
Investors will also continue to be more sensitive to the price point as opposed to the price per square foot. “[This means that] units that were previously advertised below Dh1,000 per square foot will be marketed, for instance, at below Dh500,000 for studios or Dh1 million for one-bedroom apartments to entice take-up,” explains Stevens.
REITs
Analysts also expect more trading activity for real estate investment trusts (REITs), which saw an accelerated expansion over 2016-17, with a number of high-profile acquisitions such as the purchase of The Edge, Uninest and South View School by ENBD REIT.
REITs in the UAE are increasingly becoming an instrument of investment, both for institutional and retail investors. “Given that REITs currently represent a notably small share of the UAE’s listed real estate market compared to other global hubs, the sector is expected to continue expanding over the midterm,” says Godchaux. “By further integrating real estate and capital markets, REITs will potentially increase funding avenues for developers as well as provide smaller investors access to diversified property investments.”
