CORE Dubai Market update Q3 2020

Prathyusha Gurrapu, Head of Research and Advisory at CORE says "Although this rise in transaction activity may be perceived positively, particularly in the residential market, it is most likely a release of pent-up demand created over Q2 2020

  

According to CORE’s latest Dubai Market Update for Q3 2020  “Retail and hospitality sectors continue to face headwinds due to a slowdown in global tourism, however, residential and office asset classes saw enquiries and transaction activity levels rebound with higher volumes seen in Q3 2020 as buyers, tenants and occupiers adjusted to the new normal.”

Prathyusha Gurrapu, Head of Research and Advisory at CORE says “Although this rise in transaction activity may be perceived positively, particularly in the residential market, it is most likely a release of pent-up demand created over Q2 2020. It would be interesting to see if these activity levels are sustained over the near to mid-term as positive demand drivers such as lower interest rates, increase in loan-to-value ratios, retirement visas and fractional ownership of title deeds are implemented.”

With many districts transacting nearly 35% lower than their 2014 peaks, sales prices remain at a cyclical low. As capital values now near the 2011 trough, we continue to see investor buyer interest remaining strong, particularly for competitively priced ready units. Historically, institutional investments have been limited in the UAE primarily due to the lack of investment-grade stock, despite strong demand. However, we now see institutional interest piquing as few a existing developers and corporates are making assets available for disposition as occupiers look at focusing on core business lines and assets.

Residential Market

Residential Supply: Dubai saw nearly 21,500 units come to market YTD 2020 (Jan - Sep 2020), bringing total residential stock to 571,500 units. Furthermore, there are over 10,500 units expected to be handed over in Q4 2020, making the total 2020 deliveries to 32,000 units - albeit significantly lower than the initial conservative forecast of 49,000 units at the beginning of the year. While there are other factors at play such as lower realization rates over the past several years, we have seen the impact of COVID 19 cause a significant slowdown in handover volumes.

Moreover, with the liquidation of Arabtec, we foresee added pressure on the UAE’s construction sector, with banks further tightening up project-related financing as liquidity becomes one of the foremost challenges for contractors.

Residential Sales Market: In Q3 2020, secondary market transaction volumes saw a 6.5% increase compared to Q1 2020 due to the release of pent up demand built over a subdued Q2 2020. Interestingly, Q3 2020 transaction volumes were up by 10% from Q3 2019 numbers. Despite the rise in secondary transaction volumes, sales prices continue to follow a downward trajectory with almost all areas showing sharp double-digit year-on-year drops. On the other hand, off-plan market activity is facing an interim lag in transaction volumes as buyers are increasingly preferring ready units to avoid further uncertainty and delays that may be expected from the off-plan market.

Prathyusha Gurrapu says “The government is implementing many demand drivers to spur recovery including the recent retirement visa regulations which is expected to create long-term demand as more resident expats and international buyers choose the UAE to settle down, thus contributing to sustained inward investment and population growth.”

Residential Rental Market: With many facing salary adjustments in the wake of COVID-19, we have seen household incomes contract in almost all income brackets. This has resulted in considerable movement in the rental market with high enquiry levels witnessed in Q3 2020.

While landlords may not completely agree with increasing tenant demands, most landlords are now willing to negotiate lower rents and flexible lease terms upon renewals to retain tenants. This has led many tenants to remain in their current premises as they have been able to achieve rental savings upon negotiations while avoiding uncertainty and additional moving costs. However, depending upon landlord flexibility and a tenants’ financial capability, many have relocated to achieve significant savings as rents have fallen sharply over the last few months. Tenants can now find newer build and occasionally bigger units at similar or lower rents than what they were previously paying. Some tenants on the other hand have downgraded or moved to outward locations which have seen new stock deliveries such as Jumeriah Village Circle, Dubai Sports City and projects in Dubailand to achieve major savings as tenants look to manage finances in the backdrop of widespread salary reductions.

The report states “Rents in apartment districts have fallen sharper than villa districts with a higher share of apartment districts witnessing double-digit year-on-year drops. The weakest performing apartment areas were Dubai Sports City (-

20%), Dubailand (-18%), The Greens and Views(-15%), and JLT(-14%). The villa communities witnessing the sharpest year-on-year declines are Reem-Mira and The Villa in Dubailand (-21%) followed by The Springs and The Meadows (-13%) and Jumeirah Village Circle (-12%).”

New Service Charge Regulation

Garry Murray, Head of Owners Association Management at CORE says “The recent regulation on clearance of outstanding service charge dues by the Land Department is a welcome step for Associations to have a clear pathway and regulatory support to pursue delinquent service charges which will improve confidence in the market and collections to protect the assets and Associations.”

“Management companies will need to provide transparency on where the money has been spent and allocated in the communities and engage in communication with the owners to prevent legal cases. Legal cases need to be a minority and not the standard operating procedure as the Dubai Owners Association Market continues to mature.”

Office Market

Office Supply: ICD Brookfield Place was the most prominent handover of year, adding nearly 1 million sq. ft. of Grade A office space and bringing the total Dubai office stock to 104.9 million sq. ft as of Q3 2020. While arguably the most premium Grade A building in Dubai, the completion of ICD Brookfield Place brings the total Dubai office Grade A stock to nearly 34.3 million sq. ft. We saw no prominent Grade B & C handovers in 2020, keeping the sector’s stock at 70.6 million sq. ft.

Robert Thomas, Head of Agency at CORE says “To put things in perspective, of the total 104.9 million sq. ft. of office stock, nearly 25.2 million sq. ft. is vacant, with the volume of vacant stock gradually increasing over the last five years. That said, we have seen a polarizing performance amongst Grade A & Grade B areas with most of the market witnessing a flight to quality with Grade A areas typically witnessing resilience in both occupancy and rental drops.”

Office Market Performance: Robert Thomas says “The office market saw increased relocation activity, particularly from SMEs and regional firms as most businesses adjusted to market conditions. International corporates on the other hand are mostly continuing to work from home for the remainder of 2020 with their real estate decisions deferred to 2021. We expect a second wave of relocations in 2021 when these large corporates adjust their workplace strategies.”

Robert Thomas adds “While the initial adoption of widespread work from home arrangement was met with great enthusiasm, many enterprises are now witnessing that lack of social connections and no clear separation between personal and professional life is causing loss of productivity and lower levels of engagement. Although we agree that work from home will remain prevalent with hybrid models the largely accepted workplace strategy, the importance of the physical office is unlikely to be diminished as businesses will need common spaces to foster innovation, productivity and teamwork that are hard to sustain through remote working.”

Office Rental Market: Rents have been under pressure across all the fifteen districts we track. However, freezones with predominantly single owned office assets with relatively higher occupancy levels such as DIFC, Dubai Internet City and Media City, DWTC, DAFZA and D3 have shown resilience with nominal rental drops. Old Dubai locations such as Deira, Bur Dubai, Garhoud and Sheikh Zayed Road have seen average rents fall in the range of 5 - 10% year-on-year. The weakest performing areas are the strata districts of Busines Bay and JLT displaying a steep 20% year-on-year drop in average rentals. Similarly, we have seen occupancy levels contract across the board as first phase expansions remain limited and most new demand stems from relocation activity, keeping net absorption negative.

The report concludes “The UAE government has been very proactive and agile in navigating through this ongoing situation with unprecedented fiscal stimulus measures and policy reforms deployed to soften the impact on businesses while maintaining the highest standards of public health measures to curtail the spread of COVID-19. As we draw closer to the end of 2020, with signs of gradual revival seen across sectors, we remain cautiously optimistic of a stronger 2021 on the back of ease in global travel, potential availability of vaccinations and undoubtedly the positive impact created by the upcoming Expo.”

For further information or media queries, please contact:
Prathyusha Gurrapu, Head of Research & Advisory, CORE, prathyusha.gurrapu@core-me.com
Robert Thomas, Head of Agency, CORE, robert.thomas@core-me.com 

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