The UAE residential and commercial market is still searching for equilibrium as funding has been curtailed, projects scaled back and contractor resources downsized. Developers in the UAE will continue to take a cautious approach in the short-term in view of existing oversupply, according to latest research report from Alpen Capital.
Residential construction market
The residential construction market of the UAE is still struggling to reach its pre-debt crisis levels. In 2011, mounting debt issues in both the Eurozone and the US and fears of mature markets slipping back into a recessionary phase has made investors wary of investing in UAE realty projects, particularly in Dubai. This led to many big projects across the UAE, being kept on hold in 2011. The average prices and rentals of residential units have yet to reach their 2008 levels and continue to witness a fall in some areas.
Though the UAE residential construction market is still marked by oversupply, the market did show some signs of stability, particularly in the second half of 2011. Moreover, the real estate market of UAE (particularly Dubai) was affected positively by the recent “Arab Spring” in some parts of the Middle East, reinforcing UAE’s reputation of being a safe and stable country.
In the short term, Alpen Capital maintains a cautious outlook of the UAE residential market due to prevalent oversupply situation in the market. However, in the longer term, they maintain an optimistic view of the residential construction market of the UAE on the back of rising population and stable economic growth. The International Monetary Fund (IMF) estimates that GDP at constant price and population is expected to grow at a CAGR of 4.1% and 3% respectively between 2011 and 2016. The firm also believe that the UAE market will continue to enjoy a premium on rental yield as compared to mature markets of the US and Europe. This is expected to attract foreign investors for better long-term returns towards the UAE’s property market.
Though the market is expected to remain oversupplied in the near term, the residential real estate and construction market of Dubai is likely to outperform the commercial offices markets in the short-term. Is is expected the recovery in residential unit prices in 2012 and beyond in Dubai to be driven by economic growth, improving investor sentiment, and improving global economic scenario.
Abu Dhabi’s residential market is likely to be oversupplied over the next two years due to fresh supply in the market. We expect rentals of residential properties to trend further downward across Abu Dhabi. Further, it is expected the average selling price of residential units to be under pressure as the market adjusts due to an increase in supply.
Commercial construction market
Post the subprime crisis in the US, the UAE commercial office construction market was severely affected by a slowdown in growth, an over-stretched banking sector, and fallout from the bursting of the Dubai property bubble. The region witnessed spectacular growth in commercial office construction in the last decade, which led to an oversupply of commercial office space as investors and companies were reluctant to invest in the property market post the crisis. The oversupply which subsequently led to high vacancy rates resulted in a steep decline in property prices in the UAE.
Alpen Capital expects the rental yields to be under pressure in the near-term due to declining rentals on the back of high vacancy rates. The UAE market is expected to still enjoy a premium on rental yield as compared to mature markets of the US and Europe which will help in attracting foreign investments in the sector. Although, effective rentals of commercial office properties across Dubai is likely to fall further in 2012 due to oversupply and as owners look to attract and retain new tenants, we believe any signal of stabilization in the global economy will act as a catalyst for an increase in transactions as well as rental rates across the Dubai commercial office market in the long term.
Once the global economic environment, particularly in the Eurozone, improves, Dubai, with its calm political environment, excellent infrastructure and low commercial property prices (as compared to historical prices) will lure property investors, high net worth individuals and the corporate sector to invest in commercial office space. In the longer term, Alpen Capital maintains an optimistic view of the commercial office construction market of Dubai on the back of rising population and stable economic growth.
