The worst may now be over for the UAE economy. After a slowdown in 2016, the country looks to be in line for a modest rebound in activity in 2017, with Dubai expected to lead the way.
The real estate developers were putting a brave face on it, saying they had been remarkably busy, but there was no hiding the fact that the Dubai Property Show in London in mid-May was both small and, at least on the first day of the show on Friday afternoon, sparsely attended. Around a dozen developers including Dubap Properties, Tebyan Real Estate Development and Binghatti Developers filled part of the Olympia West exhibition hall, which was dominated by a Nakheel stand in the centre.
It was certainly a far cry from the likes of the Cityscape show in Dubai, but that’s perhaps to be expected. London is after all a long way from the U.A.E., and the gloss has come off Dubai’s real estate scene of late. Prices are down by 15% from their mid-2014 peak and confidence is low in the light of the oil price slump.
In addition, the rise of the U.A.E dirham (and other Gulf currencies pegged to the dollar) means that inward investment into the region is becoming more expensive for a lot of potential buyers. And while expat residents in the Gulf who are earning money in the local currency are not affected, the regional economic slowdown also means that some of them are losing their jobs, selling up and leaving the country.
Craig Plumb, head of research at estate agency Jones Lang LaSalle (JLL), says the rising value of the dirham has “definitely been a factor” for international investors in the residential market. “The volume of residential sales in Dubai over the first half of 2016 is down by around 30% compared to the same period last year,” he says.
But such trends do not mean the whole system is about to come crashing down. In broad terms, the market for cross-border real estate investment continues to be fairly vibrant, even if these days the bulk of the deals involve Gulf investors putting their money in international markets, rather than overseas buyers picking up properties within the region. Plumb says Middle East investors bought almost $9.5 billion of real estate outside the region in the second quarter of this year, compared to $2.3 billion of capital flowing into the region.
“There has been a shift in the nature of [outbound] investments, with private investors becoming relatively more important compared to the major sovereign wealth funds,” he adds. “But the desire to invest in real estate assets outside the region remains.”
This trend has been developing for a couple of years. According to CBRE, another real estate consultancy, a total of $14.1 billion of investment flowed from the Gulf to other parts of the world in 2014, with Qatar leading the way with $4.9 billion of purchases, followed by Saudi Arabia ($2.3 billion) and the U.A.E. ($1.6 billion). The total was down on the $16.3 billion a year before but it still made the Gulf the third largest source of capital in the world after North America ($66.5 billion) and Asia ($28 billion).
While much of the outward investment has historically been done by sovereign wealth funds, in the wake of lower oil prices they have been drawing down some assets to help plug their government’s budget deficits. That leaves them with less to invest. However, that trend is being partly balanced by the fact that rich individuals are showing more inclination to invest overseas. CBRE predicts that while sovereign wealth fund investments in global real estate will fall from $9-11 billion a year to around $7-9 billion a year going forward, non-institutional investments from the Middle East will rise to an annual figure of $6-7 billion, up from an average of around $3 billion in 2010-2013.
London has long been the most enticing market for Middle East investors and it still holds the top spot, but it is not as dominant as it once was. In 2014, the U.K. capital city accounted for 32% of all outbound investment, compared to 45% in 2013. Other large Western cities followed it in popularity, including Paris ($2.2 billion), New York ($1.3 billion) and Washington ($481 million).
More recent events have altered the landscape, in particular the vote by the U.K. in June this year to leave the European Union. That is pushing investors to re-evaluate their position. A recent survey by financial advisory firm DeVere Group found that 69% of its clients, including some in the U.A.E. and Qatar, intended to decrease their investment exposure to the U.K. following the Brexit vote.
“High net worth investors are overwhelmingly considering rebalancing and diversifying their portfolios following the U.K.’s decision to leave the EU,” says Nigel Green, chief executive officer of the firm. “These investors are seeking to reduce their exposure to U.K.-based assets in the wake of the impending Brexit.”
Nonetheless, the motivation to invest in overseas markets still remains strong, whether because investors want to diversify their portfolios away from their home market and from dollar-denominated (or dollar-pegged) assets, or simply a desire to buy a residence for themselves or family members in overseas cities.
That helps to explain the results of another survey released earlier this year by property consultancy Cluttons, which found that 61% of high-net-worth individuals (HNWIs) in the GCC were likely to invest in their preferred location in 2016, against 25% who said they were unlikely to (the remaining 14% said they weren’t sure). Of those, London was the preferred city for 13% of investors, followed by New York and Bangalore in India. Half of these investors were targeting residential property, while 22% favored commercial property and 28% were looking for a mixture of both.
They are not just investing in distant lands though. Just over half (53%) of HNWIs in the U.A.E. told Cluttons that Middle East locations were among their top three investment targets for the year ahead. Dubai and Abu Dhabi were, perhaps unsurprisingly, the most popular, cited by 30% and 23% of respondents respectively. They were followed by Sharjah (8%), Muscat, Kuwait City, Doha and Riyadh. The reasons for the U.A.E. cities’ popularity stem from the country’s role as both a trading hub for the region and also—particularly in the case of Dubai—its position as a safe haven.
That too has been one of the long-term attractions of London. And although the political uncertainty caused by Brexit has unnerved some investors and led them to postpone or cancel some deals, demand is expected to recover before long. For one thing, the rise of the U.A.E. dirham and other Gulf currencies pegged to the dollar over the past few years means that it is now far cheaper for Gulf investors to buy U.K. property than it was previously, all the more so following the slump in the value of the pound after the Brexit vote.
As a result, many real estate agents say they are expecting interest in London to recover in the second half of the year.
“One of the key things of benefit to buyers from the Gulf is the fact that the majority of them, except for Kuwait, maintain a fixed exchange rate with the U.S. dollar. That means they’re effectively purchasing in dollars, so for them London property became 12% cheaper overnight on 23 June [the date of the referendum],” says Faisal Durrani, head of research at Cluttons. “Since the referendum, some of our offices in locations like Belgravia and Chelsea have reported an upturn in interest from buyers from the Gulf.”
Whether the investments follow remains to be seen but, for everyone involved, the ups and downs of recent years in Dubai and London alike is at least a useful reminder of the inherent volatility in real estate investment no matter where you are in the world.
Published in Gulf States News, 18 June 2015 There’s no sense of panic in the UAE about the current oil price, but there is a growing feeling that the emirates need to prepare for a future in which the oil price remains low for a long time.
The UAE is thought to need a price of between $73/bbl and $78/bbl to balance its budget this year, but those prices have not been seen since November. In recent weeks, Brent crude has been selling for close to $60/bbl, and few market-watchers expect a sharp rise anytime soon.
The authorities in Abu Dhabi and Dubai are, in different ways, responding to the challenge, bringing in outside advisers and thinking about how and where they should make cuts.
The UAE’s Ministry of Interior has appointed recruitment firm Korn Ferry to find a ‘strategic adviser for economic affairs’, to be based in Abu Dhabi. According to job specifications seen by GSN, the new hire will advise Sheikh Saif Bin Zayed Al- Nahyan, deputy prime minister and minister of interior (and half-brother to the UAE’s de facto ruler, Mohammed Bin Zayed Al-Nahyan) on issues related to the UAE’s economic development, growth and security, with the decline in oil prices cited as a particular example.
Abu Dhabi has built up vast savings during the recent oil boom and, if it needs to, can easily draw down some of these to cover its outgoings while oil prices are low. Nonetheless, the search for fresh economic advice will reinforce its reputation for taking a relatively conservative fiscal approach.
Despite its more diversified economy, the risks posed by low oil prices are just as apparent in Dubai. While the emirate has built up a strong presence in areas such as transport, logistics, finance and tourism, much of its activity relies indirectly on the wider region’s revenues from hydrocarbons – a fact which is forcing a rethink of some elements of the emirate’s ever-ambitious building programme.
The Dubai government is now taking advice from Abu Dhabi and independent consultants on what it should do, and the expectation is that cuts will be made. “Dubai is looking at the purse strings to see how it can tighten them,” said one executive with knowledge of the government’s thinking. “The low oil price has rattled them. People are really concerned. Some plans are being re-examined. They’re asking themselves, do we really need to do this or that?”
Just what form any purse-tightening might take remains to be seen. Large infrastructure investments, such as the $32bn expansion of Al Maktoum International Airport, are likely to go ahead, as they are seen as fundamental to Dubai’s future. However, work on some real estate projects or the plethora of theme parks might be scaled back, slowed down or abandoned. Any such moves are likely to be done carefully, however, as the government is keen to maintain public confidence and give the impression of ‘business as usual’, not least because memories of the 2008 crash are still relatively fresh.
While the authorities are at least beginning to look seriously at these issues, there are mixed signals about the attitude of the private sector to low oil prices. Companies appear to still be expanding at a healthy pace, although the rate of growth is slowing. The HSBC Purchasing Managers Index for the UAE produced by research firm Markit edged down 0.4 points to 56.4 points in May, with anything over 50 points indicating growth. However, the rise in new orders was the slowest since August 2013.
A similar survey of the Dubai economy carried out by Markit for Emirates NBD Bank showed that the increase in new business volumes in the non-oil private sector in April was the weakest in more than three years, although the figure improved slightly in May. The pace of staff hiring has also been slower in 2015 than in recent years.
Governments’ efforts to reconsider their spending plans will be welcomed in Washington, where the International Monetary Fund (IMF) has for some time been urging Gulf governments to rein in their expenditure in light of the fall in oil prices. An IMF delegation visited the UAE in late May and early June as part of its annual review of the country’s economy. In a statement issued after the visit, delegation head Zeine Zeidane again took the opportunity to call for spending cuts, although he said they should be gradual. “The macroeconomic policy mix should focus on fiscal consolidation,” he said. “Fiscal consolidation should be gradual and designed in a way to minimise its growth impact.” That looks to be pretty much in line with what the UAE authorities are planning.
If oil prices remain low throughout this year, there is a risk that demand for office and residential space could soften. Published in MEED, 22 March 2015
When it comes to the long-term health of the Abu Dhabi economy, one factor is more important than anything else. Oil sales provide the vast majority of government revenues and they in turn keep the economy as a whole ticking.
All this has a direct link to the health of the real estate industry, so with the slump in crude prices since last summer, the question facing the sector is whether property demand in the UAE capital will also take a dive this year.
The evidence to date is rather inconclusive, but many are anticipating a downturn of some sort, particularly when it comes to demand for office space. According to UK real estate consultancy Knight Frank, oil and gas companies account for 16 per cent of all office space in the city, followed by the government sector with 15 per cent.
It says there was a slowdown in enquiries for office space in the second half of 2014, which might have been due to companies reviewing the impact of falling oil prices on their business.
Others are anticipating further signs to emerge this year. “Amid the current slump in oil prices, one of the capital’s major occupier groups, the oil and gas sector, could be set for a period of decline,” says Matthew Green, head of research and consultancy for the UAE at US real estate agency CBRE. “Given the current environment, it is likely many existing new office requirements could be placed on hold, with a possibility of some downsizing should the current pricing trend be maintained for a sustained period of time.”
If that does happen, it will mark a reversal for the office market, which has been in recovery mode of late. Prime office rents grew by 5 per cent in each of the final two quarters of last year, according to US real estate consultancy JLL.
Supply has been growing at a slow but steady rate over the past year, with about 100,000 square metres of gross leasable area being added in each of the past three years. The only major addition to the market in the final quarter of 2014 was the 11,000 sq m of space at the Arjaan Rotana Capital Centre. City-wide vacancy rates were running at about 25 per cent at the end of last year, down from about 39 per cent at the end of 2013.
According to JLL, the figure is expected to remain at that level throughout this year. However, some schemes are now close to being fully let, including Capital Gate and Nation Towers, according to the UK’s Cluttons, another real estate agency.
There has been some upward momentum in prices over the past year, particularly for higher-quality office space. Grade A space rose by 12 per cent over the past year, from AED1,540 ($420) a sq m at the end of 2013 to AED1,730 a sq m at the end of 2014. In contrast, the cost of Grade B space remained flat at AED1,180 throughout the year. JLL says that it expects prices to rise over the course of this year.
Among the more prominent schemes in the city the most expensive rents are being paid at Etihad Tower, the World Trade Centre and International Tower. The costs at all these sites are running at more than AED1,750 a sq m according to Cluttons. Others such as Addax Tower on Reem Island are cheaper, with prices closer to 1,200 a sq m.
The retail market in the city, meanwhile, appears to be heading for a period of relative stability. The main development over the past year was the opening of Yas Mall in November 2014. That brought an additional 235,000 sq m of gross leasable space to the market.
Along with the opening of Capital Mall and retail space at Al-Reef, it means some 326,000 sq m of space was added to the Abu Dhabi market in the final quarter of last year.
In all, that brings the total amount of retail space in the city to 2.5 million sq m, according to JLL. Things are expected to slow down somewhat this year and the next, however, with no major developments due to open until 2017/18, when the likes of Sowwah Central, Reem Mall and the Marina Mall extension are planned to be launched.
On current projections, JLL expects some 128,000 sq m of gross leasable area to be added to the market over the course of 2015, and a further 95,000 sq m the following year.
Based on the current vacancy rates, developers should find it relatively easy to fill this space. Just 2 per cent of retail space was left unused at the end of 2014, according to JLL. Developments on Abu Dhabi island are still commanding a premium in terms of price, with average retail rents of AED3,000 at the end of 2014, slightly up on the average price of AED2,900 a year earlier.
Prices off the island are lower and have been falling slightly in the past year. They ended 2014 at AED1,860 a sq m, a drop of about 2 per cent compared with AED1,900 a sq m at the end of December 2013.
“Over the past 18 months, we have seen an increasing number of new brands entering the Abu Dhabi market, some of which have also been new to the UAE,” says Green. “The recent growth has been driven in part by a significant increase in supply, with the opening of a number of new malls including The Galleria and Deerfields Town Square in 2013, and, more recently, Yas Mall. However, the lack of available units in Dubai’s malls has also played a part in this growth, with some retailers forced to look beyond the emirate to maintain store roll-out requirements.”
Dubai also tends to lead Abu Dhabi when it comes to residential property prices, with a typical time lag of between 12 and 18 months. That suggests the UAE capital should start to see a slowdown in its residential market this year, something that is backed up by data from real estate agencies in the city.
JLL says sales prices rose by 25 per cent a year in 2013 and 2014, but the rate of increase began to slow at the end of last year and the firm predicts that prices are likely to be more stable this year. Rents have also been growing at a fairly rapid rate, with the cost of prime properties climbing by 17 per cent in 2013 and a further 11 per cent last year. This year, JLL expects residential rental prices to grow by single digits, due in part to an expected slowdown in government spending.
Julia Knibbs, research and consultancy manager at local property consultancy Asteco, takes a similar view. “The residential market is expected to keep growing in 2015, with rental rates increasing by an average of 5 per cent,” she says.
“However, sales prices are expected to remain relatively stable as prices reached high rates in 2014. Sales and rental rates are expected to increase over the next few years by an average of 3-5 per cent across the mid-to-high-end projects if market conditions remain stable.”
The supply of new stock to the city is also in something of a lull compared with some recent years. While about 30,000 units were added in 2013, the figure dropped to 7,000 units last year. This year, JLL expects about 10,000 units to be added, followed by 11,000 units in 2016.
Units on Abu Dhabi island continue to attract a premium. According to the most recent figures from CBRE, average rents for better-quality two-bedroom apartments on the main island range between AED140,000 and AED195,000 a year.
In contrast, similar quality apartments elsewhere in the city cost between AED70,000 and AED95,000 a year. However, some high-end developments buck this trend, such as those at Saadiyat Island and Al-Raha Beach, where the cost of a two-bedroom apartment is between AED160,000 and AED200,000 a year.
The market for villas shows a similar pattern. The annual rent for a four-bedroom house on Abu Dhabi island ranges from AED190,000 to AED350,000 a year in prime locations. Similar units elsewhere in the city typically cost between AED140,000 and AED180,000 a year to rent. Sales prices in the third quarter of the year were typically between AED13,725 and AED17,760 a sq m, according to CBRE.
If oil prices do stay low throughout this year, the danger is that demand for residential property could also soften. Real estate agents in the city are liable to be keeping a close eye on Brent crude prices for the foreseeable future.
Abu Dhabi is trying to convince businesses to take sustainability issues more seriously, with mixed results. Published in The Gulf, June 2013
In mid January, more than 30,000 people from 150 countries descended on Abu Dhabi for what was billed as the emirate’s first ‘sustainability week’. What that involved was a series of conferences, including the World Future Energy Summit, the International Water Summit and the Abu Dhabi International Renewable Energy Conference.
Perhaps more than any other Gulf country, Abu Dhabi has been devoting considerable efforts to establishing its sustainability credentials. There were many sceptical voices when the oil-rich emirate was chosen as the first headquarters of the International Renewable Energy Agency in June 2009, but its candidacy had been helped by the money the government has poured into Masdar City, a low carbon and low waste community, and the Masdar Institute of Science & Technology, a research-orientated university focused on alternative energy and sustainability.
But it is not just a question of inter-governmental organisations and international conferences. Another arm of the government, the Environment Agency Abu Dhabi (EAD), has also been pushing for greater awareness and action in the rather more prosaic arena of the local business community.
In May 2008, Mohammed Ahmed al Bowardi, EAD’s managing director, called for the establishment of a new cross-industry body to promote sustainability, balancing the need for economic development with environmental, social and other issues.
“Abu Dhabi is keen to keep the balance between fast development and the sustainability requirements,” explained Majid al Mansouri, the agency’s secretary general, at the time.
What emerged was the Abu Dhabi Sustainability Group (ADSG). The group was formally launched on 30 June that year with 15 founding members drawn from the public and private sectors, including Abu Dhabi National Oil Company (ADNOC), the Abu Dhabi Tourism Authority, National Bank of Abu Dhabi and Aldar Properties. The number has steadily climbed since then to 44 members. Among the most recent to join was Abu Dhabi National Energy Company (Taqa), which became a member in September 2012.
During its brief history, ADSG has also steadily expanded its focus beyond the emirate, co-operating with the likes of ICLEI (the International Council for Local Environmental Initiatives), a network of local governments around the world, on the issue of sustainable cities.
“We want to build our international network and expand cooperation,” says Volker Soppelsa, sustainability policy advisor at the ADSG.
“ADSG’s role is to champion sustainability in its widest sense. The initial focus was on Abu Dhabi but some of the feedback coming from members is that it is difficult to define sustainability for Abu Dhabi alone because it has to operate within a national and regional context, and even globally.”
ADSG’s track record within the emirate has, however, been rather mixed. The founding members signed a declaration which committed them to adopting sustainability management and reporting practices, but it is a voluntary organisation and has no powers of enforcement, only ones of encouragement. Just 15 of its members produced a sustainability report in 2009, and that dropped to seven the following year.
Yet the need for Abu Dhabi to take action is clear when you consider the challenges the emirate and the rest of the UAE face. The UAE has one of the highest ecological footprints of any country, according to the Global Footprint Network, which ranked it third worst in the world in 2012 behind Qatar and Kuwait. According to the US-based organisation, the UAE has an ecological footprint of 8.88 hectares per person, meaning that if everyone in the world consumed as much as Emiratis do, then we would need five planets to sustain humanity.
The fundamental question that this prompts is whether the country can continue on its current development course, or whether it needs to adjust its behaviour to ensure that future generations of Emiratis have a decent quality of life. Sustainability advocates suggest these problems can be overcome if Abu Dhabi starts to take the right approach to its planning, management and reporting processes.
“We’re working with the members of the ADSG to look at how green criteria attached to their purchasing could transform the economy into a much greener economy,” says Mark Halle, international vice president at the International Institute for Sustainable Development (IISD).
“We ask companies to set standards for environmentally-friendly products in their purchasing, for example by buying certified wood or energy-efficient equipment or including a recycling take-back obligation. Through many billions of dollars worth of purchasing they can send a signal to the market that environmentally-friendly products will be favoured. If you do this on a large enough scale you can transform the economy because if enough people are insisting on a particular environmental standard it won’t be worth producing to a lower standard anymore.”
The issue of procurement is ADSG’s flagship initiative. The programme was launched in April 2012 and since then there have been a number of workshops held to increase awareness and allow members to share their experiences and expertise. Soppelsa says the organisation is also working on sustainable labour practices. Further down the line, it is planning to address other areas such as waste, sustainable information and communications technology, and incorporating the issue of sustainability into the school curriculum.
For ADSG members and non-members alike, the notion of sustainability can often prompt fears of higher costs with little being gained in return. But according to some, integrating socio-economic and environmental concerns into business operations can offer benefits too, such as higher sales, reduced long-term costs, lower risks and an enhanced reputation.
“Energy-efficient production saves you money,” says Halle. “There is an initial investment and companies don’t want to lose any competitive edge in the transition while they are implementing it, but you can claim a competitive advantage once you have because you can say your product is cleaner.”
While Abu Dhabi continues to pump as much oil and gas out of the ground as it does, it will always be susceptible to the charge of being engaged in little more than window dressing, or ‘green washing’. But Halle says that, of all the countries in the region, the emirate has the most impressive track record to date.
“Abu Dhabi is way ahead of the rest of the Gulf,” he says. ”In the region it is far in the lead with taking sustainability issues seriously. It doesn’t mean the challenges aren’t also great. It’s hard, with the profile of the economy they have, to move very quickly to genuine sustainability. But this is not window dressing - they do take it very seriously. The Abu Dhabi government’s record is really quite impressive. I would say Abu Dhabi has a long way to go but it is taking the right approach.”