UAE Real Estate Market Review And Forecast 2020

Knight Frank is pleased to announce the release of its UAE Market Review and Forecast 2020.

The report provides an overview and outlook of the key real estate sectors including the commercial, hospitality, residential and retail sectors in Abu Dhabi and Dubai.

Taimur Khan, Associate Partner at Knight Frank Middle East, stated: “Whilst performance in the UAE’s real estate sectors has continued to soften on average, we have begun to see performance in certain market segments and asset grades being to fragment. More so, the introduction of a range of regulations to increase the ease of doing business and balance out supply and demand will enhance the fundamentals offering of the UAE’s property market and in turn enhance confidence from developers and investors.”

Macroeconomic overview

Initial estimates from the UAE Central Bank show that the UAE’s GDP increased by 2.3% in 2019, up from the 1.7% growth recorded in 2018.

This stronger rate of GDP growth has been primarily driven by the hydrocarbon sector, which is expected to record growth of 4.9% in 2019, up from 2.8% in 2018.

The non-oil sector has seen relatively muted growth in comparison with growth in 2019 expected to register at 1.4%, up marginally from 1.3% in 2018.

Looking ahead, the UAE’s GDP is expected to pick up momentum and record a growth rate of 2.2% in 2020, before tapering slightly to 2.1% in 2021 according to data from Oxford Economics. Expo 2020, existing stimulus packages and expansionary budgets are set to underpin these stronger rates of growth.

Residential

Residential sales prices in Abu Dhabi fell on average by 7.5% in 2019, whilst prices in Dubai fell by 6.0% over the same period.

Dubai’s residential market is showing very early signs of recovery as we begin to see a sustained increase in transaction volumes. Initial data releases show that residential transaction volumes in 2019 have increased by 26% compared to 2018.

The delivery of upcoming supply in Abu Dhabi and much more so in Dubai is the most significant headwind facing the UAE’s residential market over the coming year.

In 2020 over 8,500 units are expected to be delivered in Abu Dhabi, the most since 2013. In Dubai, almost 62,500 units are due for completion in 2020. Whilst we are unlikely to see this entire pipeline come to fruition, the quantum of stock set to be delivered is likely to be the highest since 2008.

Whilst in the short to medium term this influx of supply will continue to put pressure on prices and rents, there are a range of measures which have been implemented and will contribute to the strong fundamental offering of the UAE’s property market.

Office

Over the course of 2020, the trend of consolidation and a flight to quality is likely to continue across the UAE, driven by softer market conditions and regulatory changes, such as the 100% foreign ownership law and dual licencing.

In Abu Dhabi we expect rental rate declines to moderate, however the market is likely to remain favoured towards occupiers. As this trend comes to fruition we expect to see longer term commitments from corporate occupiers, with average lease lengths likely to shift towards the five-year mark.

Over the next three years, we expect over 392,000 square metres of supply to be delivered in Abu Dhabi, a 10.6% increase compared to current total stock. However, as the majority of this stock is in non-core locations or is built-to suit for owner occupation, we do not anticipate that this additional supply will have a material impact on market performance.

The short to medium term outlook for Dubai’s commercial market remains negative with rents expected to continue to decline across all segments. However, we are likely to see the office market begin to fragment – by area and even within asset grades.

As at 2019, Dubai’s total GLA totalled 10.05 million square metres by 2025. We estimate that this will total 11.3 million square metres, an increase of 12.5%.

In 2020, Knight Frank estimates delivery of over 280,000 square metres of commercial space in Dubai. The take up of such space is likely to be driven by relocations rather than new market entrants, which is expected to put further pressure on rental rates within locations where this additional supply is being delivered.

Retail

Whilst there will be an impact on retailers margins as we see greater levels of penetration from e-commerce and as of more recently e-retailers, physical retail space in the UAE, particularly that which is focused around destination and entertainment focused developments will attract both retailers and consumer demand.

However, looking at the pipeline of upcoming developments in Abu Dhabi and more so in Dubai, we expect further pressure to be exerted on retail assets of all grades across the UAE.

In Dubai, over the five years to 2025 retail stock is expected to increase by 56% to 5.91 million square metres, from 3.46 million square metres as at Q4 2019. Over 90% of Dubai’s retail offering is classed as regional or super-regional stock; almost 83% of the upcoming stock by total area is also classed as regional or super-regional stock.

In Abu Dhabi, Knight Frank estimates that by 2023 we are likely to see the delivery of over 680,000 square metres of retail space, a 36% increase from the current level of total stock.

Almost 85% of total upcoming stock by total area is classed as regional or super-regional stock. These regional or super-regional centres are in the main destination and entertainment focused offerings and therefore are likely to attract demand, at the expense of older malls which do not reposition their offering.

Hospitality

Despite a positive momentum in visitation numbers, performance almost universally declined in the UAE’s hospitality sector, with citywide RevPARs falling between 6.5% and 14.8%, with Abu Dhabi being the sole exception where RevPAR increased by 7.2%.

Looking ahead, whilst Expo 2020 will certainly help bolster the market, in the medium to long term both developers and operators are concerned about certain micro markets that not only have become extremely competitive in their own right, but also have a sizeable pipeline.

That said, recent government initiatives such as the easing of visa regulations and five year multi-use tourist visas alongside a growing number of varied leisure and cultural demand drivers will help ease this pressure.

Finally, as new and more diverse demand drivers come to fruition, development opportunities remain in certain sub-markets, but can only be fully exploited with a very well differentiated value proposition, and cash optimisation driving the build phase.