dubai investment outlook · the foreign exchange values of the u.s. dollar against the currencies...

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D U B A I I N V E S T M E N T O U T L O O KOpportunities and Risks | 2018

Residential Asset Performance Office Asset Performance Alternate Asset Overview Investment Outlook

32

FOREWORD

CONTENTS

Economic OverviewShrinking developer margins

Residential InvestmentsYield compression expected across the market, although reasons differ widely segment by segment

Global Comparisons Around the world in prices and yields

Office InvestmentsCommoditisation under way

Warehousing and Education SectorsThe risks and rewards

REITs becoming popular

Outlook Investment

As 2017 came to a close, a clear trend in residential sales prices remains elusive. A variety of economic parameters in Dubai are beginning to face headwinds; real estate is no exception, and faces its own particular challenges in 2018. Further rental declines, the ongoing strength of the US dollar and the imminent – albeit probably limited – inflationary effects of the introduction of VAT in the emirates are all expected to compress investment yields.

Dubai’s real estate market will weather a number of headwinds over 2018 including further rental declines, continuing dollar strength and the upcoming broad, although limited inflationary impact of the VAT.

Nevertheless, strengthening economic growth and comparably low prices and acquisition costs suggest that long term investment opportunities are still available to those discerning investors equipped with perceptive market intelligence.

This report highlights some of these real estate investment opportunities in both the residential and commercial markets, in addition to alternative asset classes such as warehousing, education and real estate investment trusts (REITs) to suit a variety of investor appetites.

Analysing real estate investment opportunities and risks in the backdrop of contracting yields and continued market softening.

This publicationThis document was published in January 2018. The data used in the charts and tables is the latest available at the time of going to press. Sources are included for all the charts. We have used a standard set of notes and abbreviations throughout the document.

54

DUBAI INVESTMENT OUTLOOK

110

82.5

55

27.5

0

100

75

50

25

0

Billio

n (U

SD)

USD/

bar

rel

Exports of Oil Fiscal breakeven oil price Average crude oil export price

2014 2015 2016 2017 2018

Source: IMF

Oil Output, Breakeven Oil Prices

Activity OutputSource: EmiratesNBD, IHS Markit Employment Prices Charged

Dubai Economy Tracker Components

Jan - 2015 May - 2015 Sep - 2015 Jan - 2016 May - 2016 Sep - 2016 Jan - 2017 May - 2017 Sep - 2017

70

65

60

55

50

45

40

Economic overview

The UAEs economy has weathered an extended period of low oil prices over the past few years and is expected to see growth pick up over 2018. The Dubai government budget for 2018 is significantly larger than in 2017 – due to infrastructure-related expenditure in the run up to Expo 2020 – and is likely to support recovery, particularly in concert with a number of

Currency fluctuations

The Emirati dirham, which is pegged to the US dollar, has strengthened slightly over the past three months relative to Sterling and the euro, recovering from a marginal decline seen earlier in the year. Given that the AED/ USD has strengthened almost 26% over 2014–2017 against a basket of currencies*, the UAE has become a relatively expensive destination for inward real estate investment from important source markets such as India and the UK.

* Federal Reserve US Dollar Index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners including the euro and the sterling.

2018

Demand indicators

The Emirates NBD Dubai Economy Index, which tracks the city’s growth across a range of sectors and indicators, shows a marked improvement due to the steady increase in new orders and output. The tracker, which had dropped below 50 in 2016 Q1, averaged 56.3 over 2017.

Oil price trends

Oil export values decreased almost 50% over 2014–2016, in line with the decline in oil prices.

Although exports and prices recovered slightly in 2017, ongoing OPEC discussions to continue curbing production are likely to keep exports from rising significantly in the near term.

economic reforms that promise to streamline government spending and increase efficiency. Nevertheless, businesses are still adapting to a more challenging environment created by the economic weakness of previous years; many firms have consolidated their operations and are now working on leaner structures in order to reduce costs.

Nevertheless, this has not been reflected in terms of employment; according to the Monster Employment Index, online vacancies in August 2017 were almost half the level seen in the same period in 2016.

76

2018


Average rentsAverage sales

Prime and upper mid-segment yields

Prime and upper mid-segment sales and rents

Sep. 14

Sep. 14

Sep. 15

Sep. 15

Sep. 16

Sep. 16

Sep. 17

Sep. 17

Jan. 15

Jan. 15

Jan. 16

Jan. 16

Jan. 17

Jan. 17

Jan. 18May. 15

May. 15

May. 16

May. 16

May. 17

May. 17

Source: Core Savills Research off-plan salesready sales

Number of transactions by area - 2017

MeydanCity

Discov

ery

Garden

Dubai C

reek

& Harbou

r Palm

Jumeir

ahMBR City

Int. C

ity

Emirates

Living

JLT

Al Furja

nDub

ai

South

Downto

wn

Dubai

Busine

ss Bay

Dubai M

arina

Dubaila

nd Sales

pric

e in

AED

/ sq.

ft

Rent

s in

AED

/ sq.

ft./y

ear

2,700

2,500

2,300

2,100

1,900

1,700

1,500

1,300

Prime apartment yields

8%

7%

6%

5%

4%

3%

2%

1%

0%

2,500

2,000

1,500

1,000

500

0DIFC Downtown

DubaiPalm

JumeirahDubai Marina

Prime villa yields

4%

3.8%

3.6%

3.4%

3.2%

3.0%

2.8%

2.6%

2.4%

2.2%

2.0%

5.6%

5.4%

5.2%

5%

4.8%

1900

1800

1700

1600

1500

1400

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

100

95

90

85

80

75

70

Palm JumeirahEmirates Hills

Source: Core Savills Research

Residential Investments

The residential market continues to see further downward adjustment in rental rates, resulting in yield compression in several areas. Although this trend is likely to continue as the next cycles of lease renewals lead to further relocations, the rate of decline is expected to slow in the near term. The underlying fundamentals for this compression vary by segment and reflect the market’s adjustment to the ongoing trends of the previous few years:

Prime

Over 2014-2016, the significant declines in prices (relative to rents) in the prime and upper mid-market segment caused yields to increase approximately 28 base points representing a relative increase of 5% over this period. This combination of weakening priwces but comparatively stable rents expectedly encouraged a share of tenants in this segment to shift towards ownership.

However, this effect – seen across communities as tenants relocated to capitalise on weak prices – eventually drove down

Yield H2 ‘17 Yield H2 ‘16 H2 ‘17 average price (AED/ sq. ft.)

rental demand and gradually caused prices to stabilise during 2017. This caused yield compression by an average of 57 base points, representing a relative decline of 11.2% across prime and mid-market communities during 2017.

In the near-term we expect prices to continue stabilising in the prime and mid-market segment but the current decline in rents to decelerate allowing yield compression to slow down.

“The residential market continues to see further downward adjustment in

rents, resulting in yield compression in several areas, although the underlying

fundamentals for this compression vary significantly by segment”

ForecastMarket Triggers 2016-2017Declining prices and stable rents caused yields to increase

Affordable

Dubai residential market dynamics

Prime

2014-2016

Triggered a shift towards home ownership – Households previously paying rent were

encouraged to take advantage of lower prices and become home

owners as relative cost of owning vs. renting was decreasing.

Households transitioning to ownership and leaving the rental

market caused further downward pressure on already declining

rentals, whilst prices stabilised. This caused yields to decline.

Prices expected to continue stabilising in the prime and upper

mid-market segment while the current decline in rents is

anticipated to decelerate, allowing yield compression to slow down

Triggered investor demand – Investors drawn to the high yields

and attractive payment plans. End users faced affordability issues,

unable to transition to ownership and continued renting

Increased investor demand led prices to stabilise but rents did not fall as significantly. Yields did not compress as much when

compared to the prime market.

Prices expected to remain relatively stable but rents anticipated to significantly drop as upcoming off-

plan stock is delivered and enters the rental market. Yields to decline faster than the prime market,

resulting in further negative impact on prices.

98


Mainstream Apartment Yields

10%

9%

8%

7%

6%

5%

4%

3%

2%

1%

0%

1,800

1,600

1,400

1,200

1,000

800

600

400

200

0

Busin

ess

Bay

Disc

over

y G

arde

ns

Jum

eirah

Vi

llage

Duba

iland

ol

d

The

View

s

The

Gre

ens

JLT

Duba

iland

Spor

ts C

ity

Mainstream Villa Yields

8%

7%

6%

5%

4%

3%

2%

1%

0%

1,600

1,400

1,200

1,000

800

600

400

200

0The Lakes Arabian

RanchesJumeirah

VillageThe Springs

and MeadowsDubailand

Affordable and Mid-market

Yields in the affordable and lower mid-market segment have also followed a similar trajectory although for significantly different reasons. Over 2014-2016, the stronger decline in prices and only a slight weakness in rents allowed yields in this segment to rise 68 base points representing a relative 8% increase, which worked towards increasing demand (similar to the prime segment). However, most of this buyer demand was led by investor buyers as opposed to end users; who could not afford to shift to ownership due to continued affordability issues.

This increased investor demand allowed the affordable segment to see prices relatively stabilise over 2017. However, given that lower-income buyers were not shifting to ownership, it was one of the main reasons the tenant pool did not shrink as much; affordable properties, therefore, did not see rents decline as significantly as seen in the prime market. This prevented yields from declining as visibly: from mid-2016 to the end of 2017 yields compressed only 35 base points representing a relative decline of 3.8%, only half of the decline witnessed in the prime segment. Investor buyers, therefore, continue being drawn to the affordable segment due to the expected high level of yields and easier payment plans while developers see robust off-plan transaction volumes as an encouraging sign of higher absorption activity and continue bringing more stock to the market. Given that affordable segment’s supply pipeline is looming with substantial off-plan deliveries in the run-up to 2020, the high

yields expected by many investors post hand-over, are unlikely to be sustained.

If rental demand of these projects is insufficient at handover, this supply surge is expected to exert considerable downward pressure on rents, leading to faster yield compression. Eventually, this contraction in yields will reduce investor demand, in turn pulling sales prices down over the mid-term.

It is important to note therefore that yield trends do not provide a full investment picture, as similar yield trajectories in different segments can hide very different economic realities and divergent risk profiles. Although yield compression is often considered to be indicative of lower risk, in the current market, this may hold true for the prime segment but not the affordable.

2018


Average rentsAverage sales

Affordable segment sales and rents

Affordable and lower mid market yields

Sep. 14 Sep. 15 Sep. 16 Sep. 17Jan. 15 Jan. 16 Jan. 17May. 15 May. 16 May. 17

Sales

pric

e in

AED

/ sq.

ft

Rent

s in

AED

/ sq.

ft./y

ear950

900

850

800

750

80

75

70

65

Sep. 14 Sep. 15 Sep. 16 Sep. 17Jan. 15 Jan. 16 Jan. 17 Jan. 18May. 15 May. 16 May. 17

9.5%

9%

8.5%

8%

7.5%

Q2 2016 – Q4 2017

Rent decline

Yield decline BPS

Relative yield decline %

Prime 11.2% 57 10.6%

Affordable 5.1% 35 3.8%

Construction Cost

Despite relatively stable construction costs, developers have seen total expenses rise significantly over the past few years. This is largely due to increasing overhead and compliance costs associated with the introduction of regulations which require developers to raise construction and development standards.

Although the implementation of such regulations will work towards strengthening Dubai’s real estate market in the long term, the high charges associated with compliance (often exceeding 10% of the total construction costs) are placing a major burden on budgets. All other factors being equal, developers have seen profit margins decline significantly.

Developers’ margins are also being compressed by increasing price competition in the market, and many are

Yield H2 ‘17 Yield H2 ‘16 H2 ‘17 average price (AED/ sq. ft.)


reducing their prices per sq. ft., bringing down average prices particularly in the off-plan market. Despite rising costs, their competitors are being forced to do the same, thus further shrinking developer profit margins.

Over the long term, such competition is likely to drive less efficient developers (and those that have not factored in these costs) out of the market. This effect is most likely to impact smaller developers that cannot benefit from significant economies of scale and find it unviable to bring new products to market, even if they are of high quality. Although this may potentially improve marketcompetitiveness, it may also create a scenario wheremany developers offer lower quality products, resulting in value and quality reductions in the market.

Relatively stable construction

costs+

Increasing overhead costs

Increasing cost / sq. ft. for building

leasable space

Increasing competition from robust

supply causing prices

to decline

Shrinking development

margins

1110

DUBAI INVESTMENT OUTLOOK 2018

Despite the popular global assumption that the majority of Dubai’s real estate stock and transaction volumes are concentrated in the prime/luxury end of the market, this sector represents just a small portion of the emirate’s residential market. In fact, only 3% of all residential transactions in 2017 were concluded within this segment.

This may come as a surprise given Dubai’s image as an expensive metropolis with a robust luxury property market; but it is less paradoxical when one considers the large amount of stock that has transacted in the mid- and affordable segments over the past 12 months, overshadowing the prime market that just a few years ago was firmly in the limelight.

In any anomaly one may find opportunity, however, as the market continues to be flooded with new stock in the lower end, the top segment may provide better prospects for investors in the coming few years.

Global Comparisons – around the world in prices and yields

Prime and ultra-prime property prices in Dubai are now amongst the lowest of any comparable global hub. This stance is further intensified by the varied level of price softening witnessed over the last three years across all segments of the market, prime properties in Dubai are approximately 40% less expensive than Singapore and 50% less than Moscow and Paris. Dubai’s ultra-prime market is also relatively inexpensive, with average prices almost 60–70% lower compared to cities such as Shanghai and Tokyo.

The long-term investment potential in Dubai’s prime segment is reinforced by a nominal tax regime and notably low real estate investment costs. These costs – associated with buying, holding and selling property – can detract significantly from an investment and essentially erode the attractiveness of an asset. Cities such as Hong Kong carry investment costs of approximately 32%, while costs in Singapore and Tokyo are nearly 20%, representing an additional charge equivalent to

almost a quarter of the value just to buy, sell or hold property. With notably low buying and selling fees, and almost no holding charges, investment costs in Dubai amount to just 8%. Although these costs are often overlooked by investors, they have a significant impact on any comparison of prospective investment yields in different cities across the world.

The trickle-down effects of continued low oil prices, a strong US dollar and continued geo-political uncertainty have collectively cast a significant dent in the absorption levels in prime stock. However, the upcoming supply pipeline is modest in this sector, with most new stock concentrated in the low-to-mid market segment – an upsurge created on the back of projected demand from Expo 2020. Given Dubai’s position as a global tourist destination and regional economic hub within five hours flying time to around one third of the world’s population, strong underlying demand for prime and ultra-prime properties is expected to be sustained in the long run.

As the market grows and continues maturing, adding depth and liquidity on the back of population growth, the demographic pressure is also likely to continue moulding the cityscape in a way that will make core areas even more obvious and unavoidable. These “city centers”, muolded by demographics rather than just master planning, will also see natural price appreciation driven by desirability, and the scarcity of land surrounding them - a novelty in Dubai.

Prime and ultra-prime will be the direct beneficiary of this phenomena, in terms of price appreciation and stability, although this will in all likeliness trigger further yield compression, making Dubai on par with other global hubs. On the other end of the spectrum, in most outer areas seeing no constraint on land availability, and being flooded by recent lower priced projects, even optimistic demographic figures will unlikely be sufficient to drive significant mid-term price appreciation, creating a widening gap and contrast with prime and ultra prime prices in the center.

Residential Yields in World Cities

Mainstream Prime

Source: Savills World Research

Prime League - 10 year change in prices

Los Angeles

Mumbai

Sydney

Dubai

Singapore

Moscow

Paris

Shanghai

New York

London

Tokyo

Honk Kong

Jun 2017 Dec 2007

Note: Scenario assumes a $2 million property (or equivalent), foreign buyer holding for five years as an individual, not as main residence. Any capital gains are not included.

Cost of sellingSource: Savills World Research Holding cost (5 years) Cost of buying

Buying, holding and selling costs in world cities

35%

30%

25%

20%

15%

10%

5%

0%Hong Kong$00% $1,0002%4%6%8% $2,000 $3,000 $4,000 Vancouver Tokyo Singapore Sydney Berlin Paris New York London Dubai Moscow

Perc

enta

ge o

f pur

chas

e pr

ice

1312

DUBAI INVESTMENT OUTLOOK 2018

Despite Dubai’s image as an expensive metropolis with an abundant supply of luxury properties, the prices of prime and ultra prime properties in the city are currently the lowest compared to other global hubs. Prime properties in Dubai are approximately 40% less expensive than Singapore and 50% less expensive than Moscow and Paris. Dubai’s ultra-prime market also is comparably inexpensive compared to prominent global cities such as Shanghai and Tokyo with average prices almost 60%-70% lower.

As the market grows and matures, prime and ultra-prime sectors are likely to offer significant investment opportunities to developers and investors. It is interesting to note, that the ultra-prime market is less

established in Dubai relative to the prime sector. For example, you can buy almost thrice the area for a prime property in Dubai, while in the ultra-prime sector, properties 4-5.5 times bigger can be acquired when compared to similar spatial benchmarks in New York or London.

This indicates that Dubai has reached a relatively stronger position in the prime market on the global scene, whilst it still has significant potential to grow in the ultra-prime segment. It is likely to see continuedinvestment inflows from global and regional investors,causing prices to stabilise - marginally contracting the gap in capital values with other global cities and witness gradual yield compression over the long term.

Square meter 1 million USD can buy (Ultra Prime)

Square meter 1 million USD can buy (Prime)

150 Dubai

83 Dubai

90Singapore

66Singapore

78Paris

27Paris

52 London

20 London

78Moscow

20Moscow

22 Monaco

9 Monaco

23 Hong Kong

8Hong Kong

55New York

15New York

60Shanghai

35Shanghai

31Tokyo

22Tokyo

What does 1 million USD buy?

1514

Office Investments

Dubai’s office market exhibits the key characteristics of an attractive prospect for global commercial investment. Occupancy levels of Grade A office stock in core locations are notably high due to strong demand from blue-chip occupiers choosing to locate their regional headquarters in the city.

Furthermore, lease acquisition costs remain low alongside high but steady yields. Although investment interest in this segment was previously limited due to the lack of willing sellers and buyers able to enter at high price points, a few recent large acquisitions by institutional investors indicate a potential shift in the market towards increased available supply and buyer interest.

Over the past few years, investment in the office market has been largely led by smaller investors in the strata segment. Developers of Grade B stock were typically hesitant to accept leasing risks, preferring an early exit by selling strata, predominantly due to a lack of understanding of mature development and disposal strategies. In a few cases it was also because selling strata provided monetary injections to strained construction cash flows.

The office market previously saw fewer institutional investors due to the limited of investment-grade stock available for sale. Master developers of Grade A stock have traditionally preferred not to sell due to the high rental demand. Such developers are typically cash-rich and can therefore sustain the leasing cycle, allowing them to hold on to the stock indefinitely. Prime districts, including DIFC, D3, Tecom and One Central for example, all experience high demand, evidenced by steady pre and post-leasing activity.


*Note: The Savills Executive Unit (SEU) includes one expat CEO, one senior expat director, a locally employed director and four locally employed administrative staff. To measure office costs, we place these seven people in a financial services firm in the best part of the city, and again in a creative start-up in a secondary location in the same city. The typical office size taken is 1,200 sq. ft.

Gross office yield levels across global cities

Source: Savills World Research

Hong KongLondon Paris New York SingaporeDubai

Creative office Financial office

7.5%

5.8%6%

3.3%3.8%

4.2%

7%

5%4.5%

4.3%3.8%

3.3%

2.6%

Sydney

Institutional investors typically prefer investment grade assets that are tenanted by blue-chip occupiers with long-term leases of 15 years or more, as is common practice across global commercial hubs. The average lease terms for prime occupiers in Dubai, however, are much shorter, ranging from five to nine years, largely due to the 4% transfer fee applicable on the total lease value for a duration above 10 years, which deters occupiers from considering longer term options. Furthermore, many office complexes within freehold areas are developed and controlled by freezone authorities, while land in onshore areas remains leasehold.Given the city’s dominant rise as an economic hub, international funds aiming to geographically diversify across the globe are increasingly pressed to include Dubai in their portfolio. In view of the steady performance of Emirates REIT, which allocates over 47% of its portfolio to commercial assets, along with the upcoming Emirates NBD REIT and the announced ADFG Etihad REIT, institutional investment is expected to gain progressively greater exposure in this market.

The close control of the market is gradually changing, with public–private joint ventures materialising recently, such as the partnership between Investment Corporation of Dubai (ICD) and Brookfield Property Partners, the flagship listed real estate company of Brookfield Asset Management. ICD Brookfield’s first major project in the UAE will be ICD Brookfield Place, a 1.5 million sq. ft. mixed-use development in Dubai International Financial Centre (DIFC). Other acquisitions include the Standard Chartered office building in Downtown Dubai bought by a Kuwaiti sovereign fund, and two buildings in Emaar Business Park sold to a regional family investment fund, both of which indicate a maturing landscape.

2018

Impact of VAT on Real Estate

VAT in the UAE is expected to have a broad inflationary impact on the real estate market, particularly in view of the following:

• Commercial real estate sales and leases are subject to 5% VAT, thereby proportionally increasing costs for commercial tenants. (Landlords of such properties will be able to claim back VAT expenses.)

• Existing/ready-built residential properties are VAT exempt. (Landlords in this category will not be able to claim back VAT expenses.) Nevertheless, given that landlords will see their operational costs increase due to VAT paid on expenses such as maintenance, the value of their property investments are likely to see marginal declines.

• New residential properties which are currently being handed over are zero-rated, allowing developers the right to claim back VAT expenses. Nevertheless, given that developers are not likely to claim back expenses at the same pace/speed as payments, their cash flows are likely to be weighed down.

VAT is therefore expected to reduce investment return values in some sectors and increase costs in the short term, effects expected to be particularly significant for small businesses. Although this is unlikely to have a visible impact on the wider economy, potential short-term weakness in the SME sector, which has faced the most significant challenges over the past few years, may work towards compounding the decline seen in rentals for Grade B commercial space. Nevertheless, in the medium term these impacts are likely to be absorbed by a broad inflationary effect across the market.

1716

Warehousing and Logistics Investments

Dubai’s position as a global logistics and manufacturing hub is aided by its geographical advantages, its aviation and port infrastructure and supporting legislation. Accounting for almost 30% of Dubai’s GDP, the manufacturing, transport and logistics sectors combined are the largest contributor to Dubai’s economy and function as the backbone for other economic segments.

However, with the ongoing slowdown in trade volumes and continued lull in oil prices, this market segment has seen dampening levels of demand and widespread rental softening. Consolidations amongst logistics operators are also creating an upsurge in supply levels that is expected to further adjust rents downward. Furthermore, the acquisition process and land ownership regulations make this asset class relatively cumbersome and non-liquid.

Potential investment opportunities do exist in certain segments due to the lack of suitable gaps in the market. International grade stock is witnessing relatively steady absorption, higher levels of occupancy and steady yields in the range of 9–12%, reflective of the relatively higher risks compared to other assets classes. Despite more free zone authorities/funds/private entities offering competitive purpose-built facilities for long term tenants, acquisitions of such assets remain limited.

Education

Investment inflows in the UAE’s education sector have increased steadily over 2017. This has been demonstrated by the completion of a number of high profile investments including Emirates REIT’s sale and lease back agreement with British Colombia Canadian School in DIP, ENBD REITs purchase of South View School in Dubailand and the Dubai Investments acquisition of Kent College in Meydan.

Continued government support for investors in this sector, including the recent announcement by the Abu Dhabi Department of Education and Knowledge to offer investors incentivised land plots, indicates the significance of the education sector to the UAE’s development vision.

Investment in the education sector is largely responding to the steadily rising demand for private schools seen in 2006–2016. This demand has been driven by the increasing proportion of school-aged expatriate children in the total population and the growing number of Emirati families seeking private education for their children. Given that the population of children in the 0–4 age group almost tripled between 2006 and 2016, demand is likely to continue increasing rapidly over the near term. The tertiary education sector rate has also seen steady increases as the UAE becomes a popular destination for regional students to come and study. According to the KHDA, Dubai is expected to require an additional 77 private schools by 2020.


Population of school-age children

600,000

500,000

400,000

300,000

200,000

100,000

02005 2016

15-1910-145-90-4Source: Dubai Statistics Center

Investments in education assets through real estate sale–leaseback agreements are typically considered to be low risk. Investors benefit from the stability of longer term leases and periodic dividends from rental yields in the 8–10% range, in addition to potential capital appreciation in the long term. As larger investors seek to increase their exposure to alternative sectors, investments in education real estate are likely to increase further.

Nonetheless, assets in this sector can carry relatively high levels of risk for investors/institutions that need to prioritise liquidity, as they cannot necessarily be easily sold or used for other purposes.

Younger population driving social change

Cities with a younger population are more likely to be centres of higher education, magnets for skilled migration and catalysts for innovation. The following describes seven examples of well-known cities where demographics will be favourable in 10 years’ time.

Dubai, with the second highest “Savills Z to X ratio*”, enjoys a strategic location in the Middle East and is

a city built on immigration. It bridges east and west, attracting businesses from a range of European and Middle Eastern markets.

* Savills Z to X ratio is a forecast of the number of 15-34 year olds (Generation Zs) in a city in 2027, compared with the number of 50-69 year olds (Generation Xs). For example: 1.8:1 equals 18 Gen Zs for every 10 Gen Xs.

2018

As existing units are increasingly improved and renovated according to occupier requirements, we foresee further segmentation between higher and lower performing assets. Rents and vacancy levels will gradually reflect these preferences, leading to the emergence of a two-tiered market similar to Dubai’s office sector. This is expected to eventually push operators/landlords to revamp existing stock, thus elevating the overall quality of supply on offer and making the industrial market relatively liquid to trade as investment grade assets. Nevertheless, thus far investment in this asset class has largely come from specialised funds/institutions due to complex transaction models and the high degree of customisation.

Edinburgh, UK1.3:1 Oslo, Norway

1.2:1

Auckland, New Zealand

1.5:1

Austin, US1.6:1

Shenzhen, China6.0:1

Dubai, UAE1.8:1

Tel Aviv, Israel1.6:1

1918

REITS

The UAE’s REIT sector saw expansion accelerate in the last few quarters, with the launch of Abu Dhabi Global Market’s Etihad REIT, scheduled for floatation in 2018, and Equitativa’s Residential REIT and 5-holding Hospitality REIT. Dubai saw the flotation of the ENBD REIT and a number of high profile acquisitions including the purchase of The Edge, Uninest and South View School by ENBD REIT and the European Business Centre by Emirates REIT.

By further integrating the real estate market with capital markets, these REITs will support the expansion of funding channels available to developers, and provide smaller investors access to diversified property investments.

While REITs currently represent a notably small share of the UAE’s listed real estate market compared to other countries,


they clearly have significant potential to grow. They account for less than 5% of the UAE’s listed real estate, compared to other countries such as the UK and Singapore where REITs make up more than 40% of total listed real estate. Given that REIT legislation differs notably between countries, non-REIT structures continue to be the preferred option to invest in listed real estate in various prominent real estate markets such as Germany and Hong Kong.

These investment instruments are still relatively new to the region, given that the UAE’s first public REIT was launched in 2010, which suggests a lack of public knowledge concerning their structures and specific advantages. The market will most likely benefit from increased education and information regarding the function of REITs, enabling this sector to gain traction amongst retail and institutional investors.

Regulatory systems

Presently the UAE maintains two regimes for REIT managers to list their property funds, the DIFC (2006) and the ADGM (2015). Although both have the same limitations on the proportion of real estate that may be under development (30% of net asset value) and the distribution of net income (minimum 80% of net asset value) the ADGM is the only regime to offer private REITs.

Aly Kassam, an attorney with the law firm Latham & Watkins LLP, commented that generally, there have been very few

REIT Year Launched IPO No. of Properties

Portfolio Value (AED) Occupancy Loan to value

Emirates REIT 2010 Apr-14 10 3 billion 83% 38%

ENBD REIT 2005 Mar-17 10 1.59 billion 83% 32%

REIT market cap as a percentage of listed real estate market cap

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

UAEFin

land

Hong K

ong

German

ySpa

inJa

pan

Malaysi

a

Singap

oreIre

land UK

Canad

aFra

nce

Belgium US

Austra

lia Italy

Turke

y

Mexico

South

Africa

Netherl

ands

Non-REITsREITsSource: SNL Financial, EY Global Perspectives: REITS 2016

Emirates REIT PortfolioENBD REIT Portfolio

67%58%

38%

4%

11%

22%

ResidentialCommercial Alternative

“REITs account for less than 5% of the UAE’s listed real estate, compared to more than 40% in countries such as the UK and Singapore.”

2018

REITs used as investment vehicles in the UAE. As a result, onshore in the UAE, the regulations and standard market practices are less developed than in international markets where REITs are much more frequently used and where standard market practices and regulations have developed over time.

To meet these requirements the Dubai Land Department and the Real Estate Registration Authority have announced that they will issue new rules regarding the regulation of REITs.

REIT Case Study

ENBD REIT announced its acquisition of The Edge office building in Dubai Internet City on 8th October from developer SWEID & SWEID, with a transaction value of AED 280 million. This transaction was facilitated by Core Savills.

Tenants of the Grade A, 92,000 sq. ft. office building include Oracle, Snapchat and McGraw Hill. The building also offers occupiers a central, accessible address, high-end interior design and quality facility management. The entire asset is expected to deliver a gross yield of 7.4% and a net yield of 6.6%.

The Edge office building

6.6% expected net yield

7.4% expected gross yield

Grade A tenants92,000 sq.ft.

AED 280 million

Acquired by ENBD REIT

2120


Ticket size*

Stability in prices**

Liquidity*** Overall risk

Total return****

Risk to reward ratio

Off-plan residential (Affordable)

3.5 1.5 1

Off-plan(Mainstream) 3 2.5 2

Off-plan residential (Prime) 2.5 2.5 2

Resale residential (Affordable) 2.5 1.5 2

Resale residential (Mainstream) 2 3 3

Resaleresidential (Prime) 1.5 3 2.5

Office – Grade A (Core + locations) 1 3 3

Office- Grade B 2 1.5 2

Warehousing(Grade A) 1 2 2

Education 0.5 4 1

REITs 5 2.5 5

Bright outlook

Mostly bright outlook

Neutral Outlook

Mixed outlook

Cloudyoutlook

Core Savills Investment Outlook

2018

*Ticket size: 0 -highest entry point | 5- lowest entry point**Stability in prices: 0 - highly variant | 5 - most stable***Liquidity: 0- illiquid to trade | 5 – liquid to trade****Total return: Factoring yield and capital appreciation

2322

62 OfficesAmericas & Caribbean

135 OfficesUK, Ireland & Channel Islands

103 OfficesEurope

272 OfficesMiddle East &Africa

134 OfficesAsia Pacific

Over 700 offices and associates worldwide

As one of the largest UAE property services firms, Core, UAE Associate of Savills, combines expert local market insight with the international strength provided by over 700 offices globally.

Core’s multi-lingual advisers share an entrepreneurial spirit with a commitment to cultivating long-term, collaborative client relationships. Our local roots, commitment, and attention to detail are backed by the global standards of Savills’ 150-year-old brand, giving our clients direct access to 30,000 experienced practitioners, with a deep understanding of specialist real estate services in over 60 countries.

Our bespoke residential and commercial property advice enables our clients to make informed real estate decisions both locally and abroad, through a single point of contact in any of the 15 languages spoken by our consultants, in one of our 3 offices, in Downtown Dubai, Jumeirah Lakes Towers and Abu Dhabi.

This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Core, UAE Associate of Savills, accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Core’s research team. © Core Real Estate Brokers.

Prathyusha GurrapuSenior Manager - Researchand [email protected]

Aruba KhalidAsst. Manager - Research and [email protected]

David AboodPartner - Head of Investment [email protected]

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