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According to JLL’s UAE Real Estate Market Overview for 2017
In 2017 the UAE's real estate sector continued to adjust to lower growth being the "new normal" according to JLL's 2017 Year in Review report, with all sectors of the market remaining in the downturn stage of their cycle.
One of the major drivers of the more subdued market has been the slowdown in economic growth, which declined from its historic average of 4.1% to just 1.7% in 2017. This represents the low point of the current cycle, with growth forecast to increase again in 2018 (by 3.3%) and averaging 3.4% per annum between 2018 and 2020. This should result in a gradual improvement in the performance of the real estate market, but overall conditions are expected to remain subdued in 2018.
The start of 2018 could see a reduction in activity and performance in the real estate market due to uncertainties around the impact of Value Added Tax (VAT).
"The UAE real estate industry is entering into a transitional phase, with VAT now in effect and key stakeholders seeking to decipher its immediate and longer term impact. Although VAT does not apply to residential rents and sales of new residential property, other real estate sectors could be negatively impacted by increased costs and cash flow challenges. said Craig Plumb, Head of Research at JLL MENA.
Despite the subdued conditions, there has been continued sales activity in both the commercial and residential sectors in 2017. Four major commercial (office and retail assets) properties transacted in 2017 (with a combined value of more than USD 340 million). The purchasers were all major institutional investors, who recognize the potential uplift in the value of selected properties obtained in periods of depressed market conditions.
The majority of sales in the residential sector have been concentrated in the off plan sector, where developers have been offering particularly attractive prices and payment plans. A total of 25,600 off plan properties were purchased in Dubai in 2017, with 2017 set to record the highest level of off plan sales in Dubai since 2008
While future supply levels remain constrained in Abu Dhabi, there is an increased level of potential supply due to enter the Dubai market in 2018 and 2019. The completion of all these proposed projects would result in a potential oversupply in some sectors of the market, but it is unlikely that all of these projects will in fact complete (with analysis by JLL revealing that only 40% of the total proposed supply of residential units in Dubai has actually materialized over the past 5 years).
The report notes that the Dubai economy is expected, to increase more quickly than the UAE average in 2018. This is partially a reflection of the
20% increase in government spending announced in the 2018 budget, with a major portion of the increased spending on infrastructure, and projects related to the hosting of Expo 2020.
Given increased client interest in the Sharjah market, JLL has increased its coverage to include Sharjah in addition to Dubai and Abu Dhabi in the 2017 year in review report for the UAE.
UAE office market summary
Dubai office market summary
Total office supply in Dubai reached 8.86 million sq m of GLA as of Q4 2017. The Trade Centre saw the completion of 70,638 sq m of GLA during the year, with the handover of One Central (69,087 sq m) and Duja Tower (1,551 sq m).
Consolidations are continuing across various sectors of the market, with tenants trying to reduce rental costs, therefore looking for more affordable buildings but still focused on good locations. Given the latter, the majority of upcoming offices are concentrated in established commercial areas such as Tecom, the DIFC, and Business Bay.
Future office supply in Dubai is expected reach 9.13 million sq m and 9.28 million sq m at the end of 2018 and 2019 respectively. Likely notable completions in 2018 include The Opus in Business Bay (5,200 sq m), Du Biotech Headquarters (34,500 sq m) and the first phase of Motorsport Business Park (6,000 sq m).
Despite the generally challenging year, some buildings recorded positive leasing results in 2017. One example is Central Park Towers in DIFC, which due to attractive rental terms announced two major key tenants. Marriott International are relocating their regional office for the Middle East and Africa into the building and are taking up approximately 7,900 sq m of GLA, (the first major company with a dual license), operating both an on-shore and off-shore license in the DIFC. The second tenant is expected to occupy approximately 5,800 sq m of GLA.
Dubai Internet and Media City have among the highest occupancy levels in the city, an average of 95% across all buildings, illustrating the lack of speculative development and Tecom's success at retaining its tenants.
Abu Dhabi office summary:
There were no completions in the office sector over Q4, with office supply in Abu Dhabi remaining at around 3.5 million sq m of GLA as of Q4 2017.
Future completions in Abu Dhabi are expected to deliver around 211,000 sq m and 57,000 sq m of GLA in 2018 and 2019 respectively. Notable completions in 2018 are likely to include the ADIB headquarters, Leaf Tower on Reem Island and Omega Tower on Reem Island.
Vacancies in the office sector in Abu Dhabi reached 22% in Q4 2017, remaining stable over the quarter. Office rents remained largely stable over the year for both Grade A and B buildings. However, as new supply enters the market, we are likely to see rents decline as competition increases which will prompt tenants to negotiate better rents and additional benefits to their tenancy terms such as longer grace periods, additional parking spaces and better service provision, as landlords incentivise to attract tenants.
Sharjah office market summary
Demand for office space in Sharjah is limited due to a combination of factors including inadequate parking and traffic congestion in established areas, Sharjah's undeveloped public transport system, the absence of a clear business district and strong competition from Dubai. The main constraint remains the lower proportion of office employment within Sharjah's economic base (which is more industrial in nature than other Emirates), something that is not going to change significantly in the short term.
There is an estimated total of around 1,110,000 sq m of existing office space in Sharjah (as at Q3 2017), with the majority of this in onshore locations. While an average of 2,500 new companies have been registered in the two free zones in Sharjah (Sharjah Airport Free zone and Al Hamriyah port free zone), most of these companies are small employers that do not require significant amounts of office space.
Most of the quality office towers are located in the Al Majaz area, which can be regarded as the Central Business District of the Emirate. A significant proportion of the total office space in Sharjah is of secondary quality and located in mixed-use buildings, where the majority of space is occupied as residential premises.
There are relatively few new office buildings currently under construction in Sharjah (with less than 150,000 sq m in active projects scheduled to complete in 2018 / 2019 and some of these projects being developed for government related agencies. While there are plans for a significant number of additional projects, many of these announced projects are unlikely to proceed in the absence of demand. Those that do proceed are likely to be on a build to suit basis for specific occupiers.
Office rents have declined across Sharjah in 2017 in the face of slower economic growth and limited demand. Rents in the basket of Grade A & B buildings monitored by JLL declined by 17% over the year to Q3 2017 to average AED 564 sq m per annum. with further declines predicted for 2018 as companies continue to cut costs.
As with all markets, rents for the prime office space (those in Al Majaz with sufficient onsite parking and water views) are higher than the market average. The asking rents in these buildings can range up to AED 750 sq m per annum but deals are certainly being done at below these levels.
UAE residential market summary
Dubai residential market summary
Emaar Properties' USD 1.5 billion initial public offering (IPO) of its United Arab Emirates development business was headline news for Q4 2017 (being the largest since the IPO of Emaar Malls in 2014). Emaar launched a number of new off plan projects in 2017, a trend that extends to the wider residential segment, where supply is increasing ahead of demand. By 2020, a total of 570,000 units of new supply could enter the market, representing an average annual increase of 8%. According to Oxford Economics, Dubai's population is expected to grow an average of 3% per annum, this undoubtedly suggests that market absorption rates will be less than the levels of new supply and thus a large number of residential units may be left vacant.
Residential stock in Dubai is estimated at approximately 491,000 units at the end of 2017, with apartments accounting for more than 80% of total supply and reached approximately 403 thousand units, while villas reached 86 thousand units. Key projects which were completed include Duja Tower in Trade Centre (679 units), and The Polo Residence in Meydan (598 units).
Looking ahead, the near completion of a number of residential developments, including New Dubai Gate in JLT, The Pad in Business Bay, Eagle Heights in Sports City, Serenia Residences on Palm Jumeirah, will likely see up to 17,000 quality apartments enter the market in early 2018. Actual completions are likely to be far less (assuming a materialization rate of around 40%).
The Dubai residential market has weathered many cycles from growth (2001-2008), to decline (2009-2011), to recovery (2012-2014), to its current status of soft landing. The recent activity in the market suggests that confidence has returned to both investors and developers, however it is worth noting that the number of new launches are significantly below their peak levels in 2006/2007 and the volume and the value of sales are also below levels recorded during 2013/2014.
Both sales prices and rents declined over the year, but the rate of decline has slowed down over Q4 (an average of 1.6% across all segments). As the market absorbs additional units, it is expected that prices will continue adjusting (downwards) with occupancy levels following a similar trend as supply growth outpaces potential demand.
Abu Dhabi residential market summary
There were 3,000 residential units delivered in Abu Dhabi during 2017, with 88% of completions being apartment units bringing the total stock to approximately 251,000 units. Key projects delivered included Sigma Towers 1 and 2, which are located on Reem Island. The first phase of Hidd Al Saadiyat, in addition to Wave and Al Jazeera Towers on Corniche were also completed.
The future supply is expected to shift to the New Islands (Saadiyat Island, Reem Island, Yas Island and Raha Beach), comprising more than 60% of projects currently under construction. By 2020, 12% of the total residential supply in Abu Dhabi will be on New Islands, compared to 8% in 2017. This trend is predominantly driven by the high number of apartment completions on both Reem Island and Al Raha Beach.
Limited future supply is expected to enter within the main Abu Dhabi Island representing approximately 57% of the total residential supply in Abu Dhabi in 2020 compared to 62% in 2017.
Both apartment and villa sales prices saw slight declines over the last quarter of 2017, while rental indices remained flat for both residential segments. Investor sentiment has been negatively impacted since 2014 when oil prices started declining.
The introduction of VAT in January 2018 is expected to add further incentives to potential buyers in the form of more generous post-handover payment plans. This is because the upcoming VAT regulations on residential sales offers developers a zero-rate on all residential sales within three years of the completion of a project. Any home sale done after three years will be subject to the 5% VAT.
Sharjah Residential Market Summary
Congestion in the older residential locations in the western parts of the Emirate along the coast and the development of new residential communities within Al Juraina, Al Gharayen and Al Nouf has led a significant shift in population to more eastern locations. The establishment of the University City and industrial area within Al Saja'a suburb has further stimulated the expansion of Sharjah City towards the east.
The other major change in the Sharjah residential market results from changes to the property ownership laws introduced in 2014 to allow non-Arab expatriates to purchase property in selected projects. This has resulted in the development of a number of master-planned residential communities for sale, including Al Zahia, Tilal City, Nasma Residences, Al Mamsha, Aljada, and Sharjah Waterfront City.
The vast majority of the residential units in Sharjah are apartments (89%), with only 11% of the current stock comprising villas.
There have been announcements to construct around 30,000 additional residential units across Sharjah in coming years. However, as most of these projects have not yet announced details of their phasing, it is not possible to identify how many of these units will be delivered over the next 2 years.
Following a marked decline in 2016, the average price of apartments sold in Sharjah has remained largely unchanged during 2017 (shifting by less than 1% for any sector in the year to Q3 2017). Prices have been supported by an increase in sales activity due to the release of units for sale in several new projects during the year.
Unlike sale prices, rentals in Sharjah have continued to decline (by between 6% and 10%) over the year to Q3 2017. This decline has been largely driven by softening of rents in Dubai, which has reduced the movement of tenants from Dubai to Sharjah coupled with low market sentiment. Sharjah continues to be an affordable residential destination, with average apartment rents 30-40% lower than comparable mid-market products in Dubai.
UAE retail market summary
Dubai Retail Market Summary
Dubai added 41,000 sq m of GLA during 2017. Notable completions during Q4 included the first phases of Marsa Al Seef and La Mer, both developed by Meraas. Looking ahead, the future supply will feature Dubai South Mall, the Dubai Mall Boulevard Expansion and the Night Souk on Deira Islands, potentially increasing supply by 30% over the next two years to reach 4.5 million sq m of retail GLA by 2020.
The new supply entering Dubai's market as well as other regional neighbours faces increased online competition. The local online platforms such as the UAE based Namshi has been offering competitive prices and free next day deliveries, entirely tempting for residents in the city where spare time is scarce. Other examples include, the ride hailing application; Careem, which announced the launch of its e-commerce venture Dukkan Careem and a number of retailers are launching their own online platforms to keep pace with this change. Fashion is being digitised and thus, the appeal of physical stores will need to compete even more aggressively as their competition has been extended to the limitless options available on the internet.
Black Friday sale, the biggest shopping day of the year for the United States, was rolled over to Dubai between the 23rd – 25th of November, with participation from more than 400 brands. The citywide shopping mega sale was the second of its kind during 2017, with the first one occurring in May. Although satisfactory for end customers, such events tend to limit the incomes and reduce the margins of retailers and landlords.
Similar to the global retail landscape, there is generally more supply than demand of retail space. Landlords in Dubai are starting to recognize that, and are offering attractive terms for tenants. This includes price flexibility, and how the retail space is utilized. This is particularly crucial as the rise of e-commerce, the over-supply of malls, and the increasing appeal for F&B concepts have collectively changed the face of shopping.
As such, 2017 saw face retail rents declining an average of -8% and -9% YoY for primary and secondary malls. This understates declines in the level of performance due to the increasing range of deals to support artificially high face rents (rent free periods).
Abu Dhabi Retail Market Summary
There were no major retail completions during 2017, with the supply remaining constant at 2.6 million sq m of retail GLA. Looking ahead, the supply of retail malls in Abu Dhabi is expected to pick up. There are smaller community and neighbourhood projects in the pipeline, collectively adding 75,000 sq m of retail GLA by the end of 2018. A notable project expected to complete in 2019 is Al Maryah Central – Gulf Related Mall, a super-regional mall on Al Maryah Island, adding approximately 150,000 sq m of retail GLA.
Dining and entertainment is gaining prominence in Abu Dhabi. The 123,000 sq m waterfront promenade expansion of Marina Mall is projected to include 19,500 sq m of GLA dedicated to F&B. According the National Investment Corporation (NIC), the promenade aims to heighten the experience of customers through the provision of a mix between shopping, dining and entertainment. Similar projects in the pipeline include Aldar's Water Edge on Yas Island. The 13 apartment buildings community will be complemented by waterfront dining and retail options.
Historically, growth in retail spending (derived both from the resident population and higher tourist levels), has supported demand for additional retail space in Abu Dhabi. This led some retail centres to increase their rents during 2014. Since then, retail spending from tourists and residents has been negatively impacted by the increased cost of living followed by the decline in oil and power subsidies and the appreciation of the USD. Consequently, activity in the retail market has been limited, with 2017 seeing a continuation of this trend.
Rents remained stable at AED 3,000 per sq m, primarily off the back of the limited existing stock of good quality malls. However, even within prime malls, the number of units where these levels of rents can be achieved has declined, suggesting there is a difference between face and effective rates.
Spending activity might be further challenged in 2018 with the introduction of the VAT. Depending on the price elasticity of goods, sales might see a decline, especially as different market players adjust to the new norm.
Sharjah Retail Market Summary
Sharjah is relatively under provided with modern retail facilities at present. While there is an estimated 1.2 million sq m of retail space across the Emirate, only around 30% of this is in organised retail malls. The majority of retail space is currently in the unorganised sector including souks and street front units, often on the ground floor of mixed-use buildings.
There are no super-regional malls in Sharjah at present, with the largest mall being the Sahara Centre (with a NLA of around 75,000 sq m). Other prominent regional centres offering international retail brands complimented by entertainment and recreational facilities include Safeer Mall, Sharjah Mega Mall and City Centre Sharjah
There is relatively little additional retail mall space due to complete in the short term, with most of the additional space planned for 2018 delivery being the expansion of existing malls. The completion of a number of major new malls in 2019 and 2020 (eg: Al Zahia City Centre, Avenues Mall, Tilal City Mall) will lead to the emergence of a two-tier market, with less competitive and poorer performing retail centres struggling to retain tenants and sustain footfall.
While the overall market will become more competitive, opportunities remain to develop further modern souks (to strengthen Sharjah's cultural image), outdoor promenades with F&B outlets, small neighbourhood and convenience malls to service growing residential communities and good quality street retail (given the popularity of street shopping in Sharjah).
Although the introduction of future supply will increase the range and quality of available retail options, it will also exert downward pressure on performance, resulting in lower rentals and higher vacancies in 2018.
Dubai Hotel Market Summary
Dubai is strengthening its position as one of the largest hospitality markets globally. The supply currently stands at 82,000 hotel rooms, an increase of 5.3% YoY. The future pipeline is still strong, with 17,400 and 9,200 keys due to enter the market in 2018 and 2019 respectively.
Key projects include the hotels being developed by Meraas on Bluewaters Island, which will be surrounding the iconic 'Ain Dubai' also known as the Dubai Eye. The project is envisioned to become a new tourism hot spot in Dubai and aims to attract 3 million visitors per year. Due to open in 2018, Ain Dubai will be the largest Ferris wheel in the world and Dubai's next must-visit attraction.
One of the major openings in Dubai over the last quarter of the year was the Bulgari Resort and Residences. Although small in size (just 120 keys) this project is expected to become one of the leaders in the luxury resort segment.
Dubai remains a strong tourism destination, progressively growing its regional strength and leaning towards a global role in the tourism market. Plans from DTCM to grow the number of visitors to 20 million in 2020 are ambitious as the number of visitors in 2016 was less than anticipated. Data for the first 9 months of 2017 show an improvement as visitors arrivals increased by 7.5%.
In terms of key source markets, there is a noticeable shift from traditional source markets to South Asia and China. Tourists from China and India increased 49% and 20% respectively YoY (data as of YT Sept 2017), while the number of tourists from neighbouring GCC countries (most notably Saudi, Oman and Kuwait) declined 10% YoY. Given the demand shift in purchasing power, hoteliers are adjusting their rates and packages to cater to these new source markets, thus the market continues to record declines in overall average ADRs and consequently in RevPAR. YT November data suggests that ADRs declined to USD 181 compared to USD 189 during the same period last year. Occupancies remain strong at 77%.
Abu Dhabi Hotel Market Summary
Hotel supply has been relatively stable in 2017 with 600 rooms entering the market throughout the year. The pipeline for future projects is mostly located outside Abu Dhabi Island with current under construction projects focused on Saadiyat Island. This should contribute towards enhancing the appeal for leisure travelers as both Saadiyat and Yas Island have potential to be strong leisure demand generators.
Approximately 2,100 rooms are expected to enter the market in 2018. Expected completions include Fairmont (812 keys) and Jumeirah Saadiyat (295 keys), and Edition Al Bateen (200 keys).
The Abu Dhabi hospitality market remains largely reliant on public sector demand from oil, gas and defence industries. As such, the lower oil price environment has led government entities to scale back budgets, which negatively impacted the hotel industry. YT November 2017, occupancies remained largely stable at 71%, while ADRs fell 6% to USD 118 when compared to the same period last year. As a result, RevPAR was 6% below levels recorded in 2016.
Over the medium to long term, the Capital is focused on diversifying its tourism base, attracting tourists outside the 'corporate sphere'. By positioning itself as an upcoming 'entertainment city', recent completions such as 'The Louvre' support this drive. This diversification towards more leisure demand is expected to benefit performance levels as it will support ADRs and occupancy levels.
Sharjah Hotel Market Summary
The number of hotel guests in Sharjah has stagnated in recent years, with 1.8 million guests in 2016, largely the same level as in 2012 and 15% below the peak of 2.1 million recorded in 2014. The largest source markets in 2016 were the GCC states (37%) Asia (23%) and other Arab nations (15%), which together accounted for around 75% of guest nights. SCTDA's tourism development strategy aspires to attract more than 10 million tourists to Sharjah Emirate by 2021.
A key component of this strategy is to increase the capacity of Sharjah Airport to 25 million passengers by 2027 (more than double the 11 million handled in 2016). Other initiatives include visa relaxations for Chinese, Russians and Indians with US residency and the opening of tourism offices in these three core source markets.
Restrictions on the sale of alcohol and the focus on Islamic history and culture will continue to ensure that the hospitality market in Sharjah remains largely focused upon local residents and visitors from regional Islamic nations. This is recognised by the SCTDA within its plans to focus on 5 key market segments (family, culture, cruise, MICE and eco-tourism).
There are approximately 8,000 hotel rooms operating in Sharjah City (with a further 3,900 serviced or hotel apartments). There is a much higher focus on the mid and budget sectors of the market compared to either Dubai or Abu Dhabi, with 57% of the hotel rooms in Sharjah City classified as 3 star or below by the SCTDA. The same is true in respect of serviced apartments, with 64% of rooms classified as 'basic'.
The SCTDA estimate that 13 additional hotels will be operational in Sharjah City by the end of 2020, adding a further 3,000 rooms to the existing supply (with an increased focus on branded developments to international chains such as Starwood and Accor). Given there is no data on the proposed completion dates of this additional supply, we have spread the scheduled completions evenly over the next three years.
The future supply of hotel apartments is expected to exceed that of hotels with 33 projects announced for delivery by the end of 2021, adding almost 5,000 rooms (more than doubling the existing supply).
The average occupancy rate (across hotels and serviced apartments) increased by 2% in 2016 to 63% but this remains below the peak level of 67% recorded back in 2013. While occupancies in hotels increased marginally in 2016 (to 64%), serviced apartments recorded a marginal decline in occupancies (61%). The strongest occupancies (73%) were recorded in the 3 star sector, while 1 star properties recorded the lowest occupancies in 2016 (50%).
Room rates have remained under pressure in Sharjah over recent years, with falls of between 10% and 15% pa recorded, since the market peaked in 2014. Data from SCTDA shows a decline of around 11% in room rates per annum, for even the most popular sector of the market (3 star). Data from STR confirms that room rates have declined further in the Sharjah market in 2017.
The full report can be downloaded here
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