CORE annual Dubai report 2020-2021

COVID-19 was a black swan event that brought unprecedented challenges and dominated all our conversations, business practices and occupier behaviour over 2020 and its impact expected to continue in 2021. However, Dubai outperformed most global cities as the government’s efficient measures to mitigate the impact of COVID-19 while maintaining business continuity, providing multiple stimulus packages to aid the economy and most importantly the recent vaccine roll-out has bolstered market sentiment and paved the way for a stronger 2021.

Prathyusha Gurrapu, Head of Research and Advisory at CORE says “While disrupting the real estate market, the pandemic has also accelerated reforms. Measures to curb supply are gradually showing effect with major stakeholders collectively addressing Dubai’s oversupply.”

Prathyusha adds “Government-led demand drivers including a range of visa reforms, low-interest rates and attractive LTV ratios for first-time buyers are supporting and sustaining demand. These steps have also resulted in a slowdown in the off-plan market and relative resilience in the ready sales market with record transaction volumes seen, largely led by end-user buyers.”

“Although the impact of COVID-19 has pushed price recovery further ahead, we are starting to see resilience in sales prices as values reach development costs in many districts. Villa districts have particularly fared well due to rising demand from occupiers requiring more space and open areas as they adjusted to changes in working arrangements. However, apartment districts maintain their downward trajectory and are yet to show signs of plateauing.”

Residential Market

Residential Supply: Dubai saw nearly 36,000 units delivered in 2020. We conservatively forecast nearly 39,000 units for 2021, however, further revisions are expected as forecasts will inherently depend on buyer confidence and an uptick in market sentiment as developers continue to adjust to ongoing market conditions.

Residential Transaction Trends: Despite a challenging 2020, ready sales market transaction activity saw an increase of 7% over 2019 volumes. Significantly lower buying costs and a raft of government led demand drivers are the biggest factors currently supporting transaction activity. In fact, after the initial slump in April and May 2020 due to movement restrictions, December witnessed the highest monthly transaction volumes in two years.

The report highlights “Off-plan market activity contracted significantly by -32% year-on-year as buyers preferred ready units to avoid further uncertainty and we expect this trend to continue in 2021.  In line with government directives and recent news of many major developers scaling back on new project launches, 2020 saw a sharp decline in new launches, dropping by 67% compared to 2019 as developers increasingly recalibrate and focus on existing inventories.”

Residential Sales Market: Apartment districts continue to see sharp declines, with a few prime districts such as Downtown Dubai (-4%), Palm Jumeirah (-4%) comparatively bucking the trend. The more affordable apartment districts such as Discovery Gardens (-15%) and Dubailand (-15%) have been the weakest performing areas over 2020. Looking historically from the peak values of 2014, villas dropped nearly 31% while apartment districts dropped over 35% with older districts such as JLT and Discovery Gardens witnessing over a 40% drop over the last six years.

Prathyusha Gurrapu adds “However, the villa market has displayed relative levels of resilience with lower year-on-year declines due to evolving occupier needs in the wake of COVID-19. The Springs and The Meadows (+1%), Arabian Ranches (-3%), Palm Jumeirah (-4%) were the most resilient villa districts with nominal changes in year-on-year sales prices, bolstered by a strong Q4 transaction market performance.”

Residential Rental Market: Rents in apartment districts, in general, have fallen sharper than villa districts with a higher share of apartment districts witnessing double-digit drops. The weakest performing apartment areas are Dubai Sports City (-19%) and Dubailand (-19%). Villa communities witnessing the sharpest year-on-year declines are Jumeirah Village Circle (-13%) followed by Reem-Mira and The Villa in Dubailand (-11%). Prime villa locations like the Palm Jumeirah (-4%) and Emirates Hills (-4%) have shown resilience in rental drops, particularly in the upper end of the market as high absorption witnessed over H2 2020 has resulted in limited stock currently available in the market.

From peak rents witnessed in 2014, villas dropped nearly 33% while apartment districts dropped over 40% with many districts displaying reductions over the 45% mark over the last six years. As rents fall at a faster pace compared to sales prices, yield contractions have been witnessed across villas and apartment districts.

2021 Residential Market Forecast

• Sales prices and rents to remain under downward pressure with apartment districts expected to face further headwinds while established villa districts that saw strong take-up over H2 2020 and now have limited supply are expected to see price resilience.
• Flexibility in lease terms as the market largely remains tenant-friendly with most landlords willing to negotiate to retain tenants, particularly in apartment districts. With household incomes expected to remain under pressure, we foresee most tenants remaining price sensitive.
• Secondary sales transactions are expected to be steady as underlying demand is supported by lower capital values and demand drivers such as financial, visa and social reforms.
• Lower new launch volumes: While oversupply concerns persist in the near term with ample new supply and unabsorbed inventory, new launches were at the lowest level in 2020 compared to the last 8 years. We expect new launch volumes to further reduce in 2021 as developers re-strategize and focus on absorption of existing inventory.

Office Market 

Office Supply: 2020 saw nearly 1.5 million sq. ft. of office space being handed over in Downtown and DIFC, bringing the total Dubai office stock to 104.9 million sq. ft. The office supply pipeline for 2021 is significantly lower than previous year with over 680,000 sq. ft. of office GLA expected to be handed over in 2021. In addition to new office deliveries, significant amount of secondary market stock and re-purposed stock was also brought to market as firms and developers re-structure their portfolio.

Office Market Performance:  Robert Thomas, Head of Agency at CORE says “The office market continues to face headwinds with occupancy levels and rents remaining under downward pressure as existing supply issues and limited first phase expansions impact office absorption. Most new demand in 2020 stemmed from relocation activity, particularly from SMEs and regional occupiers as businesses adapted to market conditions. International corporates on the other hand are largely continuing to work from home with their real estate decisions deferred to Q2 2021 subject to the wider public being vaccinated. On the other hand, over Q4 2020, we saw an increase in leasing enquiries from large local or regional occupiers as they gradually phase back staff into physical offices.”

Thomas adds “With an offset impact, we saw a rise in enquiries from technology firms who witnessed a marked rise in business activity as COVID-19 disrupted occupier behaviours and increased their market penetration. Most technology tenants with healthy cashflows are looking to secure better commercial terms, longer lease terms and early break clauses. Landlords are also willing to provide the same as longer-lease terms helps in limiting vacancy levels.”

Robert Thomas highlights “Overall vacancy levels across Grade A stock increased to over 22% as of Q4 2020 as most new stock brought to market over the last few years has been in this segment, while Grade B stock vacancy levels remained steady at 25%. Of the total 104.9 million sq. ft. of office stock, nearly 25.2 million sq. ft. of the stock is vacant (24% of all Dubai office stock), with the volume of vacant stock gradually increasing over the last five years.” 

Office Market Rents: In 2020, office rents remained under downward pressure across all the sixteen districts we track. However, freezones with predominantly single owned office assets such as DIFC, Dubai Internet City and Media City, DWTC and D3 have displayed relatively lower levels of rental reductions partially due to rents being controlled by single landlords. Old Dubai locations such as Deira, Bur Dubai and Garhoud have seen the sharpest drops with average rents falling over 20-25% year-on-year as many tenants migrated to newer locations. Other strata districts such as Barsha Heights, Busines Bay and JLT continue to face challenges, displaying a steep 20% year-on-year drop in average rentals. 

2021 Office Market Forecast

• Office is here to stay: Although flexibility around remote working will remain with hybrid models the largely accepted workplace strategy going forward, the role of the physical office will remain pivotal as businesses will need common spaces to foster innovation, productivity, company culture and teamwork that are hard to sustain through remote working.
• Second wave of relocations: With most multinationals deferring their real estate decisions to Q2 2021, we expect a second wave of relocations later this year when these global corporates inevitably adjust their workplace strategies. Most of the demand for these relocations/consolidations are expected in the Grade A market.
• Occupancy and tenant retention: As most new office demand is dominated by relocation or downsizing activity while sub-leasing activity also gathers pace, we foresee maintaining occupancy levels and retaining tenants be the main focus for commercial landlords
• Rise of technology clients: Globally, technology and allied sectors are the new major landlords, superseding the banking, finance and service industries. We are also seeing rising take-up by technology clients in Dubai.
• Furnishing and fitting out shell and core spaces: As most enquiry levels are for fitted/plug and play offices, we expect landlords to increasingly convert their shell and core assets to CAT A fit-out (raised floor and ceiling) or completely furnish to aid absorption.
• Repurposing building use: Developers and landlords are looking at refurbishing office units or repurposing retail/mixed-use into office space to optimise asset classes with offices at City Walk, Roof Top in Nakheel Mall and Golden Mile on Palm Jumeirah being prime examples.

The report concludes “With strong fundamentals and renewed business resilience, we expect 2021 to be the definitive year that Dubai has been preparing for years as we welcome the world for Expo 2020. With signs of gradual revival seen across sectors, we remain cautiously optimistic for a stronger 2021 on the back of efficient governments measures mitigating the pandemic’s impact, easing in global travel restrictions, vaccinations for the wider public and undoubtedly the positive impact on the overall market created by the upcoming Expo 2020.”

-Ends- 

For further information or media queries, please contact:
Prathyusha Gurrapu, Head of Research & Advisory, CORE, prathyusha.gurrapu@core-me.com 

Robert Thomas, Head of Agency, CORE, robert.thomas@core-me.com 

© Press Release 2021