According to the latest property report from Cluttons, as the UAE government pioneers fiscal adjustment in the region in response to declining oil prices, milestones such as Expo 2020 and the introduction of VAT will play a key role in boosting the country's property market.
Cluttons' 5th annual UAE Property Market report asserts that an increase in the rate of economic expansion is expected in 2018 and 2019, underpinned by higher spending levels. For the country's real estate markets, this is expected to translate into widespread stability and marginal growth in some segments by the end of 2018.
Faisal Durrani, head of research at Cluttons said: "We see a number of positive indicators for the UAE's property market as we head towards the fourth quarter of 2017. While Expo 2020 is well documented as the shining light on the horizon, we view the government's plan to introduce a formal tax regime as a tremendously positive step and are confident that it will help cement much-needed alternative revenue streams. Once the market absorbs the changes caused by the introduction of VAT, we expect to see a resumption in growth."
While the market continues to recover, the report also highlights how each emirate is performing in the aftermath of the oil price drop, which is the single biggest factor that has impacted the market in recent years.
Cluttons' latest report indicates that values across Dubai's residential investment areas continued to moderate during Q2 2017, dipping by an average of 1.5%. This leaves the annual rate of change at -5.8% and marks the 12th consecutive quarter of price declines, during which time prices have moderated by 14%. Apartments continue to fare better than villas, with prices decreasing by an average of 1% during Q2, compared to a 2.2% drop in villa values.
Although prices have continued to fall, soft correction in the market appears to be nearing an end, with many locations starting to show signs of bottoming out, as previously reported by Cluttons. In fact, during the first six months of 2017, just seven of the 32 submarkets tracked in the emirate registered price falls, with all other locations seeing no change in values.
In the rental market, Cluttons expects continued moderation during 2017. The consultancy forecasts rents to end the year 5% to 7% lower than 2016, but like the sales market there is growing potential for a more stable picture to emerge, as the Expo effect starts to filter through. Villa rents are expected to end the year 10% down on 2016, while apartments are expected to demonstrate greater stability, with virtually no change in average rates when compared to 2016.
Murray Strang, head of Cluttons Dubai, said: "Our view is that the rental market's fortunes remain tied to the looming Expo 2020. At this stage, the mega event is one of the primary upside risks to our outlook, especially as we expect it to drive up the rate of job creation and tenant demand, but this is not expected for another one to two quarters at least."
As has been the case for more than 18 months now, Dubai's office market continues to buck the trend being observed elsewhere in the property market, with rents remaining relatively resilient.
Durrani commented: "In general, we believe that rents will largely remain unchanged over the rest of 2017, with any declines likely to be contained at 5%. The looming VAT regime, however, which will see corporate occupiers liable for a 5% tax, based on their annual lease rates, may upset the stability the market has enjoyed recently, particularly in more secondary locations. Nonetheless, it is expected that many occupiers will have begun to price this into their plans for 2018, suggesting that the flat outlook may well persist for a year longer than it was originally anticipated before the Expo 2020 effect starts impacting demand and improving the rental growth profile of the city's office market."
Speaking on the performance of more prime locations, Strang commented: "DIFC continues to be the stand out performer with rents remaining the priciest in the city. While it has already stamped its authority as the region's foremost financial business hub, the planned addition of further Grade A stock, such as Emirates Towers Business Park, will intensify demand and help transition the financial centre from a regional hub to a global one."
Abu Dhabi's economy remains intrinsically linked to the hydrocarbon sector, which has been a critical engine of growth for a range of supporting and related economic segments, each of which plays a key role in creating fresh demand for both residential and commercial property in the emirate.
According to Cluttons' UAE report, the first six months of 2017 have seen a continued lacklustre performance of residential values in Abu Dhabi's main residential investment areas, with values overall dropping by 0.9%. The seemingly slower rate of decline has improved the annual change to -6.3% in the 12 months to the end of June, from -7.5% at the end of Q1. This latest change now leaves average residential values standing at just a little over AED 1,150 psf. Apartments posted larger corrections in the six months to the end of June of -1.4%, compared to just -0.3% for villas.
Despite the mixed performance of the residential market in the first half of the year, the industrial sector has been the city's brightest star, with rents holding steady for the last three quarters. This has been underpinned by robust demand for industrial space and a genuine lack of surplus stock to upset the delicate supply-demand equilibrium.
Edward Carnergy, head of Cluttons Abu Dhabi noted: "We are encouraged by on-going activity in Abu Dhabi's industrial market. KIZAD is developing into a regional manufacturing hub and remains the nucleus of overall industrial activity in the emirate, with international logistics firms vying for a presence in the UAE's largest free zone. The announcement of a 100-sq. km expansion earlier this year is expected to drive growth in the sector for years to come."
The report states that average prime office rents slipped by AED 50 psm to AED 1,800 psm at the end of the second quarter, 10% down on last summer. Similarly, secondary rents (AED 900 psm) are 25% lower than the summer of 2016, while office rents for more tertiary space have registered a 19% fall in the last 12 months and currently stand at an average of AED 650 psm.
Durrani said: "We expect to see rent corrections in the office market of between 5% to 10%, across the board, by the end of 2017 and the market's performance will remain hinged on the ability of the economy to shake off the drag generated by the low oil price environment. Looking ahead, while stability in rents is expected this year, should the economic weakness persist into 2018, headline rents are likely to begin dipping slightly."
Sharjah's position as an affordable alternative to Dubai continues to be retained. The emirate's emerging profile amongst the wider expat community, coupled with the strong focus on creating a family friendly destination, is boosting its appeal and this is reflected in the level of demand that's being recorded.
Suzanne Eveleigh, Clutton's head of Sharjah, explained, "The villa market in Sharjah continues to offer good value for money when compared to Dubai, and Abu Dhabi, which means households faced with rising living costs in these emirates are increasingly seeking out family home options in Sharjah. This has resulted in a turnaround in the performance of the villa market, as demand has now edged ahead of supply.
According to Cluttons' report, rents on average are likely to end the year about 5% down on this time last year, however the villa market will outperform, with growth of 3% to 4% likely by the close of 2017, following a 1.5% rise in the first half of the year and underpinned by limited supply levels. Apartment rental rates on the other hand are forecast to remain weak, ending the year about 10% down on December 2016.
In the commercial market, the report indicates that the resilience of Sharjah office rents in Al Soor and the prime and fringe areas of Al Majaz, that began earlier this year, has persisted, with rents remaining unchanged during the first six months of 2017.
Commenting on the office market, Durrani added, "The small size of Sharjah's Grade A office market has kept it relatively well-insulated from more macro issues compounding global growth, and there remains little in the way of new demand streams, aside from the constant requirements from the public sector. We expect further decreases in average office rents in the region of AED 5 psf before the year is out, taking the total decline during 2017 to about AED 10 psf."