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3 Reasons UAE Real Estate prices may remain under pressure: S&P

April 2016

April 27, 2016 | 14:30 | Dubai

For the United Arab Emirates (UAE) real estate sector, 2015 was the first year since the recession in which prices declined. Dubai’s residential real estate prices dropped 10% – 13% on average according to industry experts, and most areas of the city were affected. The city’s property developers delivered 9,400 units last year, slightly down from the 11,000 in 2014, according to REIDIN. For the coming year, S&P Rating Services does not see any sign of market improvement for the UAE real estate sector, despite housing affordability improving from the current price environment. The pressures are threefold:

  • Declining oil prices: Have dampened the hiring and expansion plans of oil-exposed companies. Non-oil private companies’ business activities have also slowed, with job creation much lower than last year and even going into neutral in Dubai in February, according to Markit and Emirates NBD Research.  These include construction and real estate, which accounted for by far the most activity by population in 2015, as well as tourism and retail.

Table 1

  • Strong US Dollar: The USD against which UAE currencies are effectively pegged has remained persistently strong over the last 12 months. This has made UAE real estate more expensive for international investors holding non-USD liquidities.

Exhibit 1

  • Pressures on Tourism: Tourism is a key industry in the UAE, especially for Dubai. In addition to tourists’ diminishing purchasing power, we view the lack of significant geopolitical improvement of the Western world’s relations with Russia as a concern, given that Russians were among the top-five retail shoppers and hotel tourists in Dubai prior to the U.S. sanctions and ruble devaluation in 2015.

S&P opines that the lifting of geopolitical restrictions, such the sanctions on Russia and Iran, could strongly benefit the recovery of the UAE property market. This would open new investment flows into the regions’ real estate markets and partly compensate for the softening demand from other countries. A rebound in oil prices as well as weakening U.S. dollar would also likely reverse the negative trend.

 

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