Jones Lang LaSalle has today released its ‘2014 Top Trends for UAE Real Estate’. Now in its seventh year of publication, this highly anticipated research assesses and forecasts the major trends that JLL anticipate are likely to impact and shape the UAE real estate sector over the next 12 months.
Launching the report Mr. Alan Robertson, CEO, Jones Lang LaSalle MENA, said: “We are excited by the improving macroeconomic climate and many positive underlying fundamentals, which have contributed to our brighter expectations for the UAE real estate market in 2014. Whilst there remains some concern that this momentum could lead to irrational exuberance and a recurrence of some past issues and challenges, JLL considers that the market is smarter and more measured this time around. This is reflected in a degree of healthy caution among both investors and occupiers. In summary, we believe that 2014 will be a relatively positive year for the UAE real estate industry, with most sectors of the market experiencing improved performance.”
The 2014 Top Trends report outlines the below key trends affecting the UAE real estate market this year:
Avoiding another bubble: With unsustainable price growth in the residential market, increasing cost pressures and return of speculative activity, there has been concern that Dubai will experience another bubble. However, JLL notes that there are many differences this time around that makes for a ‘smarter’ market. Some of these differences are that investors are more cautious, regulations are better, and property development is changing with larger projects being phased in line with demand, less reliance on pre-sales and sub-developers and significant levels of new supply being provided.
More measured mega developments: For many of the differences identified above, mega projects that were either put on hold, significantly slowed or were not initiated during the financial crisis are a reality again because of growing confidence in the UAE’s market. The plans are more measured and there is an increased focus on phasing projects over many years in line with end user demand. In Dubai, these master-plan communities include Dubai Canal, Mohammad Bin Rashid and Dubai Waterfront. In Abu Dhabi, they include Saadiyat Island and Capital District, now known as Zayed City.
Future directions of growth: Dubai is growing towards the South with Dubai World Central, which includes the Expo 2020 site and Al Maktoum Airport, driving this trend. There is also a notable trend towards development closer to central Dubai, infilling some of the gaps left by the previous scattered development. Mohammed Bin Rashid City is a good example of this trend, incorporating many of the components originally envisaged for Dubailand. This is a key aspect of the recently approved Dubai Urban Planning framework. Abu Dhabi is also following a policy of concentrating development in a number of strategic locations identified in the city’s 2030 vision.
World Expo 2020 – Important long term but limited impact in 2014: While there was a lot of excitement building up to the successful bid for Expo 2020 at the end of 2013, JLL expects there will be limited direct impact in 2014 because there will only be limited activity this year. Over the long-term, Expo 2020 will have a positive impact on the UAE with hospitality, logistics and retail being the major winners. Both price expectations and excessive new supply will require careful management leading up to 2020.
More varied approaches to funding real estate: Rather than debt, JLL expects that equity will be a preferred funding approach in 2014. Pre-sales will remain important in the residential market and pre-leases and build-to-suit will be funding many new office projects. Sale and leasebacks, REITs and IPO’s and last mile financing will become increasingly popular options for funding as banks remain cautious to enter into new relationships. There may be some further IPO’s and bond issuances in 2014 but these are not expected to be widespread and to be limited to just a few major real estate players.
Two speed investment market: Strong interest remains from local and regional investors, with the Dubai Land Department recording total transactions of more than AED162 billion in 2013. However Western institutional investors are not expected to show any substantial interest in Dubai real estate in 2014 as they place a higher emphasis on secure income and are more risk averse than high net worth local investors.
Growth in corporate activity and workplace transformation: With pent up demand increasing from corporates who are now freeing up more capital for expansion of their business, JLL sees an increase in corporate activity in the UAE in 2014. The current two-tier market is likely to continue, with the best buildings experiencing increased take up and little demand for secondary space. As corporates focus on more innovative workplace solutions, such as hot desking and open floor plans, efficiencies are being achieved that will result in the demand for real estate growing less quickly than employment levels. Overall, JLL expects that 2014 will remain primarily a tenants’ market with little decline in the current excessive vacancy levels in Dubai or Abu Dhabi.
More investment sales in hotel sector: Across the UAE, JLL expects more investment sales in the hotel sector as owners now have more realistic expectations and hotels continue to perform strongly. There remains strong interest from investors in this sector and the willingness of owners to make strategic disposals will allow this interest to be converted into more sales than have been experienced in recent years.
Sustainability – from talk to action: While JLL forecast that there would be more ‘talk than action’ around sustainability in 2013, this year looks as though there will be significant actions taken in the space. With Abu Dhabi enforcing the mandate that all new development must achieve an Estidama pearl rating, it has achieved something of a lead in sustainability-focused projects over Dubai. However, Dubai has also announced regulations requiring new development to be LEED certified and has declared its intention to rank among the world’s top 10 sustainable cities by 2020. JLL expects that enforcement will remain an important factor in bringing in green building rules for all new projects and gradually converting old ones to systems that would save energy. While many multinational corporations who have global sustainability commitments have historically made an exception for Dubai because of limited availability, they could prove to be an increasing driving force for greener buildings in 2014.
Improved valuation and measurement standards: Dubai became the first country to back new international property measurement standards (IPMS) in September 2013, and this should help better regulate the market in 2014. With measurement standards varying between different developers within the UAE, calculating rentable or saleable areas on a like-for-like basis is somewhat complex. Evidence from Europe suggests the use of different measurement standards could result in differences in area, and therefore values, of as much as 25%, up or down. Another regulatory change that will affect the UAE market from 1st April 2014 is tighter restrictions on who is entitled to undertake valuation work.
Craig Plumb, Head of Research, Jones Lang LaSalle MENA concluded: “Although winning the Expo 2020 bid will not have a significant impact in 2014, it will be a long-term driver for the hospitality, logistics and retail sectors as well as for Dubai’s commitment to being one of the most sustainable cities in the world. According to JLL’s proprietary prime rental clock, which illustrates where we estimate each sector lies within its individual rental cycle at the given period, the residential and hotel sectors are currently experiencing the strongest growth in Dubai. While we expect the residential market will witness further growth in 2014, this is expected to be at lower rate of growth, as the price increases seen in 2013 are felt to be unsustainable. The office sector is expected to continue to lag behind other sectors in Dubai in 2014.
“Prime rents are expected to increase further in the residential market in Abu Dhabi during 2014, with the hotel market in the capital also beginning to recover in 2014. The performance of the retail market is expected to remain mixed and similar to Dubai whilst the office market remains closest to the bottom of its cycle, with any growth in rentals being limited to the very best buildings.”