DUBAI REAL ESTATE INVESTMENT REPORT - RESEARCH - 2015 INVESTMENT SENTIMENT
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RESEARCH DUBAI REAL ESTATE INVESTMENT REPORT 2015 INVESTMENT SENTIMENT YIELD PERFORMANCE INTERNATIONAL TARGET MARKETS
UAE ECONOMIC PERFORMANCE AND
DUBAI REAL ESTATE INVESTMENT OVERVIEW
Survey data pointed to slowing economic Investment Sentiment Index hit 0 in Q1 residential yields for whole buildings, which
growth in the United Arab Emirates at the 2015 after posting positive net balances inched up for the third consecutive quarter
beginning of 2015, with the strength of the in each of the 11 preceding quarters. This in Q1 2015 (driven by small falls in capital
US dollar and lower oil prices hitting both signalled a stabilisation in sentiment across values and broadly stable rents). Across the
consumer and investor confidence. The the office, retail and industrial property commercial property sectors, yields have
HSBC Purchasing Managers Index (PMI) – sectors when compared to Q4 2014. been flat over the past year, after having
which tracks non-oil private activity in the (See Figure 2) trended down in the four years preceding
federation – slipped to an average of 57.9 it. (See Figure 4)
At 7.1%, prime all-property net yields for
in Q1 2015, suggesting a weaker pace
Dubai were flat in the first three months A number of factors have contributed to
of expansion compared to the preceding
of this year; indicative of pent-up investor the downward trend in yields in recent
three months (59.3). (See Figure 1)
demand for well-let real estate in the years. After the global economic crisis,
The Royal Institution of Chartered emirate. (See Figure 3) The figure remained Dubai saw a significant oversupply of
Surveyors’ (RICS) Commercial Property stable despite upward pressure from commercial office space, with market-wide
FIGURE 1
UAE Purchasing Managers Index
63 63
62 62
61 61
60 60
59 59
58 58
57 57
56 56
55 Long-run average 55
54 54
53 53
Expansion
52 52
A figure above 50 suggests expansion in the
51 non-oil sector and below implies contraction. 51
50 50
50 means no change on previous month.
49 49
The index is seasonally adjusted.
48 48
Contraction
47 47
46 46
2010 2011 2012 2013 2014 2015
Source: HSBC/Markit
FIGURE 2
UAE Commercial Property Investment Sentiment Index,
Net Balance (%)
70
60
50
40
30
20
10
0
-10 2011 2012 2013 2014 2015
-20
-30
-40
Source: RICS
vacancy rates climbing above the 55% has continued. Indeed, whilst we have Although this was almost entirely down to
mark (albeit Grade A space accounted witnessed a significant amount of equity the receding “risk-free” rate, going forward
for a relatively small proportion of overall move from the Middle East into more this gap should close as the difference falls
availability). The subsequent recovery in mature real estate environments (such as back in-line with historical norms – this
confidence across international markets led the UK and USA), demand for institutional takes into account the possibility that the
larger corporates to return to Dubai and quality assets across Dubai and other key US Federal Reserve may well raise interest
provided existing tenants the impetus to GCC centres continues to rise, partly as rates in the near-term (the UAE Central
consolidate and expand. That in turn has yields remain relatively high in context of Bank usually follows moves made by US
assisted in reducing the emirate’s prime other global cities. (See Figure 6) policymakers).
vacancy rate and applied upward pressure
Over the past 18 months or so, the spread Moreover, given that forecasters expect
on Grade A office rents. (See Figure 5)
between all-property yields and the Dubai the economic climate in Dubai to improve
Against a backdrop of low interest rates government bond has widened beyond its this year, it is difficult to see the gap
globally, the flow of capital into real estate long-run average. (See Figure 7) between all-property and government bond
FIGURE 3 FIGURE 4
Prime All-Property Yield, Dubai (%) Prime Property Yields, Dubai (%)
10.5 12 12
10.0 11 11
9.5
10 10
9.0
9 9
8.5
8 8
8.0
7 7
7.5
6 6
7.0 Industrial Alternative Assets
Retail Residential (Whole Buildings)
5 5
6.5
Office Hospitality
6.0 4 4
Q4 2007 Q4 2008 Q4 2009 Q4 2010 Q4 2011 Q4 2012 Q4 2013 Q4 2014 Q4 2007 Q4 2008 Q4 2009 Q4 2010 Q4 2011 Q4 2012 Q4 2013 Q4 2014
Source: Knight Frank Source: Knight Frank
FIGURE 5 FIGURE 6
Prime Office Vacancy Rate, Dubai (%) Prime Office Yield Spreads in Major Global Cities
8
25%
7
Prime office yield
20% 10-year government bond
6
5
15%
4
10% 3
2
5%
1
0% 0
Hong Tokyo Singapore London Paris New Frankfurt Sydney Shanghai Dubai
2008 2009 2010 2011 2012 2013 2014 2015 Kong York
Sources: REIDIN, Knight Frank Sources: Bloomberg, Knight Frank
DUBAI REAL ESTATE INVESTMENT REPORT RESEARCH
yields closing much as a result of rising Since the UAE dirham is pegged to the turn should reduce the gap between Dubai
government bond yields; it may be that a US dollar then, real estate in Dubai is now government and property yields to bring it
more material adjustment in all-property more expensive for buyers holding other back into line with the long-term average.
yields is likely. After all, if the historical currencies. On the flip side though, the
relationship between GDP growth and strength of the greenback has increased
the movement of all-property yields holds, most GCC-based investors’ buying
the improvement in the economic climate power abroad.
should apply downward pressure on yields
On balance, if the historical relationship
over the remainder of this year.
between GDP growth and all property
(See Figure 8)
yields is anything to go by, the projected
That said, compared to history, the US improvement in economic conditions in
dollar remains strong against the euro, 2015 should provide further scope for
the British pound and the Russian rouble. prime all-property yields to harden. This in
FIGURE 7
Difference between the All-Property Yield and Dubai
10-Year Government Bond (%)
4.5
4.0
3.5
3.0 Long-run average
2.5
2.0
1.5
1.0
0.5
0
2012 2013 2014 2015
Sources: Bloomberg, Knight Frank
FIGURE 8
Change in the Prime All-Property Yield
and GDP Growth, Dubai
6 -160
-140
Forecast
-120
5
-100
-80
4 -60
-40
3 -20
0
20
2
40
60
GDP growth, % y/y (LHS)
1
80
Annual change in the all-property yield, Bps (RHS, inverted)
100
0 120
Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015
Sources: Dubai Statistics Center, DED and Knight FrankDUBAI PROPERTY INVESTMENT REPORT RESEARCH
Which markets are real
estate investors from the
GCC targeting?
Knight Frank’s Middle East Capital Tracker
monitors real estate investors’ favoured
global destinations. A broad look at the
results shows that the UK remains a firm
favourite for almost three-fifths of investors
from this region, albeit the GCC and
Continental Europe are also important
targets. Although the US currently makes
up 5% of overall demand, we have seen
an increasing number of enquiries for this
market. (See Figure 9) Rolex Store, Knightsbridge, London - acquired by a private client of Knight Frank Middle East (Q1 2015)
FIGURE 9
Primary Investment Destinations Being Targeted by Survey Respondents in the GCC
6%
Rest of
US 5% the world
12%
Continental Europe
58%
GCC 19% UK
Source: Knight Frank Middle East Capital TrackerCAPITAL MARKETS
Joseph Morris
Partner
+971 50 5036 351
Joseph.Morris@me.knightfrank.com
Alex James
Senior Surveyor
+971 56 4741 921
Alex.James@me.knightfrank.com
RESEARCH
Khawar Khan
Research Manager
+971 56 1108 971
Khawar.Khan@me.knightfrank.com
PROPERTY ASSET MANAGEMENT
Simon Nash
Partner
+971 56 4202 315
Simon.Nash@me.knightfrank.com
PROFESSIONAL SERVICES
AND VALUATION
Stephen Flanagan
Partner
+971 50 8133 402
Stephen.Flanagan@me.knightfrank.com
Dubai Offices UAE Industrial & Logistics Riyadh Residential
Market Update Research Report Research Report Definition: Indicative prime yields are based upon a hypothetical
Q3 2014 H2 2014 H2 2014 best in class asset and are net of market level acquisition costs.
Prime yields are based on rack rented properties and disregard
bond type transactions. This data is provided for general
reference purposes only.
© Knight Frank LLP 2015
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