Analysing real estate investment opportunities and risks in the backdrop of contracting yields and continued market softening.
Economic overview
- The UAEs economy has weathered an extended period of low oil prices over the past few years and is expected to see growth pick up over 2018.
- The Dubai government budget for 2018 is significantly larger than in 2017 – due to infrastructure-related expenditure in the run-up to Expo 2020 – and is likely to support recovery, particularly in concert with a number of Currency fluctuations
- The Emirati dirham, which is pegged to the US dollar, has strengthened slightly over the past three months relative to the Sterling and the Euro, recovering from a marginal decline seen earlier in the year.
Demand Indicators
- The Emirates NBD Dubai Economy Index, shows a marked improvement due to the steady increase in new orders and output. The tracker, which had dropped below 50 in 2016 Q1, averaged 56.3 over 2017.
Oil Price Trends
- Oil export values decreased by almost 50% over 2014–2016, in line with the decline in oil prices.
- Although exports and prices recovered slightly in 2017, ongoing OPEC discussions to continue curbing production are likely to keep exports from rising
Residential Investments
- The residential market continues to see a further downward adjustment in rental rates, resulting in yield compression in several areas.
- Although this trend is likely to continue as the next cycles of lease renewals lead to further relocations, the rate of decline is expected to slow in the near term.
- The underlying fundamentals for this compression vary by segment and reflect the market’s adjustment to the ongoing trends of the previous few years.
Prime
- Over 2014-2016, the significant declines in prices (relative to rents) in the prime and upper mid-market segment caused yields to increase approximately 28 base points representing a relative increase of 5% over this period.
- This combination of weakening prices but comparatively stable rents expectedly encouraged a share of tenants in this segment to shift towards ownership.
- In the near term we expect prices to continue stabilising in the prime and mid-market segments but the current decline in rents to decelerate allowing yield compression to slow down.
Affordable and Mid-Market
- Over 2014-2016, the stronger decline in prices and only slight weakness in rents allowed yields in this segment to rise 68 base points representing a relative 8% increase, which worked towards increasing demand (similar to the prime segment).
- However, most of this buyer demand was led by investor buyers as opposed to end users; who could not afford to shift to ownership due to continued affordability issues.
- This increased investor demand allowed the affordable segment to see prices relatively stabilise over 2017.
Warehousing and Logistics Investments
- Dubai’s position as a global logistics and manufacturing hub is aided by its geographical advantages, its aviation and port infrastructure and supporting legislation.
- Accounting for almost 30% of Dubai’s GDP, the manufacturing, transport and logistics sectors combined are the largest contributor to Dubai’s economy and function as the backbone for other economic segments.
Regulatory Systems
- Presently the UAE maintains two regimes for REIT managers to list their property funds, the DIFC (2006) and the ADGM (2015).
- Although both have the same limitations on the proportion of real estate that may be under development (30% of net asset value) and the distribution of net income (minimum 80% of net asset value) the ADGM is the only regime to offer private REITs.
