2011 harsh on UAE, but Dubai is showing early signs of stabilisation

By Bridging Loan Directory -

2011 proved to be yet another tough year for the Dubai and Abu Dhabi property markets, with average prices for residential units dropping 12% and 17% respectively, while apartment rents followed a similar pattern moving down 9% and 12% according to Property Funds World.

The quarterly rate of decline, however, is starting to signal early signs of stabilisation with Dubai villa rents increasing slightly in the third quarter, while the pace of decline in apartment rents has decelerated significantly compared to the 2009-2010 period.

Office rents were also down 10% on average in Dubai and 20% in Abu Dhabi reflecting the slowdown in business activity coupled with relentless new supply entering the two markets leaving them with an estimated vacancy of 45% in Dubai and 20% in Abu Dhabi up from 40% in the former and 10% in the latter at the end of 2010.

According to Global Investment House, (Global), Dubai selling prices of residential units should bottom out by by the end of 1H 2012 but are still off from a general price appreciation, as the market will remain overflowed with excess supply. Significant new inorganic demand is not expected in 2012.

Global expects much the same for the office market as new supply equivalent to 20% of existing capacity is expected to enter the market during 2012 and 2013.

For the Dubai hospitality segment, Global does not expect the improvements that took place during 2011 as a result of the Arab spring to be extended further in 2012, but instead sees a more negative spell on leisure tourism and business travel from the overall negative global sentiment. For the retail segment, The company sees further stability as the absence of new future supply, the firmness of rental rates and moderate vacancy rates during 2011 act as positive indicators.

In Abu Dhabi in 2012, Global expects to see a further 15% drop in selling prices of residential units and 10% drop in rents as new supply continues to enter the market. Further deterioration in the office market is also expected as considerable new supply is currently in the pipeline pressuring both property prices and rental rates downwards.

The company’s outlook on Abu Dhabi hospitality segment is also negative for 2012 given the new supply entering the market coupled with low demand for tourism and an already feeble performance in 2011. The retail segment was able to maintain stable performance in terms of rental rates on the absence of new quality supply but is expected to see further downward pressures going forward as several deliveries are scheduled in 2012 and 2013.

In Riyadh, the residential market comfortably absorbed the new supply of c.25,000 units delivered throughout 2011. Selling prices in the residential market maintained their upward trend supported by the rise of input commodity prices like steel and cement along with increasing land prices. Villa and apartment rents increased 9% and 10% YoY on average. Villa and apartment rents in Jeddah also reported a 12% and 15% annual increase as the market continued to suffer from a state of undersupply.

Vacancies in the office market increased in 2011 to around 15% in Riyadh up from 10% at the end of 2010 as the market fails to totally absorb the new 290,000 sqm of office space. Average rents have inched higher during the year despite the increasing vacancies as tenants became more willing to upgrade to higher quality premises at slightly higher rates passing the vacancies through to lower grade sites. In Jeddah, current vacancy rates also stand at around 10-15% but are expected to increase as new supply of 180,000sqm will enter the market in 2012 and 2013 whereas vacancies in the CBD are, already, much higher reaching up to 20%.

Global does not expect any significant trend changes in 2012 in Riyadh and Jeddah, as the major market dynamics remain in place. In the company’s view, affordability constraints, supply shortage of ready residential units and high activity on land speculation will continue to drive property prices and rentals higher in both markets. Funding developers will also remain a key issue in the Saudi market especially in the almost near absence of off plan sales in a market where financing is most needed to accelerate the pace of construction.

In spite of the growing economy and business activity, Global is maintaining its negative view on the office market on the back of the large amount of new supply entering the market over the coming two years. In the retail segment, the only major new addition in 2012 will be Dar Alarkan’s AlQasr Mall. The company expects the market absorption of new supply to remain on the strong side given the lack of quality supply and the inherent importance of retail malls in Saudi as an entertainment destination.

Land prices in Kuwait maintained their long term upward move in 2011 after slowing down in the period between Q1 08 and Q2 10 increasing by an average of 20%. The majority of transactions remained in the private housing segment, which meant that land price inflation was passed through to prices of houses with transactions in some areas witnessing increases of 25-30% over 2010 prices.

The office market, on the other hand, is highly oversupplied with some alarming vacancy rates in the CBD that reached as high as 30% during 2011 with very low take up rate for new deliveries. The retail segment, however, maintained its strong posture and footfall growth during the year for the already operating well positioned malls while new market entrants are still struggling to attract shoppers, which could be an early sign of saturation, says Global.

Based on analysis of the current growth dynamics of the Kuwaiti real estate market, Global expects the major trends to remain the same as in 2011. For the residential market, the company expects trading volumes and values for the private housing segment to keep on increasing so long as organic demand remains intact and attractive capital gains are attainable. The same trend should materialise in the investment housing segment as yields remain on the attractive realm of 7-8% as opposed to sluggish stock market performance and very low returns on bank deposits.

For the office market, vacancies are expected to increase as new supply enters the market during the year with major deliveries in 1H12. Elsewhere, the delivery of Mabanee’s Phase III of The Avenues Mall will be the major addition to the retail market during the year. Performance in the hospitality segment is expected to remain sluggish on the back of slow business activity and an inherent lack of tourism inflow.

Global expect assets managers with strong visible recurring income profiles to outperform in 2012, on a relative basis, as was the case in 2011. The company does not see any significant deliveries for EEC or Dar Alarkan in Saudi as well as a sluggish 2012 Abu Dhabi market for the two Abu Dhabi based developers; Aldar and Sorouh. Emaar is Global’s favourite story in terms of international development delivery although risks of delays and defaults could materialise if the political situation in the region worsens.

In Kuwait, Phase III of Mabanee’s star project; The Avenues Mall will start operations, which should boost 2012 earnings before almost doubling it in 2013. Salhia also has a decent recurring income profile but net earnings are squeezed by high debt service costs. Emaar’s very strong retail portfolio is expected to maintain its strong operational performance while the hospitality segment could face some obstacles in terms of sustaining its 2011 ADRs and vacancy rates. Akaria is another visible story providing stable revenue generation with potential risks to earnings forecasts mostly to the upside on unaccounted for land sales.

For Aldar and Sorouh, the outlook remains bleak in the short term given market conditions and squeezed margins realized on recent deliveries. Specifically for Aldar, concerns linger over the need for more financing, and perhaps further dilution, in the near future in case new convertibles are issued. For Dar Alarkan, we maintain our view that the company will be able to meet its debt obligations on the 2012 Sukuk. This means that external financing is urgently needed to revamp the slowing down construction activity of the development projects. Global believes securing this kind of financing will act as a major boost to the stock price.