There are grounds for cautious optimism about the prospects for the Dubai real estate market in 2013 with most sectors of the Dubai market ending the year in the early upturn stage of their cycle. While the real estate sector has lagged the overall economy during 2012, there are now signs that confidence is returning among both investors and developers, particularly in the last six months with a number of major new projects announced.
Jones Lang LaSalle's recent Real Estate Investor Sentiment Survey (REISS) confirms that investors remain confident with the city emerging as the clear favourite among major real estate investors across the MENA region. There are indications that some of the lessons of the last real estate crisis have been learned. The most important of these is the need to adopt a long term and co-ordinated approach, rather than developing too much real estate too quickly.
Providing this increase in confidence does not result in negative over exuberance, it is likely that most sectors will continue to experience some growth in prices and rentals in 2013.
• Hotels: In terms of sector specific analysis the hotel market has been the strongest performing sector in Dubai during 2012, with occupancies and room rates at the highest level since 2008, supported by strong underlying demand, with the number of visitors to Dubai continuing to increase.
• Residential: The residential sector is currently the most varied. While rents and prices have increased markedly in the most popular established locations over the past 6 months, this trend is not affecting all areas, with many locations still witnessing stable pricing. Even within those locations where prices have been increasing (eg: Dubai Marina and Palm Jumeirah) there has been significant variation between individual buildings.
• Retail: The retail market has benefitted from the growth in tourist arrivals in 2012. The best performing centres have consequently been those with the greatest attraction for tourists (eg Dubai Mall and the Mall of the Emirates). These are likely to remain the strongest performing centres in 2013.
• Office: The office market ends 2012 burdened with a significant level of vacant space and more projects scheduled to complete in 2013. However, this headline disguises a number of different trends and it is not possible to speak of the whole market in the same language. Rents in prime single ownership office buildings in preferred locations such as Sheikh Zayed Rd, Downtown and free zone buildings in TECOM are now stable and there could be a limited recovery in rentals in 2013.
• Industrial: The industrial market has been much less cyclical than other sectors over recent years and continues to be dominated by long term commitments to single tenants. As the volume of freight through both Jebel Ali port and the new airport at Dubai World City continues to increase, there is likely to be continued demand for warehousing and logistics space in the major industrial locations to the south of Dubai.
In 2012, the Executive Council announced a major spending programme, re-prioritising investment into capital projects that have the greatest strategic impact on the Emirate. The Government is strategically targeting distinct market sectors and phasing these projects over a longer time frame. Abu Dhabi has become more cost competitive, its urban infrastructure and quality of life offering continues to improve through better quality accommodation and on-going improvements to social infrastructure and amenities and additional moves to channel demand to Abu Dhabi Emirate generally in line with its 2030 Vision.
However demand remains suppressed in the short term. Whilst supply continues to increase as major projects reach completion, vacancy rates are set to rise further and consequently rental values have continued to decline throughout 2012. Additional job growth is required to drive demand and absorb vacant supply and the prospects for 2013 therefore remain contingent on major government spending, The prospects for Abu Dhabi in the medium term are however very strong: the Government remains committed to Vision 2030 and its policy agenda; domestic capital will continue to dominate the market and there are sufficient wealth reserves to deliver major projects.
• Hotels: The market is still absorbing a large number of new hotels that have been completed over the past 2 years, and occupancy levels and room rates have consequently declined during 2012. The long term prospects for the market remain strong, with the continued expansion of Etihad airlines & the airport, and major investment in new leisure attractions. These projects will however take time to generate additional demand and the hotel sector is likely to remain subdued in 2013.
• Residential: 2012 has seen the completion of a number of new projects that have helped alleviate the previous shortage of high quality residential supply and increased the range of options for tenants in Abu Dhabi. There remains however a mismatch between demand and supply in terms of both quality and pricing. The prospects for the market in 2013 will be dependent upon the impact of two recent regulatory announcements, to register all existing leases in the Tawthaaq system (and thereby restrict sharing) and to encourage Government employees to live in Abu Dhabi to qualify for housing allowances.
• Retail: The high level of retail spending available in Abu Dhabi is not currently matched by the quality of its retail offering and there remains a net loss of spending to Dubai. The retail offering will improve with the completion of a number of high quality retail projects during 2013, including the Galleria on Al Maryah (formerly Sowwah) Island and Deerfields Town Square. In the longer term, the major addition to retail supply in Abu Dhabi is the Yas Mall, scheduled to complete in 2014.
• Office: The office market has seen the delivery of a number of new office towers in 2012 and this has provided tenants with a wider range of options as the vacancy rate has increased to around 30%. The market is likely to remain tenant favourable in 2013 as more new projects are completed and demand for large units remains limited to the public sector, with most private sector companies continuing to seek relatively small areas. With a continued 'flight to quality', 2013 may see opportunities to refurbish or redevelop older office projects in Abu Dhabi.
• Industrial: There remains a selection of industrial land and purpose built premises available for industrial occupiers in locations such as Mussafah. The market is likely to diverge in 2013, with smaller companies preferring these locations, while demand from larger space users is likely to shift to the new KIZAD industrial zone associated with Abu Dhabi's new Khalifa Port, the first stage of which opened for shipping in the final quarter of 2012.
Commenting on 2012, Alan Robertson, CEO of Jones Lang LaSalle MENA, said: "In 2012 the UAE real estate market has been a tale of two very different cities. We have seen cautious optimism returning to the Dubai market. The recovery has however been very selective and focused on only the best quality projects, locations and developers. While 2013 is likely to see a broader based recovery, the strongest performance will remain concentrated on those projects for which there is confirmed investment and tenant demand. The significant levels of vacancy and further new supply will limit the extent to which poorer quality projects and those in secondary locations will benefit."
"Abu Dhabi lags further behind in its recovery. The Government remains committed to a broad range of capital projects and infrastructure developments, but demand remains weak pending the return of major government capital spending whilst supply continues to drive the Emirate's vacancy levels. Until we see more take-up of available space, rents will continue to suffer. However, as with Dubai, there are examples of where good quality space that is meeting expectations, has attracted quality occupiers and where rents have stabilised."