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UAE real estate to soften in 2015, early 2016: S&P

20,170 additional units are planned for delivery in 2015.

Dubai housing prices fell slightly in the first quarter of 2015 — with apartments down two per cent, villas down one per cent and rents flat — compared with the final three months of last year. KT file photo

Dubai: The property market in the UAE is set to soften in 2015 and early 2016 after reaching a peak in 2014 with additional supply and lesser demand resulting in a moderate 10 per cent to 20 per cent correction in residential real estate prices, Standard & Poor’s Ratings Services said on Monday.

However, this correction — after three years of sharp price appreciation — should be nothing on the order that led to the crisis in 2009. Moreover, real estate companies are better armed to deal with the current slowdown and should be able to absorb it with limited ratings impact, the ratings agency said in a report.

“Our base case scenario foresees additional supply and slightly lesser demand constraining prices and rents in Dubai’s residential real estate market over the next 12 months. According to Reidin, 20,170 additional units are planned for delivery in 2015. This is a material volume increase compared with the three-year annual average of 11,600 units. Price growth has already started cooling down this year: Reidin’s residential property price indices for Dubai show negative growth of between four and five per cent from January to April 2015,” S&P report said.

“We believe real estate companies in the UAE are better armed to deal with the current slowdown and should be able to absorb it with limited ratings impact,” said S&P credit analyst Franck Delage, in the report  “Inside Credit: The UAE’s Property Market Is Prepared For The Current Correction.”

Dubai housing prices fell slightly in the first quarter of 2015 — with apartments down two per cent, villas down one per cent, and rents flat — compared with the final three months of last year, according to the main property consultants.

“We believe that prime areas will probably resist better than recently developed zones. We forecast a 10 per cent price correction for Dubai in 2015 as part of our rating assumptions. In our view, the fall is likely to reach 20 per cent for the worst locations only,” S&P report said. According to the report, the slightly lesser demand will come from nonresidents. “In early 2015, for instance, nonresident demand from Russia and other member countries of the GCC was particularly subdued. Abu Dhabi, on the other hand, is experiencing a shortage of quality housing, which is why rents will continue to climb, albeit at a much slower pace than the 11 per cent of 2014. With only 5,000 units scheduled for delivery in 2015, if rental caps or similar regulation are not introduced, we may continue to observe rent increases in the emirate’s capital. The only dampener we foresee for Abu Dhabi is the currently softer economic conditions driven by lower oil prices, which could keep rent growth in the single digits.”

In office real estate, S&P expects polarisation of the market to become even more pronounced. The gap between prime locations and lower-tier office buildings will widen in terms of rent and vacancy levels in Dubai and Abu Dhabi. “The effect may be marginal for best-located properties, but more severe for suburban locations. We believe we’ll continue to see a flight to quality, with still-high vacancy levels in locations further out from the cities’ financial districts.”

The low oil prices expected for 2015 and 2016 will limit the appetite of companies in related sectors to hire and increase office space. Also to be factored in is a potential softening of sentiment in non-oil corporate segments in the coming two years, which could slow hiring, and thus demand for new space.”

The HSBC UAE Purchasing Managers’ Index has showed some volatility over the past two months, down to a 17-month low in March 2015 after three years of steady growth, before bouncing back on improving business conditions. “Finally, we expect the currently negative investor sentiment, with the DFM index falling by 25 per cent in the past year, reflecting doubts about the sustainability of current property prices, to dampen growth prospects at least for a few quarters,” it said.

issacjohn@khaleejtimes.com