The hotel sector continues to be the best performing of the Dubai real estate market as increasing tourist arrivals lead to higher occupancy and RevPAR levels (revenue per available room), according to Jones Lang LaSalle’s latest report ‘Dubai City Profile – September 2011’.
While the hotel sector has been the major beneficiary of the Arab Spring, the retail and residential sectors have also received a positive boost over the past 9 months. The regional upheaval has re-enforced Dubai’s position as a global destination with many tourists rescheduling their holidays to the UAE due to volatility elsewhere in the region. Dubai Airport is now the fourth busiest in the world, reporting a year-on-year growth in arrivals of 9.5%, equating to around 12 million visitors in the first half of 2011. Tourism was particularly strong in July, with Dubai hotels achieving an average occupancy rate of 78% - a significant improvement on the 60% recorded in July 2009. This was driven by a major increase in the number of GCC nationals visiting Dubai, up 80% compared to the same period last year.
The retail sector has also benefitted from the unrest with major malls reporting an increase in foot traffic and sales activity. GCC guests spend more on average than other visitors, although this was largely focussed in the major centres frequented by tourists such as Dubai Mall and Mall of the Emirates. The residential market has also seen an increase in demand particularly from those concerned with stability and security elsewhere in the region. However this has yet to translate into increase in rents or prices but some locations are stabilizing. The office sector has been the least affected although there has been some interest in the DIFC from international banks currently based in Bahrain.
Alan Robertson, CEO of Jones Lang LaSalle MENA said: “The Arab Spring has had a positive impact on the hotel, retail and residential sectors of the Dubai market. We believe this has helped push the hotel and retail sectors into the recovery stage and that selected sectors of the residential market are also improving. The question now is how long this impact will last before broader international issues undermine this upturn. While the Arab Spring contributed to improved sentiment and stronger performance over the first half of the year, these benefits could be limited by the fluctuating financial concerns emanating from Europe and the US over the last few months.”
He added: “The ongoing political and economic stability of the UAE is likely to continue to bring in longer term benefits for the Dubai property market. However a more sustainable recovery requires this upturn to be converted into broader economic activity that helps to boost employment, but there is little sign that this is happening yet.”
The office market continues to become more tenant favourable, with rentals and sale prices continuing to decline in many parts of Dubai throughout 2011. Moreover, the economic scenario in Europe and the US is likely to have a negative impact on office demand from corporates as they have become more cautious and are delaying leasing decisions.
The Dubai office market could however get an additional impetus as high net worth individuals and investment institutions increasingly look at investment grade real estate opportunities in an environment of falling interest rates and equity markets. Properties with high occupancy and strong blue chip tenants are expected to remain in high demand, commanding lower cap rates than the overall market as investors compete to purchase the limited number of investment grade properties which offer higher returns than low interest bank deposits. If the global economic scenario improves, there may also be an increase in demand from occupiers looking to upgrade to better quality buildings and locations.
The outlook for Dubai’s residential market is mixed as the sector seems to approach the bottom of the property cycle. Villas, particularly in upmarket locations are clearly performing better than apartments both in terms of rentals and sale prices. Whilst average apartment prices and rentals have stayed stable over the quarter, price and rental declines are becoming more pronounced for units in the middle and low income housing areas.
Improved sentiment towards the Dubai residential market is indicated in some reports covering the first nine months of 2011. Although official data indicates that the number of transactions has fallen compared to the same period last year, the value of transactions has greatly improved and average sale prices for villas in the mature areas have increased. However with rental rates dropping more than achieved prices, there has been a decrease in yield making Dubai less attractive to investors looking for rental returns. Although the market seems to be finally seeing some upturn in some prices after almost three years of falls, recovery in demand could be delayed by negative sentiment and slowing economic growth in both Europe and the US.
The retail sector continues to tilt in favour of tenants as landlords offer incentives such as shorter leases, rent free periods and percentage of sales only rents. The overall market remains saturated but there are niche opportunities in respect of convenience centres and possibly concepts like big box retail.
Tenant favourable conditions are expected to continue to characterise the retail market for the remainder of the year. The future supply pipeline is likely to be dominated by different retail concepts such as community shopping and big box retail centres. Although retail rents have stabilised in the prime malls, it is a different situation in the older malls as landlords are trying either to reposition the tenant mix or be more flexible in rent negotiation to ensure the continuity of tenure and maintain occupancy rates.
- The Dubai hotel market will continue to be positively impacted due to the upward trend in tourist arrivals expected over the remainder of 2011. This will be largely due to the effects of the Arab Spring and Dubai status as a regional safe destination. During 2011, average occupancy rates have increased considerably.
Craig Plumb, Head of Research for Jones Lang LaSalle MENA concluded: “The lesson from the global financial crises of 2008/9 is that the Dubai market is closely tied to events in the broader global economy. The ongoing debt issues in both the US and the Eurozone could therefore have a negative impact on Dubai over the final quarter of 2011 and into 2012 if they result in a slowdown in global economic activity.
Unlike other markets in the region, affordable housing is not a major issue in Dubai. Falling prices have resulted in improved affordability, although a shortage of larger units remains with some families continuing to commute from Sharjah and the Northern Emirates.
Sustainability is becoming an increasingly important influence on the Dubai real estate market, which is now becoming more mainstream as an increasing number of owners and tenants recognise the financial benefits beyond the ‘feel good’ factor. This increased awareness seems promising but the market still has a long way to go as there are only a tiny proportion of existing projects qualifying for LEED certification. A number of innovative real estate companies in Dubai are now benefiting from the implementation of sustainability strategies across their portfolios and we expect to see more companies adopt such strategies as sustainability becomes more entrenched over the next few years.”