The supply of residential units in Dubai continued to increase over the quarter, according to JLL’s Q3 2017 Dubai Real Estate Market Overview report.
Currently, more than 480 real estate units in the residential segment, with up to 80,000 units which can be delivered before the end of 2019, JLL data has revealed. A number of developers launched mew mega residential projects at Cityscape Global in Dubai during September 2017 with large-scale developers such as Nakheel and Deyaar announcing projects worth AED 3.2 billion and AED 1.0 billion respectively.
“This renewed sentiment does, however, raise the prospect of a potential oversupply on the back of sales achieved through more attractive payment terms,” said Craig Plumb, Head of Research, MENA, JLL.
Sector summary highlights – Dubai
Accessibility will remain key differentiator in the office sector. The experience of other global cities (eg: New York, London and Singapore) emphasises that accessibility to the transport network is a key factor in determining the attraction of different submarkets. The same applies to Dubai market, with the preferred office locations benefiting from access to the metro network. Connectivity is a key factor in the emergence of new commercial districts and will dictate the timing with which Dubai South will mature from its present focus as a middle-income residential market to a new commercial district, as envisaged in the newly announced plans for District 2020. Al Maktoum airport will further enhance the future attraction of District 2020 to office occupiers. Road and metro links to support this precinct are currently underway and continue expansion.
The third quarter saw the delivery of approximately 35 thousand sq m of office GLA across Dubai, with the largest completion being The Offices 3 tower in DTCD. JLL believes there is some risk with the materialisation of certain projects owing to volatile global markets and geopolitical conditions, which may result in corporates delaying or scaling back future growth plans. Another trend noticed recently is the increase in sublease space in Dubai, with tenants seeking to sublease surplus space resulting from previous more ambitious expansion plans.
Office rents have softened across Grade A quality buildings. Favourable renewal terms is to be present to retain tenants throughout the CBD. Increase in competition from the next generation of ‘best in class’ projects such as ICD Brookfield Place, which is attracting a lot of attention. We believe these soft market conditions will continue into Q4, as landlords compete for fewer requirements, particularly when coupled with the considerable new supply that is coming on line in projects such as One Central. Office vacancies within the CBD have remained largely stable over the past quarter at around 8%.
In Cityscape for the first time in ten years allow Direct sales of UAE properties and this will peak the interest of potential buyers by allowing them to compare between the various launch offers across a variety of properties.
The majority of completions during the third quarter were apartments (with a further 3,300 units to deliver). Villas and townhouses contributed 660 and 75 units respectively. The largest completions were Duja Tower in Trade Centre First, adding 679 units and The Polo Residence in Meydan with 598 units. District 1 and Lila in Arabian Ranches 2 contributed 267 and 219 units respectively.
According to Business News for Construction, construction activity across Dubai will increase still further over the next 2 years, to award with approximately AED 350 billion worth of contracts prior to Expo 2020. Developers in Dubai have been particularly active in the residential sector with JLL data suggesting up to 80,000 units to deliver before the end of 2019, although actual deliveries are likely to be below this level.
Sale prices for both villas and apartments remained largely stable over the quarter, while rents continued their low single-digit declines. Anecdotal evidence suggests that numerous residential buildings (even within the prime areas such as Downtown and Marina) are seeing increased vacancies, and as such, tenants have been able to renegotiate their rents downwards by an average of 5%-7%.
The total value of transactions of existing residential properties (excluding land) has also increased over 2017, with sales in the year to August exceeding AED 3.7 billion, up by 28% from the AED10.7 billion recorded in the YT August 2016. This is supported by continued strong investor demand from countries like India and Pakistan. In record a total of AED 2.7 billion of sales of existing residential units for the month of August alone, with 20% of this total occurring in Dubai Marina and a similar total (20%) in the Business Bay / Burj Khalifa area.
Majid Al Futtaim (MAF) acquired the Geant franchise. MENA region will now rebrand Geant as ‘Carrefour’, with approximately 30 outlets in the resulting in the Carrefour store count increasing from 67 to 80 across the UAE. The latter also strengthens the position of MAF as a lead player in the retail domain.
Given the increased competition in the market, a number of the smaller retail malls in Dubai are re-visiting their strategies and revising their tenant offering in an attempt to increase footfall.
The third quarter of 2017 saw the completion of the Dubai Festival City expansion, adding approximately 20,000 sq m of GLA, as well as the completion of a neighbourhood and a community retail outlet in AlHebiah First and Wadi Al Safa 2, adding 18,600 sq m of GLA collectively. The remainder of 2017 is anticipating the completion of an additional 101,000 sq m of GLA, with notable projects scheduled for handover in Q4 including Phase 2 of the Dubai Mall and the Souq in Culture Village.
Property owners have been more willing to negotiate rents with existing tenants and we have therefore seen a further decline in average rental levels during Q3. Super-Regional and Regional malls have recorded declines of between 3%-5% in headline rents on a quarterly basis, which may understate the extent of effective declines. Smaller neighbourhood and community malls have generally recorded greater declines than in the larger centres.
Vacancy levels have generally increased over the past year and this trend has continued during Q3, placing further pressure on rentals. Rents are expected to remain under pressure over the next 12 months given the large volume of potential new supply due to enter the market.
Are mid-scale hotels disrupting the Dubai real estate market in 2017?
The coming few years will see a number of mid-scale hotels open, which will lead to the diversification of the hotel market and will result in the city becoming a more attractive place to visit a broader range of visitors. However, it is also likely to result in further declines in average financial returns going forward.
A further 1,800 keys were added to the market in Q3, bringing the total stock of quality hotel rooms in Dubai to almost 82,200 keys. Notable completions include the Rixos JBR (414 keys), and DoubleTree by Hilton (238 keys) located in Bay Square, Business Bay. Another trend in the market is the refurbishment of existing rooms, for example the renovation of the Atlantis (Palm Jumeirah), where 1,539 keys were released back into the market this quarter. Despite the recent push towards mid-scale hotels, the supply remains primarily focused on 4 and 5 star properties.
A potential 4,100 keys could enter the market over the last quarter of the year. Several properties are nearing completion in Business Bay including the Renaissance Dubai Downtown by Marriott (312 keys), and Bay Central by Central Hotels (284 keys).
Hotel performance remains under pressure, with the YT August RevPAR (AED 503) being the lowest level seen in the last decade. Occupancies on that other hand have hovered at a healthy 75% since the beginning of the year. Although the strategy of many hotels across the city is currently focussed on maintaining high occupancy levels at the expense of daily rates, it is important to note that Dubai remains one of the strongest performing hotel markets globally in terms of RevPAr and other financial indicators.
The decrease in the Dubai hospitality market performance is perceived as an adjustment of the market rather than an indication of distress. The outlook for Dubai remains positive, especially as the city continues to invest heavily in tourism infrastructure and diversify towards new source markets such as South East Asia. Dubai has seen a 55% growth in arrivals from China, following the relaxation of visa regulations at the end of 2016.
Craig has over 20 years’ experience providing clients with quality advice on real estate market conditions in the UK, Asia Pacific and the Middle East. With a background in urban economics and spatial planning, he has particular expertise in the areas of property market research, development consultancy, transport related infrastructure projects and corporate real estate.
Since moving to the UAE in 2006, Craig has authored over 50 research reports on different aspects of the MENA real estate market. He has also provided market research and consulting services to major investor, developer and government clients and has appeared as an independent real estate expert before the Dubai International Arbitration Centre (DIAC).
Craig holds a Bachelor of Arts in Economics & Geography from Lancaster University and an M.Phil in Environmental Planning from Reading University (UK).