Dubai’s success story has been built on showcasing itself to the world, but with economic factors biting, the city is looking to shift track. Taimur Khan takes an in depth look at its plans for the future
For more than a decade Dubai’s success story has been built on being the biggest and brightest: the world’s tallest tower, the largest indoor ski slope, the busiest international airport. However, since the global financial crisis of 2009 and the more recent slowdown in global economic activity, Dubai has seen a shift in strategic direction. Over the past couple of years, policy-makers have focused on creating a more sustainable and purposeful city, one that is here to stay.
Indeed, Dubai’s future strategy is based on holistic dimensions with people and society at its core. Prosperity, diversity, tolerance and multiculturalism are only some of the headlines that underlie the Emirate’s new development direction, elements that continue to attract a wide range of nationalities to live, work and invest in Dubai.
On the ground, improvements to Dubai’s infrastructure are taking shape rapidly. The Dubai Canal project, due for completion in 2023, is expected to add approximately 200 waterfront homes and an array of new food and beverage offerings and entertainment facilities. Similarly, plans to position Dubai as one of the world’s most connected cities are underway. The Smart City project will use the Internet of Things to increase communication and intelligent connection between people, data and devices.
Furthermore, Dubai has also established spaces fostering creativity. With phase one already completed and phase two completing in 2021, Dubai Design District will be the centre of the city’s creative community, supporting the growth of the local design industry.
What do these and other innovations mean for Dubai’s residential market?
While the recovery in 2014 fuelled rumours of a potential housing bubble, the authorities were quick to react by introducing a range of cooling measures. Coupled with developers’ realisation of the need to phase out supply in line with demand, Dubai’s residential market managed to weather the storm and maintain its stability. Today, and as the economy opens up in the face of new industries and new talent, demand continues to grow, particularly for off-plan property.
Downtown Dubai continues to be a popular location with its proximity to the emirate’s Central Business District and the vast range of entertainment and lifestyle amenities on offer, such as The Dubai Mall and Dubai Opera; and both occupiers and investors continue to be attracted to the unique offerings on the Palm Jumeirah, supported by luxury hotels and resorts. We anticipate this demand will only continue to strengthen with the introduction of The Pointe and Nakheel Mall, expected to be competed in 2018, offering world-class entertainment, dining and retail destinations. For lifestyle opportunities, residential communities such as Emirates Living and Arabian Ranches are popular among investors as they offer integrated solutions to living, including schools and community malls.
With Expo 2020 almost two years away, experts estimate the event will generate approximately 300,000 direct jobs and up to a million indirect jobs. An increase in the workforce will subsequently result in greater demand for housing. Affordable and luxury properties are already under construction to cater to diverse foreign and local appetite.
As Dubai continues to cement its reputation as a thriving global business, tourist and retail hub, the real estate sector, particularly the residential market, is expected to thrive and continue to be an integral part of the economy.
International investment prevalent despite challenging market conditions
Dubai’s residential property market has moved through a range of stages over recent history, the latest of which shows a much more stable and mature market compared to even five years ago. Over this time period, the combination of a strong dirham, the collapse in oil prices and a high level of supply have provided a correction to the market. In the present, stable oil prices, a weakening dirham, enhanced regulations, government commitment to infrastructure spending, developers phasing in projects and a more robust economic backdrop have provided stronger footing for the property market.
Dubai’s residential market in 2017 has been a story of stabilisation after a period of weak market performance which started in early 2015. Mainstream sales prices fell by 2% in the year to Q3 2017, according to data from REIDIN. Average price change in the first nine months of the year in 2016 was -5.6%; over the same period in 2017, price fall has slowed to -0.6%.
Prime residential prices over the year to September 2017 have fallen by 3.8%. However, we may be seeing this segment of the market reach its trough, with monthly price growth from August 2017 to September 2017 positive. More so in the prime market, submarket performance has begun to diverge. In prime markets where new supply has been limited, such as Palm Jumeirah and Emirates Living, we have seen price growth return over the short term, whereas in areas such as Downtown, where new supply is evident, prices have continued to fall.
Despite lacklustre market performance across both mainstream and prime residential markets, yields have remained relatively robust. As of Q3 2017, mainstream yields stood at 6.8% and prime yields at 5.5%; a year earlier, mainstream yields were 0.3 percentage points higher and prime yields 0.1 percentage points higher.
Mainstream transaction volume in the first nine months of 2017 rose by 10% compared to the same period a year earlier. The total value of transactions over this period was AED 36.86 billion ($10.04bn), up 12% compared to a year earlier.
In the nine months to September 2017, prime transaction volumes increased by 6% and total value of prime transactions was AED 2.27 billion ($619mn), up 9% from the same period a year earlier.
Dubai continues to attract international buyers to its property market, with over 217 nationalities investing in the market in the 18 months to June 2017, according to data from the Dubai Land Department. Emiratis continue to be the largest group of buyers. The make-up of the top five foreign nationalities remains broadly similar to historic trends, with Indians leading the pack followed by Pakistani, Saudi Arabian and British buyers.
More interestingly, the composition of the top ten nationalities by number of transactions shows the broad appeal of Dubai’s property market, with buyers not from the immediate region, such as American and Chinese, becoming a more material source of investment.
On balance, the outlook for Dubai’s economy and real estate market remains positive, despite some key risks which must be monitored and managed. We also note that price performance will continue to diverge across Dubai in 2018, with neighbourhoods where a significant delivery of new supply is expected likely to continue to see prices soften.
As regional economies adapt to the new norm in oil prices, Dubai diversifies in line with Vision 2021 and government infrastructure spending continues ahead of Expo 2020, we anticipate GDP growth to accelerate in 2018, providing support for the residential market.
In the first nine months of the year, the effective exchange rate of the dirham fell c. 5% against its weighted basket of currencies. This has provided support for the residential market, given the material presence of international investors in Dubai. Looking ahead, a key risk to market performance would be any significant appreciation of the dollar (to which the dirham is pegged) due to rake hikes by the Federal Reserve. Additionally, ongoing geo-political uncertainty may also affect demand.
Overall, risks may be outweighed by the expectation of stronger global economic and trade growth in 2018 than previously forecast, which Dubai would certainly benefit from, given its standing as a regional trading hub and safe haven.