cluttons.

com

UNITED ARAB EMIRATES | 2015

THE PROPERTY REPORT

ECONOMY

LOW OIL PRICE ENVIRONMENT

TO CURTAIL ECONOMIC
GROWTH IN 2015
75% of the nations fiscal reserves during
2014. In fact, the Emirates Inter Bank Offered
Rate (EIBOR) surged to its highest level in 16
months during August, while deposit levels
have fallen, according to data compiled by
Bloomberg.

As expected, the persistence of a low oil price

environment which took hold last autumn
has begun to impact the ability of most
GCC states to deliver balanced budgets.
The UAE too has begun to feel the pressure
of diminishing hydrocarbon receipts, which
ratings agency Moodys estimates comprised

PERFORMANCE OF OIL PRICES

Source: OPEC

140
120

US$ / barrel

100
80
60
40
20

The 54% fall in oil prices from a high of

US$ 110 per barrel last summer to
approximately US$ 50 per barrel now is
starting to impact the nations finances. The
IMF estimates a price of US$ 75 is required for
a break-even budget for the UAE. As a result,
the IMF is now forecasting the UAE to post
a 2.3% budget deficit this year; the nations
first since the great recession in 2009. As
a consequence of this, GDP expansion is
expected to slow to 3.2% in 2015, from 4.2%
last year.

cluttons.com

While it is not unusual for a commodity

such as crude oil to experience periods of
exceptional volatility, the relative stability in
prices between early 2011 and late last year,
meant that many OPEC states were tempted
into engaging in a wide range of state backed
infrastructure and utility projects, many of
which are now at risk of being stalled or
perhaps even cancelled.

Jul 2015

Jan 2015

Jul 2014

Jan 2014

Jul 2013

Jan 2013

Jul 2012

Jul 2011

Jan 2012

Jan 2011

Jul 2010

Jan 2010

Jul 2009

Jan 2009

Jul 2008

Jan 2008

Jul 2007

Jul 2006

Jan 2007

Jan 2006

Jul 2005

Jan 2005

Jul 2004

Jan 2004

Jul 2003

Jan 2003

OIL PRICE PLUNGE

TRIGGERS POLICY CHANGES
In keeping with the governments usual long-term thinking mantra, the UAE has begun to initiate
a series of fiscal measures to help shore up its financial position, while considering additional
measures to help cushion it from further oil price shocks. On August 1, the UAE became the
first gulf state to begin deregulating fuel prices, effectively removing government funded fuel
subsidies that have been in place since the country was formed in 1971. The IMF estimates that
petroleum subsidies in the UAE amount to AED 25.7 billion, which forms part of the larger AED
389 billion energy subsidy budget, equating to nearly 7% of GDP.
The fuel price reforms come in the wake of the decision by the emirates of Abu Dhabi and Dubai
to hike water and electricity tariffs in recent years as the two emirates governments slowly chip
away at utility subsidies.
A monthly meeting of the newly formed Fuel Price Committee will set fuel prices each month,
based on global averages. For the month of August, the committee announced a 24% hike in
petrol prices, while diesel costs fell by nearly a third. Despite this step change, prices at the pump
remain about a third cheaper than they are in the USA and nearly four times cheaper than the
UK. This is likely to drive up consumer price inflation levels; however the rate of increase may
be offset to an extent by lower manufacturing and logistics costs as a result of the fall in diesel
prices, thus helping the country to retain a degree of its cost competitive edge, when compared
to the rest of the GCC. Moodys has estimated that the change in petrol prices in August will
cost each UAE resident an extra AED 1,420 this year.

cluttons.com

ECONOMY
UAE GDP GROWTH FORECAST
Source: IMF

12
% change per annum

10
8
6
4
2
0
-2

MORE ECONOMIC REFORMS EXPECTED

Aside from fuel subsidies, the government is

now also reportedly considering tackling the
sensitive issue of value added tax (VAT) and
corporation tax, something the federation has
taken great care to avoid since its formation.
In late July the Ministry of Finance announced
that a draft law for the introduction of VAT
and corporation tax is expected before the
end of 2015; however implementation is
not expected this year. Further details on
whether or not free zone companies will be
exempt from a corporation tax are yet to be
announced.

The gradual dismantling of federal energy

subsidies has not gone unnoticed by the
investment community. In fact, Abu Dhabi,
which Moodys estimates controls 94% of the
UAEs total oil production, has already seen
its sovereign bond yields decline by 5 basis
points, reflecting the boost to the national
credit profile. Moodys estimates that the
change in fuel subsidy policies will result in
savings of approximately AED 13.8 billion by
the Abu Dhabi government.

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

-6

2000

-4

The lack of VAT and corporation taxes has

allowed the UAE to emerge unchallenged
as the regions business and commercial
nerve centre. The change in policy is however
unlikely to dent the UAEs global reputation.
As the economy matures, a raft of economic
reforms to bolster government revenues was
inevitable and we are now experiencing a
period of transition as the national economy
matures and the federal government works
to diversify its income base away from
hydrocarbon receipts.

GLOBAL GASOLINE COSTS PER LITRE

Source: GlobalPetrolPrices.com

Venezuela
United States
United Kingdom

AED / litre

United Arab Emirates

Saudi Arabia
Qatar
Oman
Kuwait
Iran

cluttons.com

7.00

6.50

6.00

5.50

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

Bahrain

CAN THE IRAN DEAL BOLSTER

ECONOMIC GROWTH IN THE UAE?
In the lead up to the historic mid-July
deal between six world powers and Iran in
Vienna, there was much speculation about
the potential boost to the UAEs economic
activity. Prior to the introduction of trade
sanctions, Iran was the UAEs biggest trading
partner and tourist arrivals to the UAE from
the Iranian republic have fallen by 50%
since 2010 according to the IMF. However,
despite the sanctions, it has remained an
important trade partner for the emirates,
emerging as the UAEs fourth largest trading
partner in 2014, according to the latest
figures from the Iranian government, which
translates into AED 62.4 billion of cross
border trade; up 8.3% on 2013.
Our view remains unchanged and we see
the landmark deal as a medium to long
term catalyst for the UAEs growth, which
is expected to be centred on Dubai. Both
local and global businesses have in the past
hubbed any Iranian operations out of Dubai
and we expect this phenomenon to begin
in earnest once the US congress formally
agrees to the lifting of the debilitating sixlayered UN sponsored trade and economic
sanctions.

AED

In fact, the Iranian government has already

announced that estimated investment of
AED 734 billion is required over the next
five years by its oil and gas industry alone,
while the aviation sector requires just over
AED 18 billion in immediate investments.
We expect to see the vast majority of
these funds funnelled through the UAEs
financial system, which should aid in the
improvement of national liquidity levels.
The rippling outward of business activity as
global firms line up to service an economy
that has been starved of investment for over
a decade is not only likely to benefit other
emirates in the federation, but regional
states as well.
The downside to the lifting of trade
sanctions is of course the impact of a
resumption in Iranian hydrocarbon exports
on the fickle oil market. While Irans oil
export levels are unlikely to rise rapidly, it is
our view that further oil price falls are likely
once the sanctions are officially lifted. The
magnitude of any downward movement and
the duration for which the low oil price era
lingers very much hinges on how quickly the
EU can negotiate a Greek deal and return
to growth. At the same time, as the bloc
remains one of Chinas most important

AED

export markets, the countrys economic

performance and therefore demand for
oil remain in a holding pattern, which
highlights the risks faced by the wider global
economy.

REAL ESTATE BOOST LIKELY TO

BE FELT IN DUBAI FIRST
For the real estate landscape, the return
of an Iranian variable to the national
real estate equation will be particularly
momentous.
It is our view that Iranian nationals will seize
the opportunity to make significant real
estate investments in Dubai, allowing them
to climb up the buyer nationality league
table. In 2010, Iranian nationals accounted
for 12% of Dubais real estate transactions,
positioning them in fourth place behind
Indian, British and Pakistani nationals.
However with the onset of trade sanctions,
investment volumes from Iranian nationals
dwindled and stood at a low of just 3%
during the first quarter of 2015 according
to data from the Dubai Land Department.
This is expected to be amongst the first
lead indicators of the benefits to the UAE
from the lifting of Iranian trade sanctions;
however an exact date for this is yet to be
confirmed.

AED

62.4 bn 734 bn 18 bn
UAE-Iran cross border trade in 2014

Estimated investment needed by

Irans oil and gas sector over the
next 5 years

Estimated investment required by

Irans aviation sector
Source: Government of Iran

cluttons.com

ABU DHABI

Sheikh Zayed Grand Mosque

cluttons.com

ABU DHABI

RESIDENTIAL MARKET
HOUSE PRICE GROWTH STALLS

APARTMENT VALUES STABLE

While the performance of the market so
far this year certainly suggests further
downward adjustments are likely as
the economy absorbs the impact of the
sharp fall in oil prices, apartment values
have remained largely stable, with the
exception of high-end apartments on
Reem Island, where prices slipped by 1.6%
during the first half of the year.

After growing by 0.5% in Q1, house prices

across the capital slipped by 0.2% in the
second quarter, the first contraction since
Q3 2012. The shrinking in average house
prices across Abu Dhabis investment zones
has reduced the annual rate of increase
from just over 15% at the end of March to
around 3% at the end of June. This equates
to a current average house price of AED
1,336 psf.

BUYER DEMAND POLARISED AT THE

EXTREMITIES OF THE MARKET
The nature of demand being stable
for the top end, luxury market and the
more affordable, sub AED 1,000 psf
properties mirrors our own experience
in the market. On one hand you have
an affluent segment of the population,
predominantly comprised of Emirati and
GCC buyers, who continue to home in on
schemes such as those on Saadiyat due to
the perceived exclusivity.

Average annual expat income

AED

199,000
Average annual rent in Abu Dhabi

AED

At the other end of the spectrum, you

have a large expat population, who are
being squeezed out of the rental market
due to the rampant rental growth over
the past 18 months, which has remained
well ahead of inflation and wage growth
rates. This group continues to target

204,000
Source: Cluttons, IMF, UAE Ministry of Economy

schemes that offer the best perceived

value for money, which is helping more
affordable submarkets such as Ghadeer,
weather the downward pressures in the
market for the time being.
Furthermore, the strong capital value
growth also means some aspiring
households are left with little option
but to rent for longer while they amass
deposits to overcome the strictly enforced
Federal Mortgage Caps. It was inevitable
that demand would become polarised,
with a renewed focus on what is
perceived to be more affordable property.
This also creates a clear opportunity for
developers to focus on this relatively
untapped portion of the market.
While Dubai has made strides to begin
addressing the affordable housing
challenges it faces, Abu Dhabi still lags
its northern neighbour to an extent. That
said, in order for any affordable housing
initiatives to take hold, intervention
at a federal level is required to ensure
that the entire nation benefits from the
introduction of a new affordable housing
class, or affordable housing quotas.

PERFORMANCE OF ABU DHABI RESIDENTIAL VALUES

Source: Cluttons
15
13
11

7
5
3
1
-1
-3
Q2 2015

Q1 2015

Q4 2014

Q3 2014

Q2 2014

Q1 2014

Q4 2013

Q3 2013

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

Q1 2012

Q4 2011

Q3 2011

Q2 2011

-5
Q1 2011

% change

cluttons.com

ABU DHABI

RENTAL MARKET GAINS MOMENTUM

After rents stagnated during the first quarter
of the year, a 1.5% rise in average rents
was registered during the second quarter,
pushing annual growth up to 3.9%. This
does however mask the fact villas (2.6%)
outperformed apartments (0.3%), which
continued to see rents stagnate, mirroring
the pattern that began in Q1.
Echoing the sentiment from the sales
market, it is not surprising that Hydra
Village was the strongest performing market
in the capital, with rents for three-bedroom
villas surging by almost 32% during the
first six months of the year to AED 125,000
per annum, while two-bedroom villas (AED
110,000 per annum) registered a near 30%
increase in rents. This reflects the increased
focus by tenants on properties they perceive
to be affordable.

RESIDENTIAL SALES AND LETTINGS

MARKETS SHARE MUTE OUTLOOK
The outlook for the capitals residential
market has deteriorated since the start of
the year, underpinned by the prolonged
weakness in oil prices and the cascading
impact this has had on the strength of
demand in Abu Dhabis commercial and
residential sectors. While the residential
market has experienced average price
rises of 34% since 2010, the rate of
change over the past four quarters has
been far more subdued. Several factors
may influence the behaviour of the
residential market in the medium to
short term, but with anecdotal evidence
pointing to a growing number of stalled
infrastructure projects as government
spending eases, the subsequent rate of
job creation and residential demand is
also expected to stabilise, or weaken
slightly, therefore denting demand.

For now however, bulk residential lettings

deals are still common and are being
driven predominantly by the hospitality
and education sectors, which often
removes stock from the delivery pipeline
before it is released onto the market.
However, with the rate of job creation
likely to slow in the coming months, this
trend is likely to subside to an extent.
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; however there will continue to
be markets, such as Hydra Village, which
are expected to outperform for the
reasons outlined above. Overall, quarterly
house price declines of between 0.5% and
1% can be expected in both Q3 and Q4,
while rents are expected to remain largely
flat during H2.

RENTS SLIP ON SAADIYAT ISLAND

The weakest performing apartment market
during H1 was on Saadiyat Island. While
two-bedroom apartments managed to
record a near 3% increase in rents, threeand four-bedroom apartments registered
falls of 10.2% and 11.9%, respectively.
While tenants continue to cite the
exclusivity factor as the underlying appeal
of the capitals emerging cultural hub, rents
here appear to have risen ahead of the
market. And with other submarkets such as
Reem Island, which is in closer proximity to
central Abu Dhabi, tenants are being lured
here as rents are still largely below those on
Saadiyat Island.

cluttons.com

THE OUTLOOK FOR THE CAPITALS

RESIDENTIAL MARKET HAS
DETERIORATED SINCE THE START
OF THE YEAR, UNDERPINNED BY
THE PROLONGED WEAKNESS IN
OIL PRICES AND THE CASCADING
IMPACT THIS HAS HAD ON THE
STRENGTH OF DEMAND

REGULATORY CHANGES ARE A

STEP IN THE RIGHT DIRECTION
During June, the government of
Abu Dhabi announced a range of
new regulatory measures, aimed at
shoring up confidence in the market.
The key highlights of the new rules,
which fall under the jurisdiction of the
Department of Municipal Affairs, include
the creation of a real estate register,
the requirement for developers to set
up escrow accounts, an off-plan sales
register and the licensing of real estate
brokers.
While the raft of new laws will offer
investors a greater sense of comfort
as the authorities work to improve
the markets transparency, there was
no mention of the much anticipated
introduction of a rent-index, similar
to that used in Dubai. For a market
like Abu Dhabi where rents have risen
by 16% since 2013, well above wage

growth, which we estimate to have

grown by just 4.8% over the same
period, a rent-index will go a long way
in helping to give landlords and tenants
a barometer from which they can gauge
market performance.
The removal of the rent cap has
allowed the market to behave in a more
dynamic manner, mirroring real-time
market conditions; however the benefit
of a rent-index will offer tenants some
protection while educating landlords,
particularly those of an international,
buy-to-let flavour.
It is worth noting that any index will
always lag real-time conditions by two
to three months and will be unable
to capture nuances of variables such
as unit size, views, proximity to public
transport nodes, etc.

cluttons.com

ABU DHABI

OFFICE MARKET
RENTS STAGNATE AS DEMAND TAILS OFF
Rents across the capital continued to
hold steady through the second quarter,
with prime, secondary and tertiary rents
all remaining unchanged for the fourth
consecutive quarter. Prime rents, which
stand at AED 1,850 psm, have remained
stable for 14 quarters now.
The office markets recent stagnation is in
large part linked to the slowdown in public
spending, which has translated into a drop
in demand for new office space. However,
due to a general lack of supply, particularly
at the Grade A end of the market, rents have
held steady and are expected to remain
stable over the course of 2015 in our central
scenario.

RENT DECLINES LIKELY IN 2016

As outlined above, Abu Dhabis heavy
dependence on hydrocarbon revenues has
meant that the rate of office take up, which
is traditionally dominated by oil and gas
companies, has cooled significantly.
This is likely to put increased downward
pressure on more secondary and tertiary
locations in the first instance, with prime
rents likely to face headwinds shortly
thereafter. We do not expect to see this
chain of events play out in quick succession,
but think it likely that rents will begin to
weaken towards the tail end of this year,
or at the beginning of 2016 should the
emirates economy slow further.

Prime office rents

Secondary office rents

Tertiary office rents

AED

AED

AED

1,850 psm 1,300 psm 900 psm

Source: Cluttons

10

cluttons.com

SIGNATURE TOWERS RATES

REMAIN UNCHANGED
For now however, mirroring the behaviour in
the citys prime office market segment, Abu
Dhabis signature office towers recorded
no change in rents during Q2, which means
that rents for the most part have remained
stable for three consecutive quarters.
Etihad Towers (AED 2,250 psm),
International Tower (AED 2,050 psm) and
Nation Towers and the World Trade Centre
Office Tower (both at AED 2,000 psm)
remain the citys most expensive (aside
from Abu Dhabi Global Market). And with
occupancy levels remaining at or close to
100%, we are unlikely to see any upward
movement in signature towers rents until
space is returned to the market.

Away from this cohort of super-prime

buildings, the newly established Abu Dhabi
Global Market financial free zone on Maryah
Island continues to cement its position as
the citys new ultra-prime office benchmark,
with asking rents standing at approximately
AED 3,700 psm.
While this still sits above its nearest
comparable at the Dubai International
Financial Centre (circa. AED 2,400 psm),
demand for space here remains stable
as international businesses home in,
attracted by the international regulatory
framework. Still, the vast majority of global
organisations continue to headquarter in
Dubai, with Abu Dhabi often the location for
satellite offices.

Q2 RENTS IN SIGNATURE OFFICE TOWERS

Source: Cluttons

Abu Dhabi Global Market Square

Addax Tower
Capital Tower
Capital Gate
International Tower
Nation Towers
World Trade Centre Office Tower
Aldar HQ

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

Etihad Towers

AED psm
cluttons.com

11

DUBAI

Dubai Creek

12

cluttons.com

DUBAI

RESIDENTIAL MARKET
VILLA PRICE DECLINES ACCELERATE
As we previously forecast, 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 (see example). Furthermore, rising
villa supply levels are dampening the
prospect of any immediate turn around in
the performance of this segment of the
residential market.
During the second quarter, villa values on
average declined by 3.4%, dragging the
annual rate of change down to -7%. It is
worth noting that the first six months of
2015 alone have registered a 5.1% fall in
average villa prices, which now stand at
AED 1,421 psf.

BUYING A AED 5.5 MILLION VILLA

Costs

AED

Minimum deposit size

35

1,925,000

Property registration fee

220,000

Agency fee

110,000

Bank fee

55,000

Total upfront cost 42%

AED 2,310,000

Source: Cluttons

The Springs (-7%) was the weakest

performing submarket during H1, while
villas in the Green Community (-2.2%)
registered the smallest fall.

CAPITAL VALUE PERFORMANCE IN KEY VILLA SUBMARKETS

Source: Cluttons

1,600
1,500

The Springs

1,400
1,300
The Lakes
1,200

Arabian Ranches

1,000
900
800

The Meadows

700
600
Jumeirah Islands

Q2 2015

Q1 2015

Q4 2014

Q3 2014

Q2 2014

Q1 2014

Q4 2013

Q3 2013

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

400

Q1 2012

500
Q4 2011

AED psf

1,100

Jumeirah Village

cluttons.com

13

DUBAI

RESIDENTIAL MARKET PERFORMANCE: CAPITAL VALUE GROWTH RATES

APARTMENT CAPITAL VALUES

SHOW GREATER RESILIENCE
Apartments on the other hand have
performed slightly better, with average
values moderating by -0.4% to AED 1,471
during Q2, which translates into a 0.6%
fall between January and June this year.
Overall, there has been almost no change
in average apartment values during H1.
High end apartments in Dubai Marina
(-2.6%), mid-range apartments on the Palm
Jumeirah (-1.9%) and high-end apartments
on the Palm Jumeirah (-1.7%) have been
the three weakest performing submarkets,
reflecting a combination of previously
stubborn vendors reducing prices to reflect
market reality and those gradually lowering
asking prices below prevailing rates to
entice buyers.
Overall, house prices in Dubais residential
market now stand 3.1% below this time last
year and 21% below the Q3 2008 market
peak.

14

cluttons.com

Q2 2015

Q1 2015

Q4 2014

Q3 2014

Q2 2014

Q1 2014

Q4 2013

Q3 2013

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

Q1 2012

Q4 2011

Q3 2011

Q2 2011

Q1 2011

% change

Source: Cluttons
24
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-6
-8

TOTAL NUMBER OF RESIDENTIAL

TRANSACTIONS FAIRLY STABLE
Looking specifically at buildings and units,
there was a 7% dip in the number of
deals recorded, while the value of all real
estate transactions slipped by nearly a
quarter (Dubai Land Department).
Drilling down further into the residential
market, the picture is fairly stable, with
data from Reidin showing that transactions
during H1 were down 2.3% on the same
period last year. The number of apartment
transactions dipped by 1.1%, while the
number of villas that changed hands
decreased by 13.1% when compared to H1
2014, reflecting the affordability challenges
outlined above.

-7%

-0.6% -3.1%

fall in villa values during H1

fall in apartment
values during H1

year-on-year decline
in average house prices
across Dubai
Source: Cluttons

This can in part be attributed to a

moderation in demand due to the breach
of affordability thresholds. Elsewhere,
villas on the Palm Jumeirah and those in
Jumeirah Islands, The Lakes - Hattan and
Arabian Ranches - Hattan have all seen
rents remain unchanged so far this year; a
trend we expect to persist.

RENTS CONTINUE TO EBB GRADUALLY

During the second quarter, average rents
in Dubai declined by 0.9%, following
the 0.4% decrease recorded in Q1.
This takes the overall change in the six
months to June to -1.3%, while the yearon-year change now stands at -3.6%.
Looking specifically at villas, Q2 saw
a 1% fall in average rents, with threebedroom properties in more affordable
communities such as the Springs,
Jumeirah Village, Falcon City, Al Reem and
The Villa seeing rents fall by almost 6%
between January and June this year.

In contrast to the behaviour of the

villa market, apartments in affordable
communities such as International City,
IMPZ, Discovery Gardens, Jumeirah Village
Circle, Jumeirah Village Triangle, Dubai
Sports City, Jumeirah Lake Towers and
Dubai Land have all held steady in 2015,
while the steepest declines have been
recorded by one-bedroom properties
(-4.4%) at the top end of the market in
communities such as Downtown Dubai,
Dubai Marina, the Palm Jumeirah and the
DIFC.

RESIDENTIAL MARKET PERFORMANCE: RENTAL VALUE GROWTH RATES

Source: Cluttons
10
8
6
4
0
-2
-4
-6
-8
-10
-12
-14

cluttons.com

Q2 2015

Q1 2015

Q4 2014

Q3 2014

Q2 2014

Q1 2014

Q4 2013

Q3 2013

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

Q1 2012

Q4 2011

Q3 2011

Q2 2011

-16
Q1 2011

% change

15

DUBAI

FURTHER WEAKENING EXPECTED IN

THE RESIDENTIAL MARKET THIS YEAR
Stiff headwinds in the form of Federal
Mortgage Caps and general affordability
challenges have been exacerbated by a rise
in the number of project announcements;
41,000 units have been announced so far
this year. The surge in the number of project
announcements over the last two years,
which has been a direct result of confidence
injected into the market by the 15% rise
in average residential values over the same
period, has translated into a strengthening
supply pipeline through to 2017. In fact,
we expect just over 20,000 units to be
delivered by the end of 2017, with villas
accounting for almost 70% of the total.
This of course is against a backdrop of an
already weak villa market, suggesting that
a sudden turnaround in values is unlikely.
With average villa prices already down by
over 5% during H1, we anticipate a further
5% to 7% fall in the second half of the year
as values adjust to market conditions and
more importantly, buyers budgets.
Apartments on the other hand still continue
to be viewed favourably by buy-to-let and
buy-to-leave investors, particularly those
from the region looking for a safe haven.
In addition, the success of recent off-plan
project sales, which continue to come to
market approximately 10% to 20% below
prevailing rates for completed properties,
underscores the affordability challenges
faced by the domestic market.

However the propensity for developers to

promote balloon payment plans, which see
buyers paying the majority of the purchase
price upon handover, is allowing this
market to be accessed by a wider segment
of buyers who may have previously been
priced out.
RENTAL MARKET TO STAY WEAK
Despite falling to 4.2% in July, from a sixyear high of 4.7% in May, inflation rates in
the emirate are expected to come under
increased upward domestic pressure as
households adjust to the removal of federal
fuel and utility subsidies, which, together
with housing costs, account for 44% of
the consumer price inflation basket. Still,
households can take some comfort in the
fact that the strength of the US dollar, to
which the dirham maintains a fixed peg, will
continue to hold back the level of imported
inflation, which to an extent will ease the
burden on household finances.
With this in mind, it is our view that the
rental market will remain weak, with further
slight declines in the region of 1.5% to 2%
likely during the second half of the year.
BRIGHT MEDIUM TERM
OUTLOOK SCENARIO
While the continuation of price moderation
in the sales market is likely to persist, the
rental market is expected to fare slightly
better. The Expo 2020 event has moved
from being on the medium-term event
horizon, to being on the short-term event

horizon and with associated public spending

on supporting infrastructure likely to gain
further momentum as the event draws
closer, job creation levels are unlikely to be
dented in the near term.
If anything, the pace at which new jobs
are created is expected to rise, which to
an extent will go some way to help in
absorbing the strengthening supply pipeline,
particularly as we expect the population to
expand by a further 400,000 to 2.8 million
by 2020. This will mitigate the risk of a
supply glut and therefore help to sustain
rents and stabilise house price growth.
In addition, any weakening in regional
demand for Dubai residential assets as a
result of continuing oil price declines is
expected to be countered to an extent
by Iranian funds, which are waiting in the
wings as outlined earlier.
However as the Dubai Land Departments
buyer nationality league tables continue
to show GCC buyers dominating overall
transaction activity, a weakening in long
term demand from this cohort does not
currently sit in our central forecast scenario.
Furthermore, strengthening yields as a
result of falling residential values and
relatively stable rents will continue to boost
Dubais overall investment appeal.

APARTMENTS STILL CONTINUE TO BE VIEWED

FAVOURABLY BY BUY-TO-LET AND BUY-TO-LEAVE
INVESTORS, PARTICULARLY THOSE FROM THE REGION
LOOKING FOR A SAFE HAVEN.
16

cluttons.com

OFFICE MARKET
HEADLINE RENTS STAY FLAT
Over the course of the first six months
of 2015, headline office rents for primary,
secondary and tertiary space were
unchanged at AED 250 psf, AED 130 psf
and AED 70 psf, respectively. This does
however mask a more complex picture at
a submarket level across the city. And there
are of course exceptions to average rates,
with core DIFC and Emirates Towers for
instance, recently quoting AED 275 to AED
325 psf.
Occupier activity is still diverse, with banks,
financial institutions, law firms, aviationlinked businesses and the technologymedia-telecoms sector accounting for
the vast majority of requirements. These
remain focussed on the emirates primary
free zones and submarkets. As previously
explained, desirable micro-markets, which
can sometimes be as small as individual
buildings within some of the larger
submarkets, continue to outperform
the rest of the market, achieving new
benchmark rents when space becomes
available.
A good example of this is the DIFC Gate
Building and Gate Village, where average
base rents currently start at between AED
275 psf to AED 325 psf, considerably higher
than the wider DIFC average. It remains to
be seen whether this trend will be de-railed
by occupiers drawn to new grade A stock in
third-party developed, strata-owned towers,
such as Burj Daman, Park Central and Index
Tower, where rents are around 25% lower
than their core DIFC counterparts and
service charge rates can be up to 50% lower
than that for DIFC owned space.
With the rising amount of supply in the
wider DIFC area, the increased competition
is requiring landlords to offer space at
slightly lower rates in order to secure
tenants. This is attracting new operators
into the zone while causing an ongoing
softening of peripheral DIFC quoting rents.

The pattern of outperformance is however

still prevalent in free zones, such as the
Dubai Internet and Media Cities, where
there is little or no vacancy and rents
continue to edge up as a result. Top end
rents here currently stand at about AED 225
psf. TECOM is due to launch its new major
Innovations Hub development later this
year with a proposed handover date of Q4
2017 and this will provide relief for pent up
demand from existing tenants looking to
expand but remain in this free zone.

Average prime office rents

(47% below Q3 2008 peak)

Elsewhere, more secondary and tertiary

space in locations such as Deira and Bur
Dubai, which saw rents move upwards
during Q1, have seen a softening of growth
in the second quarter. This can be attributed
to the recent delivery of several Grade B
schemes in submarkets such as Business
Bay and Jumeirah Lake Towers, which has
presented occupiers with a greater range of
options and price points.

AED

AED

250 psf
Average secondary office rents
(57% below Q3 2008 peak)

130 psf
Average tertiary office rents
(72% below Q3 2008 peak)

AED

70 psf
Source: Cluttons

cluttons.com

17

WITH THE WORLD EXPO IN 2020 LOOMING

AND WITH TRADE SANCTIONS ON IRAN ON
THE VERGE OF BEING LIFTED, THE OUTLOOK
FOR THE OFFICE MARKET SUGGESTS A STABLE
PIPELINE OF TAKE-UP ACTIVITY

18

cluttons.com

DUBAI
TAKE UP UNLIKELY TO WANE IN THE
MEDIUM TERM AS EXPO 2020 LOOMS
Overall market confidence continues to
edge up as international and domestic
office take up activity continues to rise,
albeit at a slightly slower pace than last
year. Our experience mirrors the sentiment
of the Q2 Emirates NBD Dubai Economy
Tracker, which signalled that optimism in
future business activity reached a 19-month
high in June, despite a slight softening in
new orders.
However respondents from all key sectors
of the emirates economy indicated an
anticipated expansion of business activity
over the course of 2015. This was in large
part underpinned by planned company
expansion through recruitment and an
expected rise in new orders.
That said, we have recorded instances
of downsizing, or consolidation of office
space by oil and gas companies, reflecting
headcount reductions and budgetary
pressures by hydrocarbon linked firms; a
pattern we are observing in other global
markets as well.
This aside, with the World Expo in 2020
looming and with trade sanctions on Iran
on the verge of being lifted, the outlook for
the office market suggests a stable pipeline
of take-up activity.

As we previously mentioned, we have

already noted an upturn in speculative
requirements from Dubai-based Iranian
businesses looking to expand their premises
in anticipation of a resumption in normal
trade with Iran. Furthermore, we have also
already noted several instances of Iranian
businesses in the emirate approaching
banks for loans to fund planned expansion.
In addition, we anticipate an upturn in
international businesses looking to service
any Iranian operations out of Dubai, which
will once again place upward pressure on
Grade A rents in sought after submarkets,
particularly the citys primary free zones
such as the DIFC, the Internet & Media
Cities, D3 and Dubai Airport Free Zone.
This, combined with the pipeline of
government backed mega-infrastructure
projects, such as the AED 117 billion Al
Maktoum International Airport expansion,
Dubai Metro extension and Jebel Ali Port
expansion, in addition to the vast pipeline
of leisure, retail and hospitality projects
points to a steady, but significant pace of
job creation over the short to medium term,
which will translate into a steady stream of
requirements.

SECTORAL BREAKDOWN OF ENBD DUBAI

ECONOMY TRACKER CONFIDENCE INDEX
Source: Emirates NBD, Markit

90
80

Index value
(>50 indicates expansion)

70
60
50
40
30
20
10
0

Wider Economy

Travel & Tourism

May 15

Construction

Wholesale & retail

June 15

cluttons.com

19

SHARJAH

Al Qasba Canal

20

cluttons.com

SHARJAH

RESIDENTIAL MARKET
RENTS SUCCUMB TO WIDER
MARKET DYNAMICS
As expected, the lettings market in
Sharjah has continued to gradually slow
in response to rent declines in Dubai and
the introduction of what is perceived
to be high-quality accommodation in
neighbouring Ajman.
These constantly evolving market drivers
have meant that tenants are now firmly
in the driving seat, with many in a
position to cherry pick from a range of
options both in and out of Sharjah. In
fact, our experience points to the trend
of reverse migration to Dubai gaining
momentum, mirroring previous property
cycles, while tenants from other northern
Emirates eye a return to Sharjah as its
perceived affordability improves.

This constant ebb and flow of tenant

requirements in the face of rising supply
in Dubai, Sharjah itself and Ajman has
undermined the emirates rental market,
which recorded a 2.3% dip in average rents
during Q2, following no change in the
first quarter. This now leaves average rents
across the citys main central submarkets
just 3.3% ahead of the same time last year.
Apartments registered a 4.2% decline during
the second quarter, while villa rents edged
up slightly by 1.4%.
On a submarket level, Al Majaz was the
weakest performing area in the six months
to June, with annual rents for threebedroom flats slipping by almost 12% to
AED 75,000. One-bedroom properties also
recorded a near 4% decrease in average
annual rents and stood at AED 50,000 at
the end of Q2. On the villa front, with the
exception of three-bedroom properties,
which have seen rents rise by just under 6%
between January and June to an average of
AED 90,000 per annum, there has been no
movement in rents.

-2.3%
Decline in average
rents during H1

1.4%
Annual change in
average villa rents

AED

90,000
Average rent for a threebedroom villa
Source: Cluttons

cluttons.com

21

SHARJAH

RESIDENTIAL MARKET OUTLOOK

HINGED ON MACROECONOMIC
CONDITIONS
The turnaround in the strong rental value
growth in 2014 (24.1%) has all but been
erased by the anaemic performance during
the first six months of 2015. This was
largely anticipated, particularly as incomes
failed to keep pace with this magnitude of
change. While there is no doubt that this
has influenced the lettings market heavily,
so has the macroeconomic picture that
has dented the performance of Dubais
lettings market, which as always, has direct
ramifications for Sharjah.

The catalysing of the real estate market

through the introduction of residential
sales to the UAEs expat community will
no doubt help to bolster economic growth;
further policy changes are likely to emerge
to help foster and cement the emirates
core sectors of manufacturing, small &
medium enterprises and aviation.
While these industries continue to be
nurtured, it is unlikely that home grown
domestic tenant requirements will be
sufficient to drive strong rental growth in
the second half of this year. Instead, it is our
view that rents will slip by another 2% to
4% on average before the end of 2015.

While authorities are clearly driving a shift

away from a reliance on the hydrocarbon
sector, the process was always going to be a
slow burn.

The medium term outlook is however

slightly better, with one off factors such
as the lifting of trade sanctions on Iran
expected to drive residential demand
in Dubai up significantly, which will no
doubt spill over into Sharjah. This is in turn
anticipated to support a gradual return to
strong growth as demand starts to overtake
supply.
On the supply front, clearly developers
have rushed to develop green-field sites
throughout the city, but as with any scheme
in Sharjah, securing SEWA connections and
permits can often delay handover for up to
six months, which will help to offset any
rapid fall in rents in the short term as the
market meanders through a challenging
period.

RESIDENTIAL MARKET PERFORMANCE:

RENTAL VALUE GROWTH RATES
Source: Cluttons
12.0
10.0

% change

8.0
6.0
4.0
2.0
0
-2.0

22

cluttons.com

Q2 2015

Q1 2015

Q4 2014

Q3 2014

Q2 2014

Q1 2014

Q4 2013

Q3 2013

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

Q1 2012

-4.0

COMMUNITY LIVING GAINING TRACTION

Despite this, Sharjahs residential landscape
continues to experience a phenomenal
sea change. The pace at which worldclass master planned communities such
as Al Zahia and Tilal City are emerging is
phenomenal and these developments are
setting the benchmark for future master
planned communities. These are growing
in popularity and we are already seeing
developers rush to meet this demand.
And while the scale and pace of development
is slower than that of Dubai, or Abu Dhabi,
the emirate is blazing a trail in the creation
of affordable upscale developments that are
designed around the emirates rich Islamic
culture and heritage.
This in itself is allowing for the emergence
of a niche residential market that caters to
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. Sharjah is taking place making
back to basics and developing communities
that people want to be a part of. There

has been a tremendous level of appetite

in Sharjahs first family friendly gated
communities.
The government is spearheading the creation
of family friendly enclaves on the fringes
of the city that are supported with all the
necessary community amenities. There is a
strong underlying desire to ensure facilities
such as mosques, schools, clinics and
community shopping centres, along with
adequate transportation infrastructure, are in
place long before the first residents move in.
At Tilal City for instance, we have been
overwhelmed by the demand from the
local resident expat community. While UAE
nationals account for just over 50% of all
transactions to date, we have seen a huge
amount of demand from UAE residents who
are native to the wider Middle East. While
some of them have been motivated to invest
in the project to escape the political unrest
in their home countries, many are genuinely
singling out Tilal City as somewhere they
wish to live and raise their families.

cluttons.com

23

SHARJAH

OFFICE MARKET
RENTS REMAIN STEADY

As previously mentioned, the small &

medium enterprises, aviation and finance &
banking sectors remain the main occupiers
in the market, however there have been
notable declines in the level of requirements
from these groups so far this year as well.
Still, the steady, but weaker level of activity
from this cohort has gone some way to
keep rents stable during the first six months
of this year.

Office rents in Sharjahs main submarkets

held steady during the second quarter,
following no change in Q1. The prime areas
of Al Majaz retained their position as the
citys most expensive space (AED 75 psf),
while Al Soor remained the most affordable
centrally located submarket, with rents
standing at AED 60 psf.
The flat performance of the office
market reflects a scaling back in overall
requirements and take up levels while the
dominant oil and gas occupiers assess their
expansion plans.

Earlier on in the year, the market appeared

to be gearing up for an extended period of
low oil prices and the subsequent impact
on the emirates economy. With this
phenomenon now taking centre stage, rents
in most centrally located office buildings
which have remained frozen and unchanged
are in danger of weakening. The ability of
the market to weather the continued low oil
price environment, or weakening demand,
is expected to put rents under pressure,
particularly at the top of the market.

PERFORMANCE OF OFFICE RENTS IN KEY SUBMARKETS

Source: Cluttons

90
80
70

AED psf

60
50
40
30
20

Al Soor

Al Majaz fringe areas

Q2 2015

Q1 2015

Q4 2014

Q3 2014

Q2 2014

Q1 2014

Q4 2013

Q3 2013

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

Q1 2012

Q4 2011

Q3 2011

Q2 2011

Q1 2011

10

Al Majaz prime

IN MORE SECONDARY AND TERTIARY LOCATIONS

WE HAVE ALREADY SEEN LANDLORDS ADJUST RENTS
DOWNWARDS IN AN EFFORT TO GENERATE DEMAND.

24

cluttons.com

MODERATE FALL IN RENTS EXPECTED

In more secondary and tertiary locations
we have already seen landlords adjust rents
downwards in an effort to generate demand.
This widening gap between the two tiers
of the market is unlikely to be sustainable,
with Grade A rents likely to slip later on in
the year. Overall, rent declines of up to 5%
are likely across the board before the end of
the year.
Furthermore, the strong rental growth over
the past two years in Al Soor (30.4%) and
the fringe areas of Al Majaz (18.2%) resulted
in several developers and land owners
rushing to not only complete office schemes
that had previously been on hold, but also
speculatively develop new space. This means
that we are now at the cusp of a spate of
deliveries, which will also hold back any
strong return to positive growth.
That said, with a potential boost to the
UAE economy likely to begin materialising
once trade sanctions are lifted on Iran,
Sharjah may feel the benefit in the form of
an upturn in requirements from domestic
and international occupiers who expand
operations to service the Iranian economy.
Although any Iran-linked boost is likely
to have a slow-motion impact, the office
market can take comfort in the fact that,
like the residential market, deliveries
and completions are subject to SEWA
connection delays, which has in the past
prevented a sudden flood of office space
onto the market and we expect this to
persist in the short to medium term, which
should shield the market to an extent.

cluttons.com

25

UAE REAL ESTATE MARKET

OUTLOOK MIXED
There are a number of headwinds facing
growth across the nations biggest real
estate markets. The continued and
prolonged slump in oil prices is one of our
chief concerns, particularly as there is a
direct correlation between hydrocarbon
revenues and state spending. A further
reduction in oil prices is more than likely
once Iran receives the green light to begin
oil exports.
This is expected to put further pressure on
the rate of job creation and therefore the
appetite and rate of office space take up
and subsequently, the rate of creation of
households and overall residential demand
at least in the short term.
The nervousness of employers in the event
of such a scenario is already materialising
in the tapering of the total number of
vacancies across the UAE. During Q2,
Morgan McKinley reported a 1.2% dip in
available jobs, with a marked decline in
permanent positions in the oil and gas
sector as global oil companies brace for a
prolonged era of low oil prices.
The impact of this will be variable across
the UAE with Abu Dhabi likely to feel
the impact most, given its heavy reliance
on oil exports. Still, with Saadiyat Island
moving closer to realising some of its
flagship projects, the appeal of Abu Dhabis
upmarket communities is rising amongst
both domestic and international investors,
particularly those looking to diversify their
UAE portfolios or those that have been
priced out of Dubai.
In Dubai, weaker oil prices may stem the
pace of government backed projects;
however with tourism showing no signs of
abating and with the Expo 2020 just over
four years away, the level of job creation in
the emirates highly diversified economy, is
expected to remain stable, if not strengthen
as the city gears up for the World Expo.

26

cluttons.com

LEADING JOBS GROWTH INDICATORS

1.89 %

growth in the UAEs total workforce over

the last 12 months.

LinkedIn

-1.2 %
drop in the number of full time jobs
during Q2 in the UAE.

Morgan McKinley

1st

Dubai was the most searched global job

destination by US expats; London was
second.

Aetna International

Furthermore, with sentiment continuing to

be buoyed through mega projects such as
Meydan One and its record breaking 1.2 km
ski-slope and 711m residential tower, Emaar
and Dubai Properties plans for the former
Dubai Lagoons site, the AED 117 billion
development of Al Maktoum International
Airport, the AED 5 billion expansion of
Jebel Ali Port and the planned Dubai Metro
extensions will ensure a steady stream of
new jobs, which will help to support growth
in the real estate sector.
For Sharjah, the lower oil price effect
will be slightly more tempered, with the
emirates drive to diversify into real estate
unlikely to wane in the near term primarily
due to the price advantage it offers over
neighbouring Dubai and Abu Dhabi.
Furthermore, government incentives to
improve transportation infrastructure and
build on the emirates reputation as the
regions leading Islamic cultural hub will
ensure its continued appeal to the regions
investors, particularly those from the Levant
region looking for an affordable regional
safe haven.

THE PROPERTY REPORT

IN NUMBERS

3.2%

SHARJAH

UAE GDP Expansion

AED 75 psf
office rents in Al Soor

-2.3%

Source: IMF

decline in average
residential rents during
H1

DUBAI

AED 250 psf

ABU DHABI

Headline office rents

stay flat

AED 90,000
Average rent for 3
bedroom villa

Residential house prices

Prime office rents have
remained stable for

14 quarters
1.5%
Rise in average
residential rents

-3.1%

down on summer 2014

41,000
residential units have
been announced this
year

3%
House price growth
Source: Cluttons

cluttons.com

27

Abu Dhabi
Third Floor
EMC building
Airport Road
PO Box 95246

Dubai
Level 22
Arenco Tower
Dubai Internet City
PO Box 3087

Sharjah
Behind Nova Park Hotel
King Faisal Street
PO Box 3615

+971 2 441 1225

+971 4 365 7700

+ 971 6 572 3794

For further details contact

Steve Morgan
CEO of Middle East
steven.morgan@cluttons.com

Murray Strang
Head of investment & agency,
UAE
murray.strang@cluttons.com

Suzanne Eveleigh
Head of Sharjah
suzanne.eveleigh@cluttons.com

Faisal Durrani
Head of research
faisal.durrani@cluttons.com
Richard Paul
Head of residential valuations
richard.paul@cluttons.com

Cluttons LLC. 2015. This publication is the sole

property of Cluttons LLC. and must not be copied,
reproduced or transmitted in any form or by any
means, either in whole or in part, without the prior
written consent of Cluttons LLP. The information
contained in this publication has been obtained
from sources generally regarded to be reliable.
However, no representation is made or warranty
given, in respect of the accuracy of this information.
We would like to be informed of any inaccuracies
so that we may correct them.

Paula Walshe
Head of international corporate
services
paula.walshe@cluttons.com

Shane Breen
Associate director commercial
valuations, Sharjah
shane.breen@cluttons.com

Krystyna Mawby
Associate director, valuations,
Abu Dhabi
krystyna.mawby@cluttons.com

0768

cluttons.com

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cluttons.com

27

3.2%

Sharjah

90,000
Average rent for
3 bedroom villa

UAE GDP Expansion

-2.3%

decline in average
rents during H1

3.3%

Annual change
in average rents

Dubai



..

murray.strang@cluttons.com
Headlinesteven.morgan@cluttons.com
office rents stay flat

AED 250 psf

faisal.durrani@cluttons.com

Abu Dhabi

Residential
house prices

21 %

paula.walshe@cluttons.com

below Q3 2008
krystyna.mawby@cluttons.com
richard.paul@cluttons.com
market peak

41,000
units

suzanne.eveleigh@cluttons.com


shane.breen@cluttons.com

1.5%

3%
House price
growth

Rise in average
rents

..
.2015 .


.. .

Have been
announced this year

Prime rents have

remained stable for

14 quarters

.
.

01166