While we entered 2020 on a positive note with steady market performance seen in both the commercial and residential markets, the rapidly escalating COVID-19 pandemic is causing disruption across industries with the real estate market expected to face strong headwinds in the near term.
OFFICE MARKET
- Of the transactions going ahead, we are seeing Q3 start dates, extended rent-free periods (2-4 months for fitted options and 9-12 months for shell and core options), capital contribution to fit-outs and shorter notice periods with limited or zero penalty on early break clauses being discussed in on-going negotiations.
- With the current uncertainty, we see landlords being increasingly adaptable, and willing to accept lower headline terms in negotiations to ensure leases are executed and long-term revenue is preserved.
- In existing leases, we are seeing many tenants asking for rental freezes.
- As tenant retention becomes critically important in the current climate, many landlords are giving April 2020 as a rent-free month and agreeing to evaluate this option on a monthly basis.
- We are also seeing some tenants talk about early exit clauses as potential downsizing activity is foreseen with occupancies expected to remain under pressure in the near term.
- While most sectors are witnessing disruption due to COVID-19, some sectors are seeing visible boosts to businesses such as logistics, super-markets, FMCG, pharmacies and online retail with surging demand for recruitment and space.
- Furthermore, we are noticing a growing trend of landlords, who earlier managed their own inventory, appointing third-party property managers to oversee their portfolio.
- Many banks which are financing such properties are enforcing the landlord to appoint bank panel-approved property managers rather than in-house managers to maintain the services and increase occupancy and rental collections.
- Office supply in Q1 2020 stood at 103.7 million sq. ft. with the only major delivery being the purpose-built headquarters for Mashreq Bank in Downtown Dubai. It is predominantly expected to be leased to third-party tenants with over one third with over one-third of the office space dedicated to Mashreq Bank.
- Other prominent deliveries nearing completion include ICD Brookfield Place in DIFC adding nearly 1 million sq. ft. of space.
RESIDENTIAL MARKET
- Dubai saw nearly 5,000 units come to market in Q1 2020, bringing the total residential stock to 555,000 units. We have seen a slowing down of handover volumes compared to the same period last year.
- Major deliveries included Arabella 2 in Mudon Villas, District One-Phase 2 in MBR City, Boulevard Point in Downtown Dubai, One JBR in Jumeirah Beach Residences, Warda Apartments in Nshama Town Square and LIV Residences in Dubai Marina.
- Due to ongoing COVID-19 restrictions we expect future handover volumes to come down as construction timelines and supply chains are impacted along with softened demand.
- Further downward revisions are expected on supply forecasts as they will inherently depend on the period of the pandemic and the pace at which functionality returns coupled with buyer confidence as developers adjust to ongoing market conditions.
- Transaction volumes across both the secondary market (cash and mortgage sales) and the off-plan market displayed year-on-year growth, stemming from the positive market sentiment with which we entered 2020.
- On the other hand, supply handovers (-27%) and new project launches (-14%) are reflecting current market conditions with both showing notable drops in year-on-year numbers as developers calibrate inventory levels.
- The attractive interest rates and the favourable loan-to-value ratio due to the increase of five percentage points for first-time buyers are expected to improve affordability in secondary sales mortgage market.
SECTOR PERFORMANCE AND OUTLOOK
While all sectors are being disrupted by COVID-19, the impact is quite varied. Asset classes that are dependent on travel, tourism and human interaction are being the hardest hit while the sectors which are essential for keeping operations going and aiding business continuity by providing essential services are relatively resilient.
Hospitality
- Reduced personal and business travel impacting the sector.
- Occupancy and revenue per available room are both being effected by many closing operations for the interim due to a significant reduction in demand.
- The magnitude of the impact will depend on the duration of the outbreak and counteracting measures.
- A potential for a rapid rebound in H2 2020 as activity resumes although caution would continue.
Retail (Brick-and-Mortar)
- Most brick-and-mortar stores are highly impacted, particularly luxury and discretionary ones.
- Increased risk of store closures in an already challenging retail market.
- High growth in some sectors such as food deliveries, E-commerce, FMCG, pharma and groceries.
Office and Co-Working
- Remote working expected to become a more permanent feature of our work culture going forward.
- Many occupiers seeking new office space in certain sectors to likely require less dedicated space per head due to a greater shift towards hot desks and remote working.
- Co-working may have a mixed impact with short-term open desk space requirements negatively impacted due to social distancing. However, the flexibility to contract or expand while keeping value-added digital services will be an advantage.
Residential
- Downward pressure across the residential rental market to persist.
- However, some of the impacts is expected to be absorbed with reduced interest rates and the much-needed increase in the loan-to-value ratio by five percentage points for first-time buyers.
Industrial
- Governments are enforcing robust measures to mitigate risks and keep supply chains active and the industrial sector is also supported by manufacturing essential goods.
- However, in the future, we expect these challenges in global supply chains to lead to more locally sourced manufacturing.
Warehousing & Retail Logistics
- Although supply chains are disrupted, the exponential reliance on e-commerce-led retail logistics is expected to keep the asset class resilient.
- We foresee increased use of automation and robots in warehousing facilities and less reliance on human interactions.
Healthcare
- While being impacted the most in terms of the increased number of hospitalisations, requiring recruitment, beds and infrastructure, this sector is expected to see a considerable influx of capital in the near term.
