Where is Dubai's real estate sector headed next?
COVID-19 has caused significant disruption across all real estate sectors in 2020 with owners and occupiers having to make necessary adjustments to business operations in response to the statutory restrictions on capacity and mobility. It remains unknown whether the pandemic will result in structural shifts for residential and commercial real estate. In the short-term, cash management, financing and lender considerations are the primary priorities across all sectors.
Impact of travel restrictions
The inflow of tourists to Dubai has been disrupted due to travel restrictions and lockdown measures that came into effect from March 2020, which had a direct impact on the hospitality and retail sector performance. Many hospitality companies are using this downtime to revise their business strategy and build resilience towards the new normal. The reduction in international visitors has also impacted footfall and spending at brick and mortar stores. The impact of Covid-19 on retailer revenues has led to many tenants seeking turnover-linked rents in their contracts. Meanwhile, certain mall owners have provided temporary incentives in the form of rent relief that were launched soon after lockdown and in certain cases have been extended until the end of the lease.
E-commerce and logistics opportunities
The challenges posed by lower spending and fewer shoppers in stores has driven faster the adoption of digitisation and online sales among many retailers. The growth in this segment has also increased the requirement for storage and fulfilment centres, thus providing a fillip to the industrial and logistics sector. Further expansion from the e-commerce and cargo sector occupiers is expected in the short to medium term, with more design and build for specific end users as opposed to speculative build. Additionally, next-day or same day-delivery options are expected to create a requirement for last-mile delivery hubs, close to the residential and business districts.
Tenants in the driving seat
Office space usage has faced disruptions as a result of the remote working model necessitated by the pandemic, first during the 24-hour restrictions in April, and since then with varying return to work policies across companies. From recent research undertaken, the general consensus is that the impact of Covid-19 on business performance is likely to be the primary driver for changes in office space requirements, which will be promoted when current leases expire, and companies may choose to downsize or even expand their facilities. The addition of approximately 900,000 sq ft of office space through the handover of ICD Brookfield Place in DIFC is expected to increase competition among prime assets in the financial district, while owners in other areas in Dubai are expected to face downward pressure on rents.
Tenants remain in the driving seat in the residential sector with wide scale migration to larger units with superior amenities, now being affordable. Capital values have also remained under pressure this year and investment volume has declined by 14 per cent YTD September 2020 when compared to the same period last year.
Demand for secondary market properties has outpaced transaction volumes for off-plan units while cash transactions continue to dominate, making up 74 per cent of the total transactions. Meanwhile developers are offering discounts, fee waivers, and rent-to-own incentives. Notably there still remains an opportunity to stimulate demand by allowing a wider income bracket of occupiers to become home owners, through targeted mortgage offerings and evaluation of loan-to-value ratios.
Outlook for 2021
The flight to quality is expected to continue in the real estate sector, as prime assets in locations with limited upcoming supply will focus on maintaining occupancy levels by offering competitive rates in addition to providing incentives on a case by case basis.
As of October, Dubai government announced economic stimulus packages worth Dh6.8 billion to support businesses. The Central Bank also launched the Targeted Economic Support Scheme (TESS) in March and has recently extended it until June 30, 2021, allowing individuals and private sector firms affected by the pandemic to tap into a Dh50 billion zero-cost facility made available to lenders so that their customers can defer loan payments.
Macro-economic and demographic factors, combined with the availability of finance and related government initiatives are likely to define the shape and pace of recovery for the real estate sector in 2021.
The writer is Assistant Director, Real Estate, Deloitte