Dubai's property market slump will continue for 12 to 24 months: S&P

Oversupply, low discretionary spending, rent relief measures to curb recovery

  
City skyline in Dubai. Image used for illustrative purpose.

City skyline in Dubai. Image used for illustrative purpose.

Getty Images

Dubai’s real estate market will not recover this year as the COVID-19 shocks of 2020 will continue to reverberate in the economy, S&P Global Ratings said.

Since the coronavirus pandemic started, the property sector has been subdued. The oversupplied market has seen increased number of empty homes owing to the exodus of expatriates after job losses.

Although sales activity has increased in recent months as buyers took advantage of low prices, the market is still lower than where it was in 2019.

“Key sectors in Dubai, particularly real estate… will likely remain under pressure for the next 12 to 24 months,” S&P said in a report released on Monday.

“The residential real estate recovery would be led by cutback of new supply, assuming new launches by developers remain minimal, low mortgage interest rates that encourage residents to buy property rather than rent [and] declining prices that make investing in Dubai’s residential property attractive,” it added.

Outlook for residential, retail real estate

Property sales transaction volumes this year will remain robust and this will be driven mainly by lower  prices. Among the residential properties in the market, villas will be more attractive to investors, as buyers lean towards larger homes during the pandemic.

Within the retail segment, the recovery could be curbed by weak tourism activity, which is not expected to return to pre-pandemic levels in 2021.

Slow economic rebound and low consumer confidence negatively affecting discretionary spending, as well as increased competition among retailers as new malls will be delivered, will also slow down the retail real estate recovery.

S&P also expects rent relief measures to continue leading to declines in revenues and earnings of property developers, while “turnover rents” will become a more common feature in leases.

However, there will be exponential growth in online shopping and omni-channel trade, which may help retail tenants boost sales.

Office

Within the office real estate market, S&P said the recovery would be led by Dubai remaining a key business destination in the Gulf Cooperation Council (GCC) region.

There will be an increase in demand for office space from fintech companies, while employees in the country are expected to return to physical offices faster than their peers across the globe.

“We expect ongoing polarisation of rents and occupancy, with Grade A spaces benefitting relative to the rest of the market, continued rationalisation of office spaces as more companies opt for work-from-home for the long term [and] co-working spaces to continue disrupting the market for traditional office space,” S&P said.

Hotels

Recovery within hotel real estate could be impacted if travel restrictions imposed around the world will not be lifted soon.

The sector will also be affected by limited air traffic recovery due to structurally lower demand.

The delivery of new hotel projects will also boost the supply, which will likely cause a steep increase in competition.

“We expect domestic demand to increase but not sufficiently to compensate for loss of international tourism. Beachfront and tourism hotels should fare better than business hotels,” S&P said.

What will temporarily ease pressure on average daily rates and occupancy will be Dubai’s hosting of the World Expo, which is set to kick off in October this year.

While the huge supply glut remains a concern, Dubai is likely to see more than 41,000 new apartments and villas turned over this year, according to Asteco. In the office space sector, there will be an additional supply of 1.5 million square feet.

With the supply expected to increase, Asteco said rental rates will likely continue to be under pressure this year.

(Reporting by Cleofe Maceda; editing by Seban Scaria)

Cleofe.maceda@refinitiv.com

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