Why Brexit Matters to the Real Estate Market

in Dubai

Ehsan Bayat

Why Brexit Matters to the Real Estate Market in Dubai

In 2016, a historic referendum vote resulted in Britain leaving the European Union in a move that is popularly referred to as “Brexit.” The decision carried a wealth of implications for the world economy, including the Middle Eastern real estate market.

JLL recently published a new outlook report, which focuses on the effects of Brexit on real estate in Dubai. The document forecasts uncertainty in the market for the time being, and it also points to growth moving forward. All things considered, the Dubai market should reach a favorable position for recovery in the early part of 2017.

In the interim, however, one factor appears to be making a significant impact: the devaluation of the English pound. Lower sterling values have created attractive opportunities for UAE nationals to invest and trade in Britain. However, there will be an opposite effect for investors from Britain, who collectively rank as the third-largest group of investors in Dubai’s real estate market. Less money equals fewer transactions.

According to JLL, the long-term effects of a devalued English pound are still difficult to measure, but the short-term consequences of Brexit have measurably surfaced. Here is a breakdown of a few of these changes in each of the four main real estate categories in Dubai.

1. Office MarketAmong the four categories, the office market in Dubai has shifted the least in the last year, and it currently sits in the “bottoming out” phase of the rental cycle (rental growth accelerating is the next phase). Vacancy rates have declined overall, and a possible explanation for this is a shortage of quality rental space.

The report identified only one completed office project during the second quarter of 2016: Westbury Square in Business Bay. Adding roughly 30,000 square meters of gross leasable area, the tower brings Dubai’s total office space to 8.5 million square meters.

The forecast for upcoming office handovers has been adjusted to accommodate a number of new variables. First, a fair amount of the projects that are scheduled to enter the market in 2017 will now open in 2018 at the earliest.

1. Office Market (continued)Moreover, Al Duja Tower, one of the more highly anticipated projects slated for 2017, is scheduled to open on time. However, the building has shifted from mixed use to primarily residential. The change in the property, which will feature one floor of leasable office space, will reduce the office supply total by 167,000 square meters for the year.

Lastly, the ICD Brookfield development has been delayed to the first quarter of 2019. The changes will affect the office market in the coming years in terms of the available supply, but JLL analysts estimate that demand will remain strong in Dubai.

Evidence of this trend is apparent in the success of the Dubai Design District (d3), which saw a 40 percent increase in rent prices in the second quarter of 2016. The Chalhoub Group, Coca Cola, and the Jumeirah Group now have office space in the area, and their presence has strengthened the value of d3. Early projections for d3 show an anticipated annual growth rate of 6 percent for the foreseeable future.

2. Residential MarketBetween the second quarters of 2015 and 2016, the residential market moved the most on the JLL prime rental clock, starting in the “rents falling” quadrant and ending in “rents bottoming out” next to the office market. The report points out that a rise in uncertainty following the Brexit vote could delay any recovery in the residential market.

JLL analysts also observe that although rental rates are down, they remain more consistent than property sales among expatriates. In terms of new properties available for rent or purchase, District 11 of the MBR City project added 1,500 villas in the second quarter of 2016 and 1,680 other units entered the market in neighboring areas of Dubai.

The Dubai Land Department announced a new system for classifying residential properties. Among its other features, the database will catalogue each unit in the emirate and provide a star rating.

3. Retail Market

Brexit has had a stronger effect on the retail market than the office and residential markets. As a result of the devalued English pound, Dubai and the entire Middle East are now more expensive for European travelers, and so this region has experienced a decline in business.

Notwithstanding this trend, three malls were completed in the second quarter for a total of nearly 30,000 square meters of new leasable area. Another 150,000 square meters of retail space should enter the market in 2016, and the supply should reach 159,000 square meters by 2017.

4. Hotel MarketThe hospitality industry has also seen a reduction in revenue from European visitors. In addition to the declining value of the English pound, the fall of the euro and the strengthening U.S. dollar have influenced occupancy rates.

W Dubai Al Habtoor City and the Rove Hotel Downtown opened for business in the second quarter, and these properties, along with others, have created 72,500 new hotel rooms in Dubai. Other projects scheduled for completion in 2016 have been postponed until 2017.