2017 UAE Real Estate Market: Opportunities & Risks

The year 2016 will be remembered for the short-term challenges of adjusting to the “new normal” of lower oil revenues, which impacted the United Arab Emirates’ (UAE) economy and its real estate sector, according to JLL’s ‘2016 Year in Review’ report. The UAE’s GDP growth declined from 4.5% in 2015 to just 2.3% in 2016 and employment growth levels remained relatively unchanged at 1.5%, as companies consolidated their operations, particularly in the oil and banking sectors. However, according to the report which looks at the UAE’s real estate market, the medium-term picture for the UAE economy is more positive. Highlights of the report:

 

Opportunities

Growth in the UAE’s entertainment and tourism sector

A number of tourist attractions came to completion during 2016 such as the Dubai Parks and Resorts as well as the Dubai Opera, with others under way in Abu Dhabi principally on Yas and Saadiyat Islands which feeds positively into the real estate market. Going forward, we are expecting the completion of Louvre Abu Dhabi, Dubai Safari in 2017 in addition to many more in the pipeline, such as the AED 2.6 billion Six Flags Park which is scheduled for completion in H2 2019, and Sea World on Yas Island by 2022. These should help enhance the UAE’s position as the touristic attraction of choice in the region.

 

Domestic legislations and reforms

In October 2016, Dubai’s Real Estate Regulatory Authority (RERA) implemented a law whereby all advertisements of property will require a permit. Additionally, in December 2016, the government reinstated the Abu Dhabi 5% rental cap three years after its suspension, and the various new real estate laws which were introduced in 2015.

 

Opportunities in alternative real estate asset classes

The education sector is leading the way as an increased number of real estate investors, developers and builders seek to diversify their portfolios. The major attraction of this sector to real estate investors and developers are the strength of demand, the attractive financial returns available and the alignment of this sector with government policies to improve educational standards across the region.

 

Risks

Mergers and acquisitions due to reduced government spending

The mergers between NBAD/FGB and Mubadala/IPIC may be followed by others. The reduced oil price (from the highs of 2014/2015) has caused the Abu Dhabi government to act prudently. This has translated to a pause in government capital spending as well as job and budget cuts in the public sector. In Dubai, a number of international companies have been restructuring rather than expanding, which may continue to impact the office sector.

 

Increased cost of living

In Abu Dhabi, the cost of living has increased over 2016, with an annual inflation increase of 2.1% for the first 10 months of the year. As part of the government’s diversification plan, energy subsidies were removed, and a new fee (3% of rent) added as a fixed cost to a household’s utility bill. Further increases likely in 2017 and with VAT being introduced in January 2018.

 

Continued appreciation of the US dollar

A strong US dollar has reduced demand from many traditional leisure source markets in 2016. Performance of hotels and retail markets could remain under pressure during 2017 if the USD continues to strengthen in value.