Covid-19: Outlook on the UAE real estate market

Oversupply across Dubai's real estate sector is amplified by tightening financial conditions

  
Image used for illustrative purpose. Dubai Marina Urban Skyline.

Image used for illustrative purpose. Dubai Marina Urban Skyline.

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The outbreak of Covid-19 is adding to the strain on Dubai's already weak real estate market.

The emirate has been struggling with oversupply in most segments but notably in residential and hotel sectors for about three years. Property markets in the Gulf Cooperation Council, as in most of the world, are now hit by travel and other mobility restrictions imposed by governments to contain the spread of the new coronavirus, alongside low consumer and business sentiment. S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak.

Some government authorities estimate the pandemic will peak between June and August, and we are using this assumption in assessing the economic and credit implications. We believe measures to contain Covid-19 have pushed the global economy into recession and could cause a surge of defaults among nonfinancial corporate borrowers. As the situation evolves, we will update our assumptions and estimates accordingly. Oversupply across Dubai's real estate sector is amplified by tightening financial conditions, which significantly complicates our impact analysis.

We now expect the fall in residential prices will be steeper than we previously expected, with adverse trends lingering well into 2021. The current supply-demand imbalance in Dubai's real estate market has been exacerbated by the effects of the Covid-19 pandemic. We also expect negative employment trends across some key sectors such as tourism and retail, as well as for certain small and midsize enterprises, which could weigh on demand for new properties. Given the global pressures, we also expect to see international demand for property in Dubai to be subdued.

In 2019, more than 35,000 residential units were completed, the highest number delivered in a single year in Dubai. Based on developers' announced completion dates, 2020 is likely to be another record year for deliveries, adding to supply. We believe real estate prices are approaching levels seen at the bottom of the last cycle in 2010, and are even lower on an inflation-adjusted basis and considering sales incentives for off-plan property. While reported Covid-19 infection rates are not relatively high in United Arab Emirates (UAE), Dubai may at some stage see widespread temporary closures of business, similar to that in other regions, or work stoppages, including at construction sites, which could lead to delays in future residential property deliveries.

This would increase working capital funding gaps for developers, including Emaar Properties and Damac Real Estate. We also expect developers' EBITDA margins to contract significantly given that prices may be lower on new sales and that companies may offer discounts to existing customers. However, given the negative macroeconomic backdrop, we might also see higher delinquencies in customer payments than observed historically.

Due to tightened travel restrictions, hotel occupancies will plummet for the next few months. Some hotels have closed temporarily, and we think there may be more closures in due course. Malls have been mandated to close for two weeks for now, except supermarkets and pharmacies. Restaurants have been asked to cater only to home deliveries. This would significantly affect the variable portion of real estate landlords' revenues.

Dubai-based government related real estate companies have announced a relief package designed to partly alleviate the burdens of businesses or individuals within their ecosystem that have been affected by the outbreak of the new coronavirus. We anticipate private retail real estate companies such as Majid Al Futtaim and Emaar Malls may also have to grant a rent freeze to allow tenants to manage their businesses, as is the case in other regions. Similar measures might also be extended by office real estate landlords, such as DIFC Investments, to support businesses that aren't operating at their usual capacities.

Although the severity of the impact on Dubai's real estate sector depends on the duration of the Covid-19 outbreak and the extent of government measures, it's clear there will be some downside. This is mainly because of the emirate's reliance on travel and tourism activity, which provides thousands of jobs in the economy. What is also uncertain at the moment is whether the World Expo 2020, due to be hosted by Dubai later this year, can shore up market sentiment or lead to meaningful recovery.

Sapna Jagtiani is the associate director of Corporate and Real Estate Ratings at S&P Global Ratings. Views expressed are her own and do not reflect the newspaper's policy.

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