Dubai leads growth in tourist numbers

To get an idea of where growth is coming from in the UAE’s tourism industry, one only needs to look at the focus of its airlines. Over the summer, Dubai’s flag carrier Emirates upgraded its flights to Moscow, Beijing and Shanghai to all-A380 services, with the switch to the superjumbo adding 1,000 seats a week on the Moscow route alone. In September, low-cost airline Flydubai doubled its capacity on routes to Russia.

UAE Real Estate: A Buyers’ Market

Published in Forbes Middle East, 23 October 2016

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.

Remittances steady despite market volatility

Published in Gulf News, 7 March 2016

Remittances are a necessity rather than a luxury for many expats, a fact which is cushioning the sector from the economic slowdown

Every year billions of dollars flow out of the UAE as expat workers send money home. They may be supporting family members or perhaps buying a property to return to, but whatever the reasons, the amount has been growing quickly. In 2010, the figure crossed the $10 billion (Dh36.7 billion) barrier for the first time, according to the World Bank; by 2013 it had nearly doubled to almost $18 billion. 

But the years of heady growth have ended. Low oil prices, a slowing economy and cuts to major project spending are denting confidence and job security among expat workers. The value of remittances was nearly flat in 2014 at $19 billion and, while there doesn’t appear to have been any reduction, some are forecasting a drop in the amount of money being sent abroad this year.

“In 2015, we observed almost no effect on remittances flow in the UAE compared to previous years,” says Diana Jarmalaite, Analyst at research firm Euromonitor International. However, she adds that “2016 is expected to be a less favourable year, mainly because of the ripple effect that comes from the low prices for oil. We would expect the remittance market to decline at around 2-3 per cent.”

Of the money that leaves the UAE, the largest proportion by far goes to India, with 43 per cent of the total in 2014, according to the World Bank. Other major destinations are Pakistan, the Philippines and Bangladesh, which between them account for 35 per cent.

Some of these workers have been reaping a mini-windfall over recent years, as their home currencies have weakened against the US dollar, which the dirham is pegged to. In May 2014, for example, one dollar bought less than 60 Indian rupees, but today it buys almost 70 rupees (About Dh3.7). There have been similar moves with the Philippine peso, Pakistani rupee, Indonesian rupiah and Malaysian ringgit.

“In the UAE, 90 per cent of the population consists of expatriates, dominated by those from Asian countries whose currencies have depreciated against the US dollar,” says Promoth Manghat, CEO of UAE Exchange. “Since the dirham is pegged to the dollar, these factors work in favour of the expatriates, who get to send more money home.”

Indian and Filipino expats in the UAE stand to reap the biggest remittance returns this year, as their home currencies hit new lows against the dirham. The peso surpassed the 13 to Dh1 level for the first time in six years in the last week of January, and the Indian rupee has been on a downward trend against the dirham.

The competitive nature of the market in the UAE also helps expats. The market is contested by banks and specialist money transfer operators, but it is the latter that dominate. “The remittance market is mainly shaped by the big share of population who do not have access to actual banking services,” says Jarmalaite.

Competition between the different players means that the cost of sending money abroad is often relatively low, at 2-4 per cent — the global average is about 7.4 per cent.

These twin trends of low costs and depreciating currencies are a boon to expats but, on the flip side, workers are also having to consider what might happen as a result of the weakening macroeconomic climate. If job losses mount and expat numbers dwindle, the remittance industry will also be affected. For now, most industry executives appear confident. As many point out, sending money home is a necessity rather than an option for many expats.

“Despite indications of softening in certain sectors, especially those affected by lower oil prices, we predict that the impact will be somewhat limited on the remittance industry,” says Rashid Al Ansari, General Manager of Al Ansari Exchange. “The majority of remitters residing in the UAE have dependents back home who rely on regular money being sent.”

A recent World Bank report recently warned that if lower oil prices persisted and economic activity in the GCC declines, then “outward remittances from these countries may eventually decline. Despite the concerns, industry experts don’t seem overly worried. “We believe the long-term prospects for money transfers are strong as people continue to move out of their home countries in search of better economic opportunities,” says Hatem Sleiman, Regional Vice-President for the Middle East at Western Union. 

Over the past 10 years, the population of the UAE has more than doubled from 4 million to 9.5 million, which has triggered a strong growth in expats sending money home. 

Dubai Adjusts to a Cooler Real Estate Market

Published in Bloomberg Businessweek, 5 October 2015

The real estate sector is accepting that lower prices may be here to stay

Almost all the main indicators are pointing in the wrong direction for Dubai’s property market these days. Over the past year the sale price of apartments has dropped by an average of 9 per cent and for villas by 5 per cent, according to Jones Lang LaSalle (JLL), a real estate agency. Prices are expected to continue their fall for the rest of this year. Rental values for villas have also been declining, albeit at a slower rate of 2 per cent, while apartment rents have shown a small rise of 1 per cent.

Many working in the real estate sector and beyond are questioning whether this represents the start of a sharp downturn or simply the usual market ebb and flow. Zainab Mohammed, CEO of property management and marketing at wasl Asset Management Group, says that Dubai’s property sector is in a much fitter state than it was prior to the property crash in 2008. “We are witnessing a correction,” he says. “However, the current situation is healthy. Dubai’s real estate market has matured and should be viewed in the overall context of the economic cycle.”

The downward pressure on real estate prices is likely to continue. Investment in Dubai property from foreign markets–particularly Russia and Europe–has slowed due to currency pressures. The slump in the price of oil is hurting demand from within the region also. The slowdown has “dented confidence and applied downward pressure on transaction levels and prices,” says Diaa Noufal, associate partner at real estate agency Knight Frank. “This has led to speculation that prices may soften further over the remainder of 2015 leading some buyers to adopt a watch and wait attitude.”

This is happening in the wake of tighter regulations introduced in late 2013, including a mortgage cap and an increase in transaction fees. These are having a bigger impact than low oil prices, according to Steven Morgan, CEO of Cluttons Middle East, a real estate agency. “What we’re seeing in the market is a general slowdown, which is natural as a result of the legislation and the supply coming on,” he says. “There is a possibility that if oil prices continue to be low there could be an impact on population growth and therefore house prices. You hear that oil companies are starting to downsize and aren’t recruiting, but we’ve yet to see that come through in the market.”

What has been seen is a fall in the volume and value of sales. The Dubai Land Department says the number of unit sales fell from 20,309 in the first half of 2014 to 16,107 in the first half of this year. The value of those sales dropped from 31.9 million dirhams ($8.7 million) to 25.3 million dirhams.

Some property firms are adjusting their strategies to take account of the slower market. Dana Salbak, research manager at JLL, says developers are being more realistic in terms of the scale and timing of their project launches, and some schemes have been delayed. “We see the residential market as subdued, with sale prices softening and rents stabilising as a result of the negative investor sentiment, but also because Dubai had become too expensive,” she says. “Both the government and developers have realised that.”

With many buyers unable to access the higher end of the market, affordable housing–a traditionally underserved area of the market–is seeing increased demand. “Developers are now catering more to middle-income earners who are increasingly putting down their roots in the region,” says Mohammed. “The character of the market has changed [to] one where property is being purchased primarily as a home and not just an investment.”

The shift is seeing some developers look for growth in new markets. Damac Properties, which specialises in high-end developments, is paying more attention to places like China, to supplement its usual markets in the rest of the GCC, India, Pakistan and the UK. “We explore and experiment with new markets all the time,” says CFO Adil Taqi.

Further help from foreign shores could come in the form of the easing of economic sanctions on Iran following its signing of a nuclear accord with world powers in July. Dubai has strong trade links with Iran and is likely to be the first port of call for Iranians looking to buy overseas. The emirate is also an ideal location for international companies looking to access the Iranian market to establish or expand operations. “I think Iran will be as important as any other country of its size and proximity,” says Taqi. “If and when it opens up in the short-term you might see some surge because of the pent-up demand, but that demand will be met very quickly.”

Further falls in the oil price and an injection of new properties onto the market could offset such a boost. JLL estimates an extra 19,000 residential units will be available next year. “There will be a strong level of supply in the market over the next 12 months, which will undoubtedly have an effect on transaction levels and possible further softening of prices,” says Noufal.

The downturn is still a long way from comparison with Dubai’s 2008 property crash. Lenders have not been spooked in the way they were then, according to Morgan from Cluttons Middle East. “In 2008 and 2009 the banks stopped lending,” he says. “That’s not happening now. There is a lot of competition, banks are liquid and they’re still keen to lend.”

Dubai pursues smart grids

Published in MEED, 24 August 2015

Some smart city ideas can seem futuristic and improbable, but the first steps are already being taken around the region in the prosaic world of electricity networks.

US consultancy Northeast Group reckons $17bn will be invested in ‘smart grid’ systems around the region in the next 10 years, in areas such as smart metering, home energy management and battery storage. “Most of the near-term investment will be in GCC countries,” says Chris Testa, research director at the firm. “Countries such as Egypt will make up a larger share of investment, beginning in the early-to-mid-2020s”

Among those pushing ahead is Dubai Water & Electricity Authority (Dewa). In 2014, it announced a three-pronged effort to modernise its network and promote energy efficiency.

The first initiative is to install solar panels on buildings around the emirate. The electricity generated will be used onsite, with any surplus exported to the network. The second element involves the installation of smart meters, which allow customers to easily monitor their consumption and, it is hoped, reduce their electricity use and cut their bills. The third element is to install electric vehicle charging stations around Dubai.

Of the three, it is smart metering that will affect most people first. Dewa plans to install 200,000 devices by January 2016. More than 1 million should be in place by 2020. That could, in turn, open the way for other smart city services down the line.

“Most smart grid investment begins with smart metering. It allows utilities to gain the real-time data that is necessary for many other functions of a smart grid,” says Testa.

“A communications network implemented for smart electricity metering or distribution automation can in some cases also be used for other smart city applications such as smart street lighting, smart traffic controls, or smart water and gas metering. Smart grids also create millions of data points that cities can analyse to improve operations citywide.”

The challenges to becoming a smart city

Published in MEED, 24 August 2015

In the Spanish city of Barcelona, the traffic lights turn green as the red lights of fire engines approach. In Amsterdam, the authorities are testing a system that lets people transfer energy generated from solar panels on their homes to their electric cars’ batteries. On the other side of the world, in the new Songdo business district near Seoul in South Korea, a centralised pneumatic waste collection system is being installed to eliminate the need for garbage trucks.

Such is the world of the ‘smart city’, where previously standalone devices talk ever more frequently to other machines. The definition of a smart city can be hard to pin down. As well as the examples above, it could contain car park monitors to alert drivers of free spaces or sensors to detect leaks in a water network. But a common thread is the collection and sharing of data.

This era of the ‘internet of things’ and machine-to-machine communication should, claim its advocates, make our lives easier, make us less wasteful and make cities more sustainable. But making that a reality is not straightforward. It requires heavy investment in information technology (IT) networks, monitors, ‘smart meters’ and the like. It also requires government bodies to collaborate and be more open to the public, in ways they may find uncomfortable.

The amount of money being spent is already starting to add up. US consultancy Deloitte predicts that 1 billion wireless internet-of-things devices will be sold around the world this year, worth a total of some $10bn. The value of the associated services that go with these devices could be $70bn. The Middle East will account for about 25 million of those devices, worth a total of $250m, along with $1.7bn in services.

Most of the regional activity is in the Gulf, which has the money and the inclination to adopt the technology. “A necessary requirement for smart cities is the availability of a highly developed infrastructure,” says Mohammad al-Shawwa, research manager for Arab Advisors Group, a Jordanian research firm. “In our region, the GCC countries remain ahead of the pack when it comes to both the level of deployment and the adoption of high-tech infrastructure, so they are in a better position.”

One of the earliest projects was Masdar City in Abu Dhabi, which was launched in March 2006 with the aim of creating a zero-carbon city. Construction began in 2008, using 90 per cent recycled aluminium, low-carbon cement and other sustainable materials. Masdar is really a suburb of Abu Dhabi rather than a city in its own right, but such greenfield sites represent a relatively easy way to test new technologies and create more sustainable developments. Authorities elsewhere have taken a similar view.

Saudi Arabia, for example, has launched several developments in and around the capital, such as the King Abdullah Financial Centre and the Information Technology & Communications Complex, where technology infrastructure can be up to date. At the same time, the government has also been pushing forward with entire new cities such as the King Abdullah Economic City on the west coast, where public transport, cycling and walking will be prioritised over cars.

But if a country is to make the most of the opportunities, it also has to modernise its existing infrastructure. That is what is happening at the kingdom’s Yanbu Smart City Project, under a 20-year deal between the Royal Commission for Jubail & Yanbu and local telecoms firm Mobily, signed in September 2013. The first phase covers the development of the telecoms infrastructure. Subsequent phases will include smart electricity grids and solar panels.

In Qatar, the authorities are also pushing ahead with new developments such as Lusail to the north of Doha and the remodelling of existing areas. The local Msheireb Properties is redeveloping the old centre of Doha in what it labels the world’s first sustainable downtown regeneration project. Under the Msheireb Downtown Doha scheme, heavy goods vehicles will be pushed underground to make the area pedestrian-friendly, and buildings are designed to use less energy and water.

On a nationwide basis, the Qatari authorities are rolling out a new high-speed broadband network, under a five-year programme that began in March 2011. It is being implemented by the local Ooredoo, using technology from China’s Huawei.

However, among all the Gulf cities, it is probably Dubai that is best placed to develop as a smart city, according to analysts.

“Dubai presents the most likely candidate for developing a smart city, given the government’s current focus on digitising services and fostering entrepreneurship and innovation, as well as its relatively developed IT infrastructure,” says Michael Romkey, director of Deloitte Middle East.

Smart Dubai

The push is coming from the top. In 2013, Sheikh Mohammed bin Rashid al-Maktoum, the ruler of Dubai, launched the Smart Dubai initiative, based around areas such as transport, communications and urban planning. It aims to deliver higher-speed internet access and put more government services online, ranging from traffic information to emergency services.

Several developments in Dubai already encompass some of the principles of a smart city, including Dubai Design District and Silicon Park at Dubai Silicon Oasis.

The latter is due to be completed by the end of 2017. It will include electric cars and bikes, street-side charging docks for phones and smart lighting systems that respond to traffic and pedestrians.

Expo 2020 offers another opportunity. “I believe the best opportunity within the Middle East to achieve a smart city is in Dubai, and Expo 2020 is the great opportunity for Dubai,” says Sameer Daoud, managing director for the UAE at Arcadis, a Dutch design consultancy. “A lot of things are linked to the Expo, including the extension of metro lines, the expansion of the airport, utilities, and commercial and residential buildings.”

More projects are bound to emerge in the future. Deloitte reckons the number of new smart city developments in the GCC will double within the next two to three years.

The cost of all this is hard to quantify, but the IT requirements are substantial. Alex Chau, the Hong Kong-based research director for UK-based Machina Research, says cities need to lay down a fibre-optic backbone and link that with wi-fi and low power wide area (LPWA) networks, the latter for use with smart metering systems.

The networks will also need enough capacity to deal with the ever-growing amount of data. The Middle East and Africa region generated more than 30 exabytes (30 billion gigabytes) of cloud data traffic in 2013, according to Deloitte, and it could reach more than 260 exabytes by 2018.

Ultimately, the price will come down to how ambitious a city chooses to be. “The cost of developing a smart city depends entirely on the depth and breadth of the projects,” says Romkey. “Songdo is estimated to have cost $40bn. On the other hand, Citizens Connect, an iPhone application used in Boston that allows citizens to place complaints about problems around the city, had an initial development cost of only $25,000.”

As the demand for services proliferates, so have deals between telecoms companies and technology firms. In December 2013, for example, Vodafone Qatar and Australia’s NetComm Wireless signed a strategic partnership to work on smart city applications such as intelligent transport and smart medical devices.

In March this year, Ooredoo announced it was working with Sweden’s Ericsson to launch a cloud-based machine-to-machine platform in Indonesia, with Qatar, Algeria and other markets to follow in the future. Meanwhile, Saudi Telecom Company is working with the likes of the US’ Cisco and SK Telecom of South Korea to develop cloud, mobility and security services. Etisalat is working with Ericsson and Huawei among others, and Du is working with Hong Kong-based PCCW Global.

It is not simply a matter of telecoms firms and equipment manufacturers teaming up. Utility firms are also exploring the potential of smart metering systems to reduce energy and water use. Among the most active is Dubai Water & Electricity Authority (Dewa).

There are plenty of other possible applications that have yet to be fully exploited, from insurance companies using sensors to monitor driving standards and reward better drivers, to logistics firms using enhanced vehicle tracking systems, and remote patient monitoring by health services.

Privacy issues

If it is done well, all this could lead to more economic growth, with new business sectors emerging and existing sectors being more efficient. But hardware and software can be installed without a city really becoming smart. To make the most of the potential, different systems and service providers will need to interact. Convincing bureaucrats used to working in discreet silos that they must collaborate will not be easy. The process will also throw up security and privacy issues.

“The biggest challenge is having to connect multiple systems into one system,” says Daoud. “It creates risks for the government because there are security aspects. If someone can hack into the system, they can control the infrastructure of the city. For individuals, the most worrying aspect is privacy.”

Some other cultural differences will have to be overcome. Governments will need to be more open with their data, which may not come easily to authoritarian rulers in the region. Also, consumers need to be convinced to use the technology. In some instances, that may be harder in the Gulf than in other parts of the world. Utility bills are heavily subsidised in the region so there is not the same incentive for consumers to use smart meters to keep bills down.

“One of the challenges faced by smart cities is changing the mindset of the people,” says Al-Shawwa. “The normal citizen will not adopt new services unless they are more efficient and easier to use than their alternative.”

And when it comes to technology, there is of course always the risk of obsolescence. Whatever systems are put in place today will probably have to be replaced in 10 or 15 years. If a city opts for technology that is superseded more quickly, or if a developer goes out of business, that time frame could be far shorter.

“If a city chooses wrongly and the technology provider goes bust then in a few years they’ll need to purchase a new solution. That’s why there is a lot of caution right now,” says Chau.

It is one thing to become smart. Staying smart will require just as much effort.

Low oil prices prompt talk of cutbacks

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.

Dubai to see real estate slowdown

The emirate appears to have avoided falling into another round of real estate boom and bust, although prices are set to dip this year due to tighter regulations and lower oil prices. Published in MEED, 18 March 2015

Over the past year, residential rental prices have first stalled and then begun to fall in Dubai, according to real estate agents in the city.

UK consultancy Knight Frank says rental prices in the UAE emirate declined in the final two quarters of 2014 and it expects further price drops this year, with rents to decrease by an estimated 5 per cent and sales prices by 5-10 per cent. US consultancy JLL also says it expects a subdued year, not least because 25,000 additional housing units are due to be brought onto the market – the biggest increase for many years.

The changing nature of demand and supply can be clearly seen in data from the Dubai Land Department, which shows falls in both the number and value of transactions in the emirate last year. In all, the department recorded 53,871 transactions in 2014 worth a total value of more than AED218bn ($59.3bn). That compares with 63,652 transactions worth a total of AED236bn a year earlier – declines of 15 and 8 per cent in the respective metrics.

Tighter rules

The fall in activity may be, at least in part, a reflection of the tighter rules governing house purchases. In October 2013, the Central Bank of the UAE announced it was placing more stringent rules on how much an individual could borrow when buying a property. The Dubai Land Department doubled the transaction fee on real estate purchases to 4 per cent in the same month.

Sales prices for villas have stabilised or even fallen slightly in many parts of the city since then, according to UK property consultancy Cluttons. It also notes there has been a fall in rental values after many years of sharp rises. The speed at which rental values were rising began to slow in the third quarter of 2013 and subsequently started to retreat slightly, with prices dropping by 0.3 per cent in the third quarter of last year, according to Cluttons. That was the first fall since the start of 2011.

The softening of the market conditions has calmed some nerves. Greg Lewis, a senior negotiator at Knight Frank, says the mortgage market is the most important element behind the slowdown in the Dubai market, and he says fears of another property bubble have been dispelled for now.

“The main factor is the mortgage rates,” he says. “With such limited borrowing and larger deposits needed, buyers are struggling to find the money or are not willing to be exposed to that level in this market.”

Adding to the downward pressure last year was the slump in oil prices, which began in the summer and continued for the rest of the year. Although Dubai is not an oil-driven economy, much of its economic activity is based around providing services to other countries in the region that do depend directly on hydrocarbons revenues. As a result, confidence levels have taken a dip.

“Dubai experienced a general slowdown in real estate performance during the second half of 2014, with a decline in residential transactions, flat rental growth for residential properties and prime offices, and only marginal growth in residential sales prices,” says Matthew Green, head of research and consultancy for the UAE at US real estate agency CBRE.

“One of the key factors in this whole situation is the negative impact on sentiment. With uncertainty surrounding the length of any oil price slump, investors have rightly become more cautious. While there has yet to be any noticeable slowdown in the office sector, occupiers from the oil and gas and the finance sectors are likely to be more restrained. Uncertainty is also likely to lead some consumers to be more prudent in their spending.”

There are some similar trends noticeable in other parts of the market. According to JLL, the growth in rents for retail space began to slow down towards the end of 2014, and it now appears to be reaching a similar point in the cycle to the residential market.

In this area too there is plentiful new supply coming to the market. Over the course of this year, some 267,000 square metres of additional retail space is expected to become available, with 118,000 sq m due for completion in the first quarter alone, according to JLL. Among the schemes are the second phase of Dragon Mart, with a total built-up area of 175,000 sq m. Several smaller, neighbourhood centres are also due to be completed, such as The Box Park by Meraas Holding in Jumeirah.

The increase in shop space comes after several years of little or no growth, with total supply at 2.9 million sq m at the end of 2014, according to JLL. That has contributed to a drop in vacancy rates, with the proportion of empty shop units across Dubai falling to just 8 per cent at the end of 2014, down from 12 per cent a year earlier.

“Dubai remains the clear destination of choice for the majority of brands looking to enter the region for the first time,” says Green. “Currently, the main challenge for brands looking at Dubai is finding available retail space at one of the major malls.”

The mismatch between demand and supply mean rental rates have risen very fast over the past year. At the end of 2013 the cost for a sq m in a secondary location was AED1,720 while in a primary location it was AED3,965. By the end of last year, these figures had risen by close to 30 per cent, reaching AED2,220 in the case of secondary sites and AED5,060 for primary locations. However, JLL says that, while there is sufficient demand in the market to fill the additional space expected this year, it expects rental rates to be flat over the coming 12 months.

Commercial space

While the residential and retail segments appear to be at or near the top of the cycle, the picture is slightly different in the commercial office market and there appears to be room for further increases in prices. The continued healthy growth in Dubai’s private sector economy has helped to maintain momentum in the commercial property sector. And while low oil prices may be dampening confidence levels to some extent, the emirate can still rely on its reputation as a safe haven in the region. That factor should help to keep demand for office space buoyant this year, according to Knight Frank.

There are some significant office developments coming to the market, including Dubai Design District, Dubai Trade Centre District and other schemes in Business Bay and Dubai Internet City. According to JLL, up to 1.2 million sq m of new office space is expected to come to the market over the course of 2015, although it says some projects may yet be delayed. Even so, this marks a significant change from recent years. In 2013, the amount of new office space added to the market was 300,000 sq m, while in 2014 it was 200,000 sq m.

The small amount of additional space last year contributed to a fall in vacancy rates, which dropped from 29 per cent at the end of 2013 to 24 per cent by December 2014, according to JLL. At the same time, average rents for prime office space climbed slightly, from AED1,850 a sq m in 2013 to AED1,870 a sq m by the end of 2014. The agency suggests that rental rates and vacancy levels should remain stable in the short term. However, all the additional space means average rents could face downward pressure and vacancy rates are expected to rise in the main business districts by the end of the year.

In the longer term, there may be some bigger changes coming to the city’s real estate market. In late 2013, Dubai was selected to host the World Expo 2020, which prompted an unsustainable boost to the emirate’s real estate prices. That has since died away, but the need to prepare for the event is a factor in the continued investment in the city’s infrastructure.

The expo will be held close to the new Al-Maktoum International airport and this part of the city is likely to become increasing important in the years ahead, according to Julia Knibbs, research and consultancy manager at local property consultancy Asteco.

“The [Al-Maktoum] airport will employ large numbers of people and attract businesses serving the airport to the area,” she says. “As a result, we expect that over time, there will be a shift and expansion of the city towards the new airport, away from the existing, more congested areas of Dubai.”

Lingering concerns over Dubai’s debts

Dubai has proven fairly adept at managing its debt, and greatly reduced the risk of another crisis. But low oil prices and the possibility the emirate has miscalculated the success of Expo 2020 and other planned tourist attractions remain factors to watch. Published in Gulf States News, 5 March 2015

The restructuring of $14.6bn of Dubai World debts in February may have given the impression that the emirate is handling its debt burden fairly well these days. But some five-and-a-half years after Dubai had to go cap in hand to richer neighbour Abu Dhabi, the emirate is still not completely out of the woods. A mountain of debt still needs to be paid off, and there are some concerns Dubai could hit problems further down the road, particularly if oil prices stay low.

As of April 2014, Dubai had debts of some $141.7bn, equivalent to 141% of its GDP, according to the International Monetary Fund (IMF). That figure includes money owed by the government directly as well as the loans and bonds of government-related entities (GREs), which are often collectively known as ‘Dubai Inc.’. As well as Dubai World, this group include the likes of Dubai Holding and the Investment Corporation of Dubai.

Some debt has been paid off since the IMF made its calculations. In 2014, Nakheel repaid Dh7.9bn ($2.2bn), and the recent Dubai World deal included the repayment of $2.96bn that was due in 2015, along with an extension for $11.7bn that was due in 2018 but now won’t have to be repaid until 2022.

Such arrangements mean the total amount of Dubai debt has fallen, but it remains substantial, and the fall in oil prices since last summer has revived concerns about Dubai’s ability to repay all of it in a timely manner. Although the emirate is not an oil producer of any note, its economy depends to a large extent on providing services to the other Gulf countries which do depend on hydrocarbons. If low oil prices persist, then Dubai could be hit indirectly.

“The [Nakheel and Dubai World] deals along with a few others have greatly reduced the risk of a debt crisis in the next few years at least. It has made the debt servicing burden a lot easier,” said Jason Tuvey, Middle East economist at Londonbased Capital Economics. But he added: “Dubai’s debt problems aren’t over just yet. If oil prices stay low for a long period, this could easily lead to problems further down the line when it comes to actually repaying the debts.”

More debts to come?

For now, most observers appear fairly sanguine. Moody’s Investors Service reclassified Dubai World debt from ‘impaired’ to ‘performing’ as a result of the restructuring. That, in turn, has improved the outlook for the local banking sector, which now has lower levels of non-performing loans to deal with. “Although the recent oil price collapse has increased the downside risks of the regional operating environment for the

UAE’s local banks, this more sustainable resolution of the [Gulf Co-operation Council] GCC’s largest legacy default reduces one of the key uncertainties facing the UAE banking system,” senior credit officer at Moody’s Khalid Howladar said.

However, the problem is not just Dubai’s existing debts, but also its propensity to incur more. The emirate is expected to spend more than $18bn on preparing for the Expo 2020 fair, according to HSBC. Of that, $8bn is expected to be incurred by the government and $10bn by GREs and the rest of the private sector. As the IMF noted in a review of the UAE economy in 2014: “GREs bear large-scale financial risks related to the implementation of these projects, and… this could undermine the deleveraging of GREs and, ultimately, their financial health.”

The Dubai Expo Committee estimates that 25m people will attend the Expo – whose latter stages will coincide with the UAE’s golden jubilee – over the course of six months. Those are big numbers and would mean that more people visit Dubai in that period than visit some far more established destinations elsewhere in the world. “Dubai is quite optimistic on the legacy of the World Expo and it expects visitor numbers to Dubai during the Expo and after to be greater than to London and Paris,” Tuvey said. “If the actual visitor numbers don’t meet expectations, they could face some problems. That is one of the key risks going forward.”

Confidence that the emirate can steer a safe course over the next few years has been helped by the general health of the economy. Fears of another damaging round of property boom and bust have receded after rental and sales prices softened in the second half of 2014.

Local estate agents say that was due to a mix of factors, including tighter mortgage rules, higher transaction fees, and buyers becoming more cautious because of lower oil prices. At the same time, the purchasing manager index for the UAE, which measures demand in the non-oil economy, remains at a high level.

Deputy director for the Middle East at the Institute of International Finance Garbis Iradian said the latter factor highlighted the resilience of the UAE’s non-oil sector. “I think Dubai’s growth will remain strong,” he said. “I am not concerned about the GREs. Most of them will continue performing well and will be able to service their debt.”

But in other parts of the market, there are signs of overbuilding. In the tourism sector, for example, there are plans for more than a dozen theme parks in the UAE, most of them in Dubai. That suggests that some investors, at least, are suffering from a touch of irrational over-exuberance. “We question whether that market can support the introduction of all the parks. I don’t know which ones will not open, but it would be my guess that some will not,” said Dennis Spiegel, president of International Theme Park Services, which provides consultancy for theme park operators.

For now no one is predicting another debt crisis, and while some agree that the emirate’s debt burden is an issue, they say it is one the authorities can deal with. “If you have $120bn of debt, it is a problem for any nation the size of Dubai,” head of research at Egyptian investment bank EFG Hermes Wael Ziada said. “But it is manageable.” The problem for Dubai is that at least some of the factors that will determine whether it can repay its debts on time remain outside its control, not least the direction that oil prices take.