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JLL, the world's leading real estate investment and advisory firm, has today released its '2016 Top Trends for UAE Real Estate'. For the ninth consecutive year, this highly anticipated report assesses and forecasts the major trends that JLL anticipates are likely to impact and shape the UAE real estate sector over the next 12 months.
Commenting on the 2016 trends, Mr. Alan Robertson, CEO, JLL MENA, said:
"2016 is expected to see more challenging conditions in the UAE real estate market as we begin to feel the impact of the continuing fall in oil prices and ongoing geopolitical tensions leading to reduced liquidity, and pressure on government budgets. Whilst this overall scenario will naturally impact the UAE and wider GCC region, the UAE real estate market is now better equipped to deal with such challenges than it has ever been.
With subsidy cuts, reduced spending and the potential introduction of a Goods and Services Tax (GST), the government is already realigning its strategy to further reduce its reliance on oil revenues. 2016 is likely to be a more challenging year for the UAE real estate market than 2015, but it must be recognised that the overall economy is still expected to grow at around 2.7%, so there remains opportunities as well as challenges".
JLL outlines eight key trends that will affect the UAE real estate market this year:
1. Tightening liquidity: With oil prices remaining low, the government has less scope to inject liquidity into the financial system, resulting in a general tightening of liquidity that will impact investment into real estate development in 2016. Conventional project financing such as bank lending or IPOs will become more difficult, and developers will have to look for alternative funding mechanisms such as joint ventures, refinancing, public private partnerships (PPPs) and co-investment vehicles.
2. Increase in 'Build-to-Suit' (BTS) and 'Sale & Leaseback (SLB)': One of the alternative means of funding new development in the face of tightening liquidity will be 'build-to-suit'. BTS involves developers building schemes according to the specifications provided by corporate tenants, who then commit to either lease or purchase the premises upon completion. This concept is prevalent in more developed markets, and would signal further evidence of the maturation of the UAE real estate market. Sale and Leaseback (SLB) is a means by which occupiers of existing buildings can free up capital for reinvestment in their core business. BTS and SLB solutions have been most prevalent in the office and industrial sectors of the UAE market to date but there is increasing interest in these concepts in the education and healthcare sectors.
3. Reduced outflow of capital: 2016 will witness reduced capital outflows from the Middle East into real estate in the rest of the world. Capital outflows are expected to decline from 2015 levels when ME investors injected USD11 billion in overseas markets. An increasing share of the Middle East capital flow in 2016 will be from wealthy private individuals or families, as compared to sovereign wealth funds that dominated activity in 2015. As sovereign investors become more mature, they are expected to change their investment strategy in 2016 and will look at profitable exits, which will increase selling activity.
4. Project delays reduce risk of oversupply: A by-product of the slowing market conditions in 2016 is likely to be a continuation of the trend of project delays. This will represent something of a 'blessing in disguise' and will help stabilise the market and avoid excessive oversupply. Project delays will be attributed to a number of reasons, including financing issues, contractual disputes, construction delays and licensing/approval delays, while some developers will deliberately hold back completions to avoid flooding the market. Over the past five years, the materialisation rate of proposed projects has been relatively low, with only 30% for proposed residential projects and 45% of proposed office space completing on schedule. The materialisation rate is expected to remain low with further project delays in 2016, which in effect will reduce oversupply risks.
5. Buildings that work: Productivity will be a key factor for occupiers selecting new office premises –resulting in demand being increasingly focussed on those functional buildings where they can operate more efficiently and productively. While overall levels of demand are expected to be lower than in 2015, those buildings that offer functional and efficient floor plates, high quality lifts and other services, sufficient parking and access to public transport will remain in demand. There is also an increased recognition that office premises contribute to staff productivity and high quality and flexible office space can therefore assist occupiers attract, retain and motivate staff.
6. Adding value to existing buildings: Another trend that can be expected in 2016 is a renewed focus on adding value to existing buildings rather than developing new buildings. This trend is resulting in increasing demand for fit-out within retail, office and hospitality projects, as owners seek to position them to match demand patterns. In a challenging economic environment, many occupiers are re-examining their fit-outs as this may represent a more cost effective option than moving to new premises. The demand for new office fit-out is growing as occupiers increasingly seek functional, productive, spacious and affordable premises. In contrast, there is less demand for iconic or less functional buildings.
7. Changing hotel landscape: The UAE hotel and hospitality landscape is expected to evolve and change significantly in 2016 as overall demand softens. The market will be affected by disruptions relating to technology (i.e. online bookings), growing demand from new customer profiles (i.e. younger generation), broader hospitality offering (i.e. growth of resorts) and a general move from Dubai's core luxury offering into a more broad based hospitality offering. This changing landscape and the issues and factors around it will impact how hotels operate and their profitability in 2016.
8. Emphasis on building safety: 2016 will witness greater attention towards building safety from various stakeholders, including developers, landlords, occupiers, consultants and government agencies. Due to increased overall awareness, there will more demand for well-maintained buildings with better fire safety and other systems. The market will also witness new regulations where building owners will have to adhere to stricter fire safety guidelines from government agencies such as Civil Defence. The important need in 2016 is probably less for new regulations, but for more effective enforcement of the existing codes and regulations. This is likely to remain a hot issue as stakeholders seek to reduce the reputational risk to their brand from accidents and incidents relating to building safety.
Craig Plumb, Head of Research, JLL MENA concluded: "In a more challenging economic environment, real estate stakeholders (including investors, developers, occupiers and the government) need to consider a range of new strategies to realign themselves and accept the new realities. Despite softening demand across many sectors of UAE real estate there remain significant opportunities for those willing to embrace the new trends offered by an increasingly mature and sophisticated market. It is also important to recognize that while the pace of economic growth in 2016 is expected to be below that seen in 2013 and 2014; it remains in line with that seen in 2015. The market may be slowing but it is still growing".
The UAE remains an attractive real estate market and some buyers, especially owner-occupiers and those investors taking a long term perspective may well see value at current levels. Overall, we remain confident that while prices and rentals will soften further in the short term, they are likely to increase again, perhaps as soon as 2017, as the UAE continues on its' path to becoming a more mature real estate market."
Dubai prime rental clock
This diagram illustrates where JLL estimates each prime market is within its individual rental cycle as at the end of the relevant quarter along with the forecast for the end of 2016.
Abu Dhabi prime rental clock
Head of Research - JLL MENA
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