The GCC’s real estate markets vary significantly from country to country and city to city, but all have faced similar headwinds from a slowing world economy combined with further supply of real estate units coming online in both the residential and office space. Four executives with close knowledge of the region’s real estate market offer their views on where the sector is at and where it’s heading in 2019.
How is the real estate market performing at the moment from your perspective?
Lakhani: The real estate market has been on a glide path to lower pricing, both in terms of rents and sales, since it peaked in early 2014. A combination of geopolitical and economic issues are responsible for this but at the market microstructure level, when compared to other markets, the stage of the market is similar to what more developed markets have gone through. This is to say that the market is moving from a “mass production” model to a more gradual delivery based system; one in where the individual has greater bargaining power.
Sameer Lakhani, Global Capital Partners
Architecturally speaking, this implies a move away from some of the vertical communities that were in vogue in the first phase, and more towards the mid-level, architecturally diverse community neighbourhoods. There will always be an oscillation between these two impulses that drive growth in the real estate space – between vertical and horizontal, and between urban and suburban construction. This is a function of a plethora of factors, not the least of it being rising interest rates and liquidity on the one hand, and economic reforms that continue to sharpen focus on the demand curve of the spectrum.
Cooper: The GCC’s real estate market is currently experiencing a number of headwinds that are acting as a drag on demand. These headwinds include lower than trend oil prices (although oil prices have risen recently), lower than trend GDP growth and little-to-no growth in disposable incomes. These demand headwinds have been compounded by a significant increase in supply in many of the GCC’s real estate sectors – the hospitality, office, residential and retail sectors in particular. Despite this, demand fundamentals remain in the GCC’s real estate market and a number of major events and government initiatives are set to drive demand higher over the next two to three years. These events include the Expo 2020 Dubai, the 2022 FIFA World Cup Qatar and the KSA Vision 2030 initiative.
Ehrnrooth: KONE saw a slowdown in the real estate market in some of the GCC countries in the last few months; however, the market, especially in UAE, remains at a good level considering the pipeline of existing projects.
Ebrahimy: Despite reports of softening from several real estate services companies, and with the market not expected to recover until 2019 due to continued supply, Ras Al Khaimah has a strong pipeline of residential, leisure and retail developments as well as hospitality projects expected to be delivered over the next few years. These underscore the confidence RAK developers have in the product here, which will undoubtedly help bolster the market going forward.
The residential segment has remained steady due to our value for money and attractive lifestyle proposition. We are currently seeing strong demand for smaller townhouses as second homes which is something we are preparing to introduce to our customers.
As a master planner and luxury developer in the Northern Emirates, what projects are you working on at the moment?
Ebrahimy: From a retail perspective, our Manar Mall development is currently undergoing a US$100m expansion and upgrade which will see the Gross Leasable Area double in size from 300,00sqft to nearly 600,000sqft, adding a further 80 retail and F&B destinations. As part of the development we have also signed a management agreement with Emaar Hospitality Group to operate a 250-room Rove Hotel which will have access to the mall.
What are the major challenges you’re facing?
Lakhani: Smaller developers face challenges in terms of being unable to match the post-handover payment plans that their larger counterparts have offered in the ready and the off plan space. Combined with rising interest rates, this lack of liquidity has meant that a significant amount of the announced supply will be delayed or cancelled, and the move that is being made available for some of these developers is to consolidate, which is what we are seeing at present. This dynamic has resulted in lower returns on equity across the real estate development spectrum, a mean reversion towards global norms; what it also implies is the development of a debt market that has to facilitate the continued urbanisation, and until it does, the next phase of growth in supply will naturally be more subdued through a process of “winnowing out” as Darwinian law inevitably kicks in. Even though developer gimmicks such as return guarantees have mostly died a natural death, it will be difficult to put the genie of post-handover payment plans back into the bottle.
Barry Ebrahimy, Al Hamra
Ebrahimy: We have seen several low priced, smaller properties being launched in Dubai, developments that are targeting the affordable segment at a price point of AED1 million ($272,300). This has put some pressure on developers in RAK, particularly when the customers only concern is value for money and finding the cheapest property possible. However, from an Al Hamra perspective, we’re confident our offering for homeowners, which includes larger property size, beach-font location and world-class amenities, stands us in good stead.
What do you attribute any underlying weakness to?
Ebrahimy: The real estate industry has undoubtedly been hampered by the supply and demand gap. Fortunately, developers in Ras Al Khaimah have been more cautious, at Al Hamra we always ensure that when launching a new product there is market demand. This model has proven very successful, to the extent our units are absorbed exceptionally well when launched.
Are there any bright spots in the market (developments that are performing well, or units that are performing well?)
Ehrnrooth: In our industry, there are two important aspects that we think about all the time. The first one is an extremely interesting trend. We are witnessing unprecedented developments in the industry. Our customers’ needs are changing quite rapidly. This phenomenon in turn is bringing a lot of new opportunities, and revenue streams which are driven by the ease and evolution of technologies. This is what we call technological disruption.
The other megatrend is urbanisation. There are 200,000 people moving to cities every day, so about 80 million people a year. This creates constant demand for affordable/accessible housing. What’s more the ageing population in urban cities requires more and more accessibility. This also provides opportunities for the elevator industry, especially for us, to contribute to the improvement of the flow of urban life.
Lakhani: The bright spots have been in areas where developers have anticipated the need for affordable housing, and have tied up with banks to offer customers flexible payment plans. Where this has happened the end results have been beneficial, to the point of where prices have even started to rise in certain districts such as Sports City and Majan in Dubai.
Ebrahimy: RAK’s burgeoning tourism industry is having an extremely positive impact on the real estate market. The increase in the number of hospitality developers and operators is attracting and showcasing RAK to a market that was previously unfamiliar with what the emirate had to offer. Thanks to initiatives undertaken by the government and the work of RAKTDA more people are seeing exactly what is on offer here which is having a positive impact on the real estate market.
What are you expectations for the market in 2019?
Cooper: Although headwinds will remain, we expect the GCC’s real estate market to gain momentum in 2019, as growth in the constituent economies starts to pick up and this translates into increasing investor confidence and disposable incomes.
Martin Cooper, Deloitte Middle East
We also expect that the GCC will start to catch-up with other mature markets in the use of online retail in 2019. There have been a number of major investments in the sector recently, including Amazon, which closed the purchase of Middle East online retailer Souq.com, the launch of Noon, a major Middle East online retailer and Emaar’s acquisition of a stake in online fashion retailer Namshi. We predict that the growth in online retail in the GCC will further disrupt the market in 2019 and that this will put additional pressure on retailers that do not effectively integrate in-store and online activities through the development of “omnichannel” business models.
Lakhani: With further economic stimulus, and structural reforms, it is likely that the demand curve of the equation will slope higher, especially as supply levels continue to lag behind market expectations. It’s worth going back to first principles: for developers the bet has always been on the city growing rapidly in population, ever since the advent of the freehold market in 2002. That bet hasn’t changed, despite the two boom-bust cycles that we have gone through since. From a longer term perspective, it is that singular bet that will determine the trajectory of growth (both in terms of demand and supply as well as pricing dynamics) when we look at the post 2020 scenario.
Henrik Ehrnrooth, CEO and President of KONE, offers insights into the regional and global elevator industry
Elevators are not the first component of a building that most people consider when thinking about real estate, but play an instrumental role in making buildings successful. If a developer gets the elevator provision wrong in some way, complaints from residents and workers come thick and fast.
Thankfully, in the Gulf region, developers take elevators seriously and are increasingly keen to adopt the latest technologies, according to Henrik Ehrnrooth, CEO and President of KONE. “KONE is seeing a growing trend in the elevator industry when it comes to advance technology and digitalisation. Many clients are aiming to meet end user’s expectations of digitalisation trends through an increased use and integration of automated equipment and user-friendly applications that ensures smoother people flow and safe access and travel,” he said.
Henrik Ehrnrooth, CEO & President, KONE
Interestingly, the elevator industry is – like many other sectors – making significant gains from big data. KONE has developed a service called KONE 24/7 which enables equipment to be connected round-the-clock. This allows equipment to be monitored constantly and also provides valuable real-time data on lift usage and maintenance, which is important for customers and service technicians.
“Through the IBM IoT Platform, KONE 24/7 can collect vast amounts of data from elevator and escalator sensors that can thus be monitored, analysed and displayed in real-time. These technologies boost safety, transparency and predictability of elevators and escalators’ operations, hence taking maintenance service to the next level,” Ehrnrooth said.
Ehrnrooth added that KONE is working with IBM for pattern recognition and machine learning, which KONE complements with its own industry-knowledge and expertise.
The company has also launched its own digital platform, which is open to third-party solutions. It connects people – usually customers, end users and employees – to equipment and data, which in turn can lead to the transformation of the people flow experience in buildings and cities.
“We have been driving digital transformation at KONE for a number of years. We have taken a customer perspective rather than a technological perspective, meaning the approach we take is focused on what can the technology bring to our customers, not just what is the latest in the market,” Ehrnrooth said.
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