December 2009
Emerging Demographic Patterns in Dubai Real Estate, After years of strong population growth, Dubai now faces the prospect of a falling population as many expatriate workers have lost their jobs and returned home over the past nine months. While difficult to quantify, job losses have been commonplace in many sectors of the economy. With nationals accounting for less than 20% of the total population, and most expatriate visas tied to work permits, it is no surprise that thousands of expatriates who have been made redundant have had to leave the country.
The extent of this expatriate exodus has been the source of much speculation. While the Dubai Statistics Centre is still predicting population growth, the consensus of the various private sector reports that have been released is that Dubai will see its first annual decline in population in 2009. The absence of accurate and up-to-date statistics makes it difficult to forecast the exact extent of this decline. Despite notable legislative improvements over the past few years, Dubai still suffers from a lack of timely demographic data on which to base population forecasts.
The Indian embassy has announced that over 200,000 Indian nationals returned home from the UAE over the first half of 2009, but unfortunately, no breakdown is available of this data between emirates or between "blue-collar" and "white-collar" expatriates.
Anecdotal evidence from school enrolments and removal companies supports the view that while expatriate numbers are down, the summer months have not seen the scale of exodus expected in some of the more negative forecasts. Our own assessment of the available data leads us to assume a consensus figure of a 7% to 10% decline in population for 2009.
Residential Market Activity
Declining population numbers have been just one factor driving the major adjustment in residential pricing in Dubai over the past 12 months. Sale prices have declined by 40% to 60% and rents by 30% to 50% in the areas that we monitor across the city. While the market has moved decisively in the tenant /purchaser's favour over the past year, we are now experiencing quite different trends between the sales and leasing sectors of the market. Sales activity has decreased significantly due not only to the outflow of expatriates, but also the low investor sentiment and lack of liquidity, which have reduced transactional volumes by around 55% since Q2 2008.
While sales transactions have declined, the volume of leasing transactions has increased since Q1 2009 as a result of relocations to Dubai from other emirates, upgrades in living accommodation and a decrease in household size.
Relocation to Dubai
There has been increased demand for rental properties in International City and Discovery Gardens over the past few months. These two Nakheel projects, located on the outer peripheries of Dubai, have benefitted from demand from those previously living in Sharjah and Abu Dhabi who can now afford to live in Dubai. As residential rents in Dubai soared in 2007-2008, a considerable proportion of the working population in Dubai was forced to live in Sharjah due to cheaper rents. This trend is now reversing as average rents in International City have decreased by more than 30%, making it more affordable and attracting people back to Dubai.
Rents in Abu Dhabi are now significantly higher than those in Dubai due to the capital's lack of affordable new supply. A typical two-bedroom apartment in Abu Dhabi would currently command an annual rent of AED 180,000 to AED 200,000, while the same type of unit in Dubai would rent at approximately 30% to 40% less. For this reason, many of those working in Abu Dhabi have opted to shift to Discovery Gardens and other projects to the south of Dubai where they can pay a lower rent and still commute to and from Abu Dhabi relatively quickly.
Upgrading to Better-Quality Units
Residents are also taking advantage of lower rents to upgrade to better-quality housing units within Dubai.
For example, those previously living in Discovery Gardens are now able to lease apartments in Jumeirah Lake Towers or Dubai Marina. Similarly, residents of Dubai Marina are now able to upgrade to units located on Palm Jumeirah or in downtown Burj Dubai.
Moving companies are benefitting from the increased turnover (churn) within Dubai itself as well as from the inflows from Abu Dhabi and Sharjah. However, the number of international moves has declined, with interviews with removal companies revealing that only around 10% of moves are from outside of the UAE.
Decreasing Household Size
The third positive factor driving activity in the leasing market has been a significant reduction in the average household size during 2009. According to the last population census (2007), the average household size in the Dubai urban area was 4.14. Given the high number of single expatriates that have moved into Dubai over the past few years, this figure was declining even before the fall in rental rates in 2009 stimulated more sharers to form their own household units.
With rental rates having fallen as much as 50% during 2009, more individuals have moved out of shared accommodation, generating strong demand for smaller (studio and one-bedroom) units. Before the financial crisis, many single people were forced to share two- or three-bedroom apartments as a cheaper alternative to renting their own studio or one-bedroom apartment. Tenants are now taking advantage of affordable rents and opting out of shared accommodations to live on their own.
Based on surveys undertaken by Jones Lang LaSalle, we estimate that the average household size in Dubai has fallen from 4.1 in 2007 to between 2.5 and 3.0 today.
The reverse holds true in the sales market, where two- and three-bedroom apartments that are ideal for end users and families are in higher demand than studios or one-bedroom apartments. This is different from the past, when buyers were mostly speculators looking for short-term investments and interested in flipping studios and one-bedroom apartments that required a lower capital outlay.
Outlook
A combination of improved affordability and falling household size will naturally increase residential demand.
At the same time, construction delays and project cancellations will help ease the potential oversupply situation. If these current supply/demand trends continue into 2010 as expected, the residential market is likely to stabilise next year. However, we are unlikely to witness a return to the pricing levels experienced in the real estate boom (from 2007 up until mid-2008) in the near future.
Need for Improved Transparency and Regulation
The global economic downturn has resulted in a more critical examination of the real estate regulatory environment in Dubai. In these circumstances, steps to provide more accurate and timely market information, increase transparency and introduce clearer legislation will play a major part in rebuilding confidence and stimulating more investment in the real estate sector.
In the current uncertain economic climate, investors are understandably more worried about risk. Increased transparency and clearer real estate regulations will help ease investors' nerves and allow them to make better-informed and more calculated decisions.
Jones Lang LaSalle's most recent Real Estate Investor Sentiment Survey (October 2009) reflects these tends. Investors ranked regulation/legislation and market risk as the two most important factors influencing their investment decisions.
The Importance of Transparency
Improved transparency is important for both tenants and investors. For occupiers, transparent markets allow for easier comparison of occupation costs and provide more options for strategic action (e.g., execution of sale and leasebacks is easier in transparent markets) and improved market data raises the efficiency of transactions.
For investors, transparent markets allow for better risk management and the establishment of suitable risk premiums and the assessment of likely future investment returns through performance benchmarks.
They also provide for enhanced decision making through better information and the development of more robust and informed investment strategies and target allocations.
Less transparent markets are likely to perform better in periods of boom than more mature markets.
However, most serious long-term real estate investors are currently looking at opportunities in more mature and stable markets. Central London is currently the "flavour of the month" among Middle Eastern investors, accounting for the vast majority of Middle Eastern investment in overseas real estate during the first half of 2009. This capital has been attracted to London by the perception that prices have adjusted the furthest and due to the openness and transparency of the market, which makes it relatively simple to establish value and create a more suitable exit strategy than in less mature or transparent markets such as Dubai.
Although the Dubai Lands Department (DLD) has introduced a database (REIDIN) to track investment within the city, as well as a rental index, there are few statistics tracking supply or demand.
© Capital ME 2009 The establishment of real estate market indices tracking the performance and valuations of assets within the markets would undoubtedly aid Dubai’s market transparency. Whether transaction or valuation based, such an index would improve investor confidence.
Emerging Demographic Patterns in Dubai Real Estate, After years of strong population growth, Dubai now faces the prospect of a falling population as many expatriate workers have lost their jobs and returned home over the past nine months. While difficult to quantify, job losses have been commonplace in many sectors of the economy. With nationals accounting for less than 20% of the total population, and most expatriate visas tied to work permits, it is no surprise that thousands of expatriates who have been made redundant have had to leave the country.
The extent of this expatriate exodus has been the source of much speculation. While the Dubai Statistics Centre is still predicting population growth, the consensus of the various private sector reports that have been released is that Dubai will see its first annual decline in population in 2009. The absence of accurate and up-to-date statistics makes it difficult to forecast the exact extent of this decline. Despite notable legislative improvements over the past few years, Dubai still suffers from a lack of timely demographic data on which to base population forecasts.
The Indian embassy has announced that over 200,000 Indian nationals returned home from the UAE over the first half of 2009, but unfortunately, no breakdown is available of this data between emirates or between "blue-collar" and "white-collar" expatriates.
Anecdotal evidence from school enrolments and removal companies supports the view that while expatriate numbers are down, the summer months have not seen the scale of exodus expected in some of the more negative forecasts. Our own assessment of the available data leads us to assume a consensus figure of a 7% to 10% decline in population for 2009.
Residential Market Activity
Declining population numbers have been just one factor driving the major adjustment in residential pricing in Dubai over the past 12 months. Sale prices have declined by 40% to 60% and rents by 30% to 50% in the areas that we monitor across the city. While the market has moved decisively in the tenant /purchaser's favour over the past year, we are now experiencing quite different trends between the sales and leasing sectors of the market. Sales activity has decreased significantly due not only to the outflow of expatriates, but also the low investor sentiment and lack of liquidity, which have reduced transactional volumes by around 55% since Q2 2008.
While sales transactions have declined, the volume of leasing transactions has increased since Q1 2009 as a result of relocations to Dubai from other emirates, upgrades in living accommodation and a decrease in household size.
Relocation to Dubai
There has been increased demand for rental properties in International City and Discovery Gardens over the past few months. These two Nakheel projects, located on the outer peripheries of Dubai, have benefitted from demand from those previously living in Sharjah and Abu Dhabi who can now afford to live in Dubai. As residential rents in Dubai soared in 2007-2008, a considerable proportion of the working population in Dubai was forced to live in Sharjah due to cheaper rents. This trend is now reversing as average rents in International City have decreased by more than 30%, making it more affordable and attracting people back to Dubai.
Rents in Abu Dhabi are now significantly higher than those in Dubai due to the capital's lack of affordable new supply. A typical two-bedroom apartment in Abu Dhabi would currently command an annual rent of AED 180,000 to AED 200,000, while the same type of unit in Dubai would rent at approximately 30% to 40% less. For this reason, many of those working in Abu Dhabi have opted to shift to Discovery Gardens and other projects to the south of Dubai where they can pay a lower rent and still commute to and from Abu Dhabi relatively quickly.
Upgrading to Better-Quality Units
Residents are also taking advantage of lower rents to upgrade to better-quality housing units within Dubai.
For example, those previously living in Discovery Gardens are now able to lease apartments in Jumeirah Lake Towers or Dubai Marina. Similarly, residents of Dubai Marina are now able to upgrade to units located on Palm Jumeirah or in downtown Burj Dubai.
Moving companies are benefitting from the increased turnover (churn) within Dubai itself as well as from the inflows from Abu Dhabi and Sharjah. However, the number of international moves has declined, with interviews with removal companies revealing that only around 10% of moves are from outside of the UAE.
Decreasing Household Size
The third positive factor driving activity in the leasing market has been a significant reduction in the average household size during 2009. According to the last population census (2007), the average household size in the Dubai urban area was 4.14. Given the high number of single expatriates that have moved into Dubai over the past few years, this figure was declining even before the fall in rental rates in 2009 stimulated more sharers to form their own household units.
With rental rates having fallen as much as 50% during 2009, more individuals have moved out of shared accommodation, generating strong demand for smaller (studio and one-bedroom) units. Before the financial crisis, many single people were forced to share two- or three-bedroom apartments as a cheaper alternative to renting their own studio or one-bedroom apartment. Tenants are now taking advantage of affordable rents and opting out of shared accommodations to live on their own.
Based on surveys undertaken by Jones Lang LaSalle, we estimate that the average household size in Dubai has fallen from 4.1 in 2007 to between 2.5 and 3.0 today.
The reverse holds true in the sales market, where two- and three-bedroom apartments that are ideal for end users and families are in higher demand than studios or one-bedroom apartments. This is different from the past, when buyers were mostly speculators looking for short-term investments and interested in flipping studios and one-bedroom apartments that required a lower capital outlay.
Outlook
A combination of improved affordability and falling household size will naturally increase residential demand.
At the same time, construction delays and project cancellations will help ease the potential oversupply situation. If these current supply/demand trends continue into 2010 as expected, the residential market is likely to stabilise next year. However, we are unlikely to witness a return to the pricing levels experienced in the real estate boom (from 2007 up until mid-2008) in the near future.
Need for Improved Transparency and Regulation
The global economic downturn has resulted in a more critical examination of the real estate regulatory environment in Dubai. In these circumstances, steps to provide more accurate and timely market information, increase transparency and introduce clearer legislation will play a major part in rebuilding confidence and stimulating more investment in the real estate sector.
In the current uncertain economic climate, investors are understandably more worried about risk. Increased transparency and clearer real estate regulations will help ease investors' nerves and allow them to make better-informed and more calculated decisions.
Jones Lang LaSalle's most recent Real Estate Investor Sentiment Survey (October 2009) reflects these tends. Investors ranked regulation/legislation and market risk as the two most important factors influencing their investment decisions.
The Importance of Transparency
Improved transparency is important for both tenants and investors. For occupiers, transparent markets allow for easier comparison of occupation costs and provide more options for strategic action (e.g., execution of sale and leasebacks is easier in transparent markets) and improved market data raises the efficiency of transactions.
For investors, transparent markets allow for better risk management and the establishment of suitable risk premiums and the assessment of likely future investment returns through performance benchmarks.
They also provide for enhanced decision making through better information and the development of more robust and informed investment strategies and target allocations.
Less transparent markets are likely to perform better in periods of boom than more mature markets.
However, most serious long-term real estate investors are currently looking at opportunities in more mature and stable markets. Central London is currently the "flavour of the month" among Middle Eastern investors, accounting for the vast majority of Middle Eastern investment in overseas real estate during the first half of 2009. This capital has been attracted to London by the perception that prices have adjusted the furthest and due to the openness and transparency of the market, which makes it relatively simple to establish value and create a more suitable exit strategy than in less mature or transparent markets such as Dubai.
Although the Dubai Lands Department (DLD) has introduced a database (REIDIN) to track investment within the city, as well as a rental index, there are few statistics tracking supply or demand.
With so much development occurring in such a short space of time, the need for a greater understanding of future supply levels is a necessity.
Improving real estate legal processes will also increase transparency and investor confidence. At present, it is difficult to get a judgement on a real estate court case and the legal process can be confusing, time-consuming and in many instances, fruitless. Despite recent attempts to provide clarity, the law concerning residency status for freehold purchasers remains unclear. The need of the hour is for clear policy which is fair, open and adhered to across the board.
Real Estate Indices
RERA’s current real estate index is a spot value updated each quarter. This could be taken to the next level and used as the basis of a representative index of real estate pricing and values. A bench marking service which gives owners an objective measure of their real estate performance against relevant yardsticks could also form a useful tool in improving the transparency of the Dubai market.
Successful indices rely heavily on institutional investors and valuers to provide the necessary information required to track performance and values on a timely basis. At present, Dubai is yet to see a significant institutional investment market develop.
To reach such a level of maturity requires all real estate professionals (owners, valuers, brokers and regulators) to step up the call for further improvements in transparency.
Craig Plumb, Director, Head of Research, MENA, at Jones Lang Lasalle, has over 20 years' experience providing clients with quality advice on real estate market conditions in the UK, Asia Pacific and Middle East.© Capital ME 2009 The establishment of real estate market indices tracking the performance and valuations of assets within the markets would undoubtedly aid Dubai’s market transparency. Whether transaction or valuation based, such an index would improve investor confidence.
