The social and political turmoil that has swept through the MENA region over the past 6 months (the Arab Spring) has had a positive but muted impact upon the Dubai real estate market. While increasing demand in some sectors of this traditional ‘safe haven’ this has been insufficient to offset the impact of the Emirates widely reported excessive supply levels.
Our recently released report for Q2 2011 shows that the tourism/hospitality sector has been the major beneficiary of instability elsewhere in the region, with the diversion of travel to Dubai helping to stimulate a growth in visitor arrivals. With hotel room rates having fallen significantly over the past two years and the introduction of more budget properties, the market has become more competitive for visitors looking for a value for money destination. This has helped push occupancies higher and improved the performance of hotels (particularly those located along the cities beaches).
With more tourists from the rest of the region visiting Dubai, retail spending levels have also grown during 2010. Unlike the office and residential sectors (which continue to experience excessive levels of new supply), the supply pipeline was turned off in the retail market some time ago, with no major completions over the past year and this has provided the market with some ‘breathing space’. The Dubai summer shopping festival attempts to benefit from the obvious attraction of the cities air conditioned malls during the climatically challenged summer months, but with the city experiencing the highest provision rates in the region, retailers are benefitting from greater choice. This is likely to see a further decline in rentals in secondary locations as retailers relocate to the better performing centres.
The local media has made something of a splash about residential rentals and prices having increased in some areas of Dubai over the past 3 months (for the first time since the market crashed in 2008), with strong demand being reported for villas in iconic projects such as the Palm. While the influx of buyers from less stable markets in the region and the recent announcement that purchasers of residential properties in Dubai will qualify for 3 year residency visas are positive factors, these are likely to be insufficient to offset the ongoing impact of high levels of new supply over the next 12 months in both Dubai and nearby Abu Dhabi. Any recovery of prices is therefore likely to be extremely selective, with prices and rents continuing to fall in the overall market for some time yet.
It remains a good time to be an office tenant in Dubai, with vacancies across the whole market nudging towards 50% and more space becoming available in even the best quality buildings. The market continues to experience positive net absorption, but the additional demand remains swamped by additional new supply. Tenants can therefore be increasingly selective and are only really interested in prime locations, with older properties and those in off-pitch locations struggling to attract tenants at any price.
The expansion of Dubai’s non oil economy over the past 6 months means there is some ‘light at the end of the tunnel’, but it remains too early to call the bottom of the property cycle in most locations of the city. Despite this, the ‘selective recovery’ identified in our Q2 report, can be perceived as a positive in a market starved of good news for real estate investors over the past 2 years.