With the fallout from low oil prices and continued currency woes, it is no surprise that 2016 was a tough year for the UAE's real estate market, according to leading ratings agency S&P.
Dubai's residential prices dropped by eight to 11 per cent on average and rent fell by six per cent according to Reidin.com, with most areas of the city affected.
The strength of the dollar is also making the UAE increasingly expensive for tourists and low oil prices in 2016 have diminished purchasing power and weakened investor sentiment, said the S&P Global Ratings in its report, "Another Tough Year For UAE Real Estate Market Amid Currency Woes," published today.
The pound declined by 17 per cent versus the US dollar in the past 12 months due to Brexit fears, it stated.
The evolution of the pound remains a concern for the UAE as the UK is traditionally among the top three source markets for visitors to Dubai, and UK nationals were the fourth largest investor in residential real estate in the first half of 2016.
The UAE is becoming increasingly expensive for tourists and shoppers as the US dollar continues to appreciate, according to the S&P report.
Along with the pound, the euro, Chinese yuan renminbi, and Indian rupee have declined by three, seven and two per cent, respectively.
If currency pressures persist, Dubai could potentially lose its coveted status as an international shopper's paradise and have to concentrate its customer base on GCC travellers, it stated.
The profile of visitors is shifting to a value-conscious tourist who might spend less per trip than a tourist the year before. This thwarts growth in the retail, restaurant, hospitality, and entertainment sectors. Therefore, international retailers will need to adjust prices in the market to keep shoppers spending, the report pointed out.
The UAE is considerably dependent on oil with 30 per cent of GDP derived from oil-related activates, despite many measures to diversify its economy, especially in Abu Dhabi (50 per cent of GDP).
With oil at about $50-$55 per barrel - which is just half of what it used to be at its 2014 peak--economies are still adjusting to the new price environment both on the revenue and expenditure side.
According to S&P, Dubai's economy has very little direct dependence on oil, however, indirect effects of low oil prices in 2016 include diminishing purchasing power, weakened investor sentiment leading to lower investments from the region, and slowing business activities of non-oil private companies.
Although the January 2017 UAE non-oil private sector purchasing managers' index did show signs of steady growth and posted the highest reading since July 2016, signalling output expansion and new order growth, this is nowhere near its September 2014 peak.
Despite multiple macroeconomic pressures, we upgraded two UAE real estate companies during 2016, said the top ratings agency.
"We raised the rating on Aldar Properties PJSC to 'BBB' from 'BBB-' on the back of its improved financial performance thanks to the transition of its business model, which now generates significant profitability from more stable and predictable rental and development activities," it added.
On the 2017 outlook, S&P Global ratings said: "We see no signs of market improvement for the UAE real estate sector, despite housing affordability improving from the current price environment. We expect residential prices and rents to fall by another 5 per cent-10 per cent in Dubai in 2017."
"However, we do not foresee major negative movements in our real estate sector ratings in the next 12-18 months as we think developers will be able to absorb the fall in house prices due to low debt burdens and strong balance sheets. Rated real estate companies are also hedged somewhat due to their high asset quality and long-lease structures," it added.-TradeArabia News Service