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COVID-19& TheUAEReal EstateMarketMay | 2020

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The Coronavirus disease 2019, better known as COVID-19, is an infectious disease caused by severe acute respiratory syndrome coronavirus 2, also known as (SARS-CoV-2). The disease was first identified during December 2019 in Wuhan China and has since spread globally, a result of which is the current coronavirus pandemic. Widespread infections overwhelmed health facilities in many countries, prompting social distancing measures to complete lockdown measures and stay-at-home orders by many governments.

At the time of writing this report, the government announced new guidelines with restrictionspartially eased during the holy month of Ramadan, however, most of the UAE labour force is still working from home. While maintaining health and safety measures, retail malls are now allowed to operate within limited opening hours and capacity. Employees are not allowed to work in offices unless it is absolutely necessary, with only 30% occupancy allowed on any given day.

Introduction

The Economic Impact- Winners & Losers

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Industries on the potential losing side are aviation and maritime, tourism and leisure, automotive, retail, manufacturing, financial services, education, oil and gas, as well as construction and real estate. On the potential winning side, we have healthcare, medical supply and services, e-commerce, food processing, agriculture and information and communication technology.

As the UAE is positioned as a major global destination and travel crossroads, with Dubai International currently holding the title of the world’s busiest airport for international passengers, it was likely to be only a matter of time before the virus would be recorded locally. Since the World Health Organization (WHO) declared the coronavirus outbreak a pandemic on 11th March 2020, the UAE has responded with timely and assertive measures to help curb the spread of Covid-19, which in turn have affected every facet of the population’s social and business lives. Following international guidance on a stay at home campaign and social distancing, the Federal government laid down policies to slow and impede the further proliferation of the virus:

• Temporary suspension of passenger and transit flights

• Temporary closure and suspension of public and private educational institutions with implementation of distance learning

• Provisional closure of all leisure, entertainment, cultural, and fitness establishments including places of worship

• Sterilisation program for medical facilities and countrywide disinfection program for public areas, transportation, and utilities

• Public mass testing and setting up drive-thru testing facilities

• Conditional measures affecting non-essential retail shops and businesses including financial institutions

• Prohibition, postponement or cancellation of all public events, gatherings, and sporting activities

• Ministry of Human Resources and Emiratisation has mandated workers from the private sector to a skeletal workforce not exceeding 30% of the total number of employees, with the remaining 70% to do so remotely (work-from-home), particularly for those whose presence isn’t required at the workplace

• Suspension of all flights except cargo, halting operation of major public mass transport (Dubai Metro and Tram)

From a global perspective, and with stay-at-home measures currently in place across the world, there will unfortunately be many business losers as a result of lock-downs. However, there are also potential winners and new opportunities presented they may help mitigate some of the economic downsides.

Application fees towards government services reduced and fees imposed towards cancelled flight tickets paid with debit/credit cards would be refunded, as well as waiving ATM cash withdrawal fees. Emirates airlines benefited from new capital from the Dubai Government. 10% deduction on water and electricity bills, this is in addition to individual free zones announcing their own economic incentives that included the postponement of rental payments.

Sharjah, Ajman, Ras Al Khaimah, Umm Al Quwain and Fujairah, all launched various economic incentives to reduce economic burden on individuals and companies alike, this included exemption of some fees and discounts for many government services as well as rental reductions.

Initiatives Aiding the UAEEconomy During COVID-19

Abu Dhabi declared AED 5 billion supporting water and electricity companies, AED 3 billion towards small and medium enterprises (SME) in a financing guarantee program, AED 1 billion to establish ‘Market Maker Fund’ at the Abu Dhabi Securities Exchange. Abu Dhabi reduced service fees by 50% for SMEs on transactions less than AED 5 million in addition to reducing prices by 50% for accounts without balance. There were also banking initiatives in the form of delaying payments of due instalments and interest on loans and credit cards for three months. School fees allowed to be paid by instalments without interest.

Dubai government declared an AED 1.5 billion economic incentive package to maintain financial liquidity for individuals as well as businesses. Banking initiatives included delaying repayment of loans and waiving interest for employees without salaries for three months. Loan to Value (LTV) increased by 5% to reach a maximum of 80% for first-time property buyers.

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Navigating through these challenging global challenges, the top priority for World Expo 2020, which was originally due to open its doors in October this year, was to ensure the health and safety ofeveryone involved. For this reason, Expo 2020 was delayed by one year. The event will run from 1st October 2021 to 31 March 2022. This was after a two-thirds majority of Bureau International des Expositions (BIE) Member States who voted in favour of postponing the next World Expo by one year. This will be the first World Expo in the Middle East, Africa, and South East Asia, and the largest ever event to be held in the Arab World, Expo 2020 will welcome 192 countries.

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Impact onExpo 2020

With UAE real estate markets currently considered by many to be in a state of suspended animation – due to the ‘stay at home’ campaign in support of the nationwide disinfection program. It will be crucial to see what price & transaction trends become evident once markets emerge from lockdown.

During the first 10 weeks, property sales performed reasonably well. It was the final two weeks of the first quarter when brokers began to report drastic drops in inquiry numbers mainly due to buyers becoming more cautious and taking a wait and see approach, it will need to be seen what appetite exists and how market activity picks-up from where it left-off after a positive opening to the year.

Impact onReal Estate

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Eight months prior to the COVID-19 pandemic and the stay at home campaign, sales transaction activity in Dubai was on a significant growth trend.

On a quarterly basis, Q1 2020 saw cash sales of ready homes up 30.4% annually with no change quarterly. Despite the COVID-19 challenges which began to impact during the second half of March, this was considered as the best first quarter for ready home cash sales since 2014. Off-plan home sales grew 18.2% annually, however, saw a considerable drop of 26.3% when compared Q4 last year, this was mainly a result of developers limiting new project launches during the quarter due to oversupply concerns, as well as discontinuing further sales since lock-down measures were put in place.

Dubai Real EstatePerformance Q1 2020

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

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Average Price (AED/SQF)

Volume RHS

Source: REIDIN, ValuStrat.05

Sales Transactions - Ready HomesTotal Volume and Average Price

Off-plan Sales Volume Q1 2020

Last Year18.2%

Last Quarter-26.3%

Ready Sales Volume Q1 2020

Last Year30.4%

Last Quarter-0.3%

Source: REIDIN, ValuStrat

With the stay-at-home measures put in place, it came as no surprise that April cash sales transaction volume performance was just half of what was reported for March. Ready homes sales volume witnessed a steep monthly fall of 75%, off-plan homes sales declined 32% when compared to March. Properties developed by Emaar, Dubai Properties, Dubai Holding and Danube, topped the sales charts overall. Top off-plan locations transacted during April were in Dubai Creek Harbour, Jumeirah Village, Umm Suqeim Third, and Jumeirah Beach Residence. Most transacted ready homes were in Palm Jumeirah, Dubai Marina, Town Square, Arabian Ranches and Downtown Dubai.

April Transactions

VPIValuStrat Price Index

Dubai ResidentialCapital Values

VPI – Residential Capital Values for Dubai as of April 2020 stood at 71.9 points, declining 1.9% since March, -10.8% annually. The COVID-19 coronavirus pandemic began to show its impact during the second half of March as demand decreased due to the stay at home campaign supporting the nationwide disinfection program.

All properties monitored by the index saw monthly capital value declines, the highest of which were apartments in Jumeirah Village and Dubai Production City with -2.1%, and the lowest registered capital value decline was -1.6% in The Greens. The weighted average residential price per square foot fell below AED 1,000 since August 2019, currently at AED 915 per sq ft, not too dissimilar to average rates during 2012.

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0

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120

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100.0

Feb

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112.9

Aug

Sep

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Dec

2014

Jul

Oct

Jan

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Mar

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May

Jun

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Sep

Nov

Dec

2015

Jul

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Jan

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2016

Jul

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Nov

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2018

Jul

Oct

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2019

Jan

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71.9

2020

ValuStrat Price Index - ResidentialMonthly Growth Rates2015 - YTD

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Jul

Oct

Feb

Mar

Apr

May

Jun

Aug

Sep

Nov

Dec

2014

Jul

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Jan

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Mar

Apr

May

Jun

Aug

Sep

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2015

Jul

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Mar

Apr

May

Jun

Aug

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Nov

Dec

2016

Jul

Oct

Jan

Feb

Mar

Apr

May

Jun

Aug

Sep

Nov

Dec

2017

Jul

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Feb

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Apr

May

Jun

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2020

ValuStrat Price Index - Residential16 Apartment and 10 Villa Locations in dubaiBase: Jan 2014 = 100

Source: ValuStrat

Source: ValuStrat

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The Dubai VPI for residential rental values during Q1 2020 stood at 69.6 points, declining 1.7% quarterly and 8.9% annually. On an annual basis, apartment and villa asking rents fell 9.4% and 8% respectively. The average residential annual rent in Dubai was AED 86,444, apartments at AED 67,371 and villas at AED 203,602. Dubai’s residential net yields averaged 6.2%, with apartments at 6.4% and villas at 5%.

VPIValuStrat Price Index

Dubai ResidentialRental Values

Villa Asking Rents

Last Year-8.0%

Last Quarter-3.5%

Apartment Asking Rents

Last Year-9.4%

Last Quarter-0.8%

Source: REIDIN, ValuStrat

The average citywide residential asking price per square foot declined 2.2% quarterly and fell 7.8% when compared to last year. The average asking price for ready apartments stood at AED 1,178 AED sq ft displaying a decline of 2.5% quarterly, and 5.9% lower than in the same period last year.

For ready villas, the average asking price was AED 876 per sq ft indicating prices declined 1.6% quarterly and 12.1% annually.

Abu Dhabi Real EstatePerformance Q1 2020

Villa Asking Prices

Last Year-12.2%

Last Quarter-1.6%

Apartment Asking Prices

Last Year-5.9%

Last Quarter-2.5%

Source: REIDIN, ValuStrat

The weighted average residential capital value this quarter was AED 843 per sq ft, apartments stood at AED 934 per sq ft, and villas at AED 627 per sq ft. Ready properties in Al Reem Island, Al Reef and Hydra Village saw double-digit declines in capital values since Q1 2019. Locations that were more resistant to downward pressure, with capital values declining annually in single-digit percentages, were apartments in Al Muneera Island, Saadiyat Island, and Al Bandar, as well as villas in Mohamed Bin Zayed City, Saadiyat Island and Al Raha.

VPIValuStrat Price Index

Abu Dhabi ResidentialCapital Values

The Abu Dhabi VPI for residential rental values for Q1 2020 stood at 76.3 points, declining 1.2% quarterly and 1.7% annually. On an annual basis, apartment asking rents fell 2.6%, however, villa asking rents remained relatively stable. The average residential annual rent in Abu Dhabi was AED 131,069, apartments at AED 103,772 and villas at AED 194,762. Abu Dhabi residential net yields averaged 5.3%, with apartments at 5.3% and villas at 5.2%. Villa Asking Rents

Last Year-0.6%

Last Quarter-0.6%

Apartment Asking Rents

Last Year-2.6%

Last Quarter-1.7%

VPIValuStrat Price Index

Abu Dhabi ResidentialRental Values

0

20

40

60

80

100

120

2016 2017 2018 2019 2020

Q1

100.

0

Q2

95.4

Q3

94.1

Q4

96.4

Q1

92.4

Q2

90.3

Q3

88.5

Q4

87.1

Q1

85.5

Q2

83.8

Q3

81.1

Q4

77.6

Q1

67.9

Q1

75.1

Q2

72.7

Q3

70.9

Q4

69.1

Base: Q1 2016 = 100ValuStrat Price Index - Residential Capital Values

Source: ValuStrat

Source: REIDIN, ValuStrat.08

LookingPost-COVID -19

Residential

• In the medium term, tenants are likely to renew lease contracts. With the falling rents trend observed in the last few years, tenants were anticipated to look out for new areas which could offer better value for their money. However, we do now expect a possible near-term rush of pent-up activity, with the possible more negative forces being felt in downward price pressures in the medium term onwards. Further downward pressure is likely due to cases of salary reductions and job losses.

• On the other hand, would be end-users that have been doing due diligence for their first property might finally decide on a property purchase given that buyers may enjoy increased bargaining power during the current climate.

• Before the pandemic, a slower frequency of new project launches has been observed. Fewer new launches could mean that we could see a higher share of buyer interest towards the secondary market. Fewer large-scale project launches may also help in reducing over-supply fears Dubai has seen in recent times.

• There is a possible rise in vacancies as the International Labour Organisation (ILO) estimated 195 million jobs worldwide are at risk due to the current pandemic with its rippling effect could extend up to the end of the second quarter. Adversely affected sectors include retail, FMCG, and business service, to name a few. In a slew of unfortunate events, which we could characterise as a “perfect storm”, the Gulf Cooperation Council (GCC) member countries must endure the effects of falling oil prices at the same time. Due to these circumstances, albeit, it is premature to have a reliable and accurate job loss forecast and household reduction. With most of the retail workforce in employer-provided accommodation, there may be a minimal impact in vacancy for low to middle segment housing markets. In contrast, with recorded pay cuts in high paying positions, vacancies for upper-mid to top-tier properties may increase as some would consider trading down to smaller apartments or villas.

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LookingPost-COVID -19

Office

• Rise in remote work policies

The Dubai Future Foundation predicted remote work could be the new norm after the pandemic. Currently, though, the UAE has the lowest remote workforce percentage of 10% when compared to the global average of 62% as per International Workplace Group. This statistic might see growth as companies in the country would reconsider implementing work from home policies and change their perspective and attitude towards remote work. Demand for office space from some corporate occupiers may decline, as more of their staff find a better Work-From-Home balance going forward.

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LookingPost-COVID -19

Retail

• Acceleration in technology investments and digital presence

As one of the worst affected sectors, the pandemic is sure to further reshape the retail landscape and accelerate the on-going e-commerce expansion and growth in its aftermath. Dubai Mall, for instance, has partnered and launched its online presence through Noon.

Although the future of retail has been gearing towards the digital environment, in 2019 Business Insider Intelligence estimated e-commerce sales exceeded 10% of overall retail sales for the first time. We expect more brick-and-mortar retailers to establish a solid online existence in the medium to long term.

With UAE Central Bank encouraging contactless payment technologies, this scheme could also see an extended upward trajectory which was observed since 2018, already taking up a quarter of all UAE transactions. Banks have also recorded an average 30% annual growth rate in digital transactions

Hospitality

• Extended deterioration of key performance indicators

Perhaps the most severely affected asset class, as long as global travel restrictions are imposed. Unlike the retail sector which is expected to bounce-back relatively quickly due to most demand-drivers coming from inside the country. YTD February 2020 data from Dubai Tourism, occupancy has declined 2% annually, Average Daily Rate down 8% annually and Revenue per Available Room dropped 11% annually. Along with EXPO 2020 being rescheduled for another year, this could result in lower hotel revenues which could delay the anticipated positive change in performance.

• Prevalence of special packages, longer stay promos, and focus on local source markets

As early as April, hotels have launched special promotions including competitive monthly rates, flexible payment terms, and reduced rates with recorded evidence stating 5-star hotels started to lower rates to 4-star and 3-star levels in an attempt to attract guests, these type of schemes could saturate the market in the medium term.

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The ValuStrat Price Index for Abu Dhabi’s residential capital values is a valuation-based index constructed to represent the quarterly price change experienced by typical residential units within Abu Dhabi City. The ValuStrat Price Index for Abu Dhabi’s residential rental values is constructed to represent the quarterly rental change experienced by typical residential units within Abu Dhabi City. The ValuStrat Price Index for Dubai’s office capital values is a valuation-based index constructed to represent the quarterly price change experienced by typical office space within Dubai. The ValuStrat Price Index for Dubai’s residential capital values is a valuation-based index constructed to represent the monthly price change experienced by typical residential units within Dubai. The ValuStrat Price Index for Dubai’s residential rental values is constructed to represent the quarterly rental change experienced by typical residential units within Dubai. The VPI applies weighted averages using data samples representing more than 90% of all property types across the city’s freehold locations and is built by our expert RICS Registered Valuers.

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ValuStrat is a leading consulting firm headquartered in Dubai providing Advisory, Valuations, Research, Industrial Consulting and Due Diligence

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Every effort has been made to ensure the accuracy of this document. Prices are calculated from actual transactions that have been carefully cleansed to exclude duplicates, bulk sales and outdated transactions. Rental data is derived from a carefully cleansed database of listings that don’t include duplicates, potential errors and outliers.

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This document is the property of ValuStrat Consulting FZCo and must not be reproduced or transmitted in any form or by any means, without the prior written consent of ValuStrat Consulting FZCo. We welcome your constructive feedback and any corrections that may need to be made to this document. ValuStrat Consulting FZCo does not accept any liability in negligence or otherwise for any damage suffered by any party resulting from reliance on this document.