The real estate market in the United Arab Emirates is beginning to feel the effect of low oil prices with property values falling across Abu Dhabi, Dubai and Sharjah, according to the latest report from Cluttons.
Oil prices have fallen by over 50 per cent since June 2014 and are currently hovering at around $50 per barrel. The hydrocarbon sector accounts for the largest share of the UAE’s economy.
“The direct correlation between hydrocarbon revenues and state spending will put pressure on the rate of job creation. In turn, this will impact the rate of office space take up and subsequently, the creation of households and overall residential demand,” the report said.
It also cautioned that a further reduction in oil prices is likely once Iran receives the green light to begin oil exports.
Chief executive of Cluttons Middle East Steve Morgan said: “We see a number of economic factors at play which will impact the level of transactions in the near term.
“The decline in oil prices has seen the government take necessary fiscal measures to boost its financial position, including the deregulation of fuel prices and the much talked about future move towards the introduction of VAT and corporation tax.
“These initiatives will likely cause consumer price inflation levels to increase, resulting in a reluctance of tenants to pay higher end rents and families to purchase homes. However, some of the rises may be off-set by the fall in diesel prices, helping to maintain the UAE’s competitive edge, which is unchallenged in the region,” he added.
On the other hand, while the expected lifting of sanctions on Iran may cause an increase in oil prices, the move is anticipated to make the Dubai property market more attractive to Iranians.
In 2010, Iranian nationals accounted for 12 per cent of Dubai’s real estate transactions, positioning them in fourth place behind Indian, British and Pakistani nationals.
However, according to data from the Dubai Land Department, investment from Iranians fell to 3 per cent during Q1 2015.
“It is our view that Iranian nationals will seize the opportunity to make significant real estate investments in the UAE, particularly Dubai, pushing them back up the buyer nationality league table,” said Morgan.
There has been no significant change in average apartment values in Dubai during H1 2015, with a 0.6 per cent drop recorded between January and June.
However, villa prices on average declined by 3.4 per cent during Q2, bringing the annual rate down by 7 per cent.
Head of Research at Cluttons Faisal Durrani said: “The villa market continues to bear the brunt of the federal mortgage cap restrictions, which have made affordability a central issue for potential buyers who are now required to hold significant equity to fund upfront costs.
“We expect a further 5 per cent to 7 per cent fall in villa values this year as supply levels rise and affordability issues challenge buyers.”
The overall sales market will also weaken further this year thanks to factors such as the federal mortgage cap, affordability challenges and a strengthening supply pipeline, which has seen 41,000 new units announced so far this year, he added.
Meanwhile average rents fell by 0.9 per cent during the second quarter of the year, with the overall drop in H1 reaching 1.3 per cent.
Looking ahead, the rental market is set to be boosted by Expo 2020, with infrastructure projects moving forward in turn supporting job creation, the report indicated.
“It is our view that the rental market will continue to perform at a reasonably stable level, with further declines in the region of 1.5 per cent to 2 per cent likely during the second half of the year,” said Durrani.
“The severity of the decline is being hugely offset by the strong rate of job creation and population growth, which remains stable, strong and diverse.”
In Abu Dhabi, house prices slipped by 0.2 per cent in the second quarter of 2015, the first contraction since Q3 2012. Current average prices stand at Dhs 1,336 per square foot, the report said.
Demand is stable in the top-end luxury market and the more affordable properties prices below Dhs 1,000 per square foot.
“This is driven by affluent Emirati and GCC buyers continuing to home in on schemes based on perceived exclusivity, while the large expat population that is being squeezed out of the rental market due to rampant rental growth, is targeting more affordable properties that are perceived as better value for money,” the report explained.
Average rents rose 1.5 per cent during the second quarter, with annual growth up 3.9 per cent. Hydra Village was the strongest performing submarket, with rents for three-bedroom for villas up almost 32 per cent during the first six months of the year to Dhs 125,000 per annum.
Durrani said: “With government spending subsiding, the rate of job creation and residential demand is also expected to stabilise. With this in mind, it is our view that the residential market will see further slight to moderate price falls over the remainder of 2015.
“Overall, quarterly house price declines of between 0.5 per cent and 1 per cent can be expected in both Q3 and Q4, while rents are expected to remain largely flat during H2.”
In Sharjah, the rental market has slowed due to declining rates in Dubai and the introduction of better quality accommodation in Ajman.
The emirate recorded a 2.3 per cent dip in average rents, with apartments seeing a 4.2 per cent drop during the second quarter. Villa rents edged up slightly by 1.4 per cent.
“In the sales market, master planned communities such as Al Zahia and Tilal City are quietly growing in popularity and setting the benchmark for future master planned communities,” said Durrani.
“These affordable upscale developments are allowing for the emergence of a niche residential market that caters for families who have been priced out of other UAE markets and those that have been waiting for more affordable communities in surroundings that echo their more traditional lifestyles,” he added.