UAE and Dubai economic activity slows on back of low oil prices

02 November 2016 Consultancy.uk

Real estate prices in Dubai have taken a -10% hit for villas and a -9% hit for apartments. The region is increasingly pressured by lower oil prices, which has seen the government turn to its reserves and reduce expenditure. The Dubai property sector has also taken a hit as investors, hit too by currency fluctuations, reign in spending and turn to lower cost housing.

In the new report from Deloitte, the accounting and consulting firm considers the state of the United Arab Emirates’ economic position following the global downturn in commodity prices, as well as the wider effects the slowdown has on a range of real estate sectors, from private property sales to commercial buildings in Dubai.

GDP growth UAE and world

UAE Slows

The United Arab Emirates has enjoyed robust growth in recent years even while world economic growth languished. In 2014, at the start of the steep fall in oil price, the economy grew by around 4.5%, falling to around 3.5% in 2015. Relatively low growth is not projected to continue, however, with 2016 forming a dip of around 3% before the region’s economy grows to around 4% by 2018. The fall in commodity prices, particularly oil, coupled with a slowdown in China are implicated in the region’s slowdown.

Global oil price and UAE central bank government deposits 2015

The fall in oil price has, however, had a knock on effect on the UAE’s budget, which fell to -2.5% in 2015 and is likely, assuming a spot price of $51 per barrel of oil, to hover around balanced this year. In the coming years, assuming a slight uptick in oil spot prices, the UAE will be able to again enter the black. The period of lower than projected commodity prices, has caused a considerable hit to central bank government deposits, which fell around 20% last year between April and October. The regions’ governments, among others, need to dip into reserves, as well as decrease depositing due to lower incomes, may place downward pressure on liquidity and increase in the cost of borrowing.

Average residential sales prices, Dubai 2015

Market cools

The research found that the average sale price for both apartments and villas across Dubai saw a decline in 2015, villas fell by around -10% and apartments by around -9%. The analysts cite a number of factors as contributing to the slowdown. One factor was a correction to previous years’ high property price growth, which hit 24% in 2013 and 14% in 2014. Another change has been the lower oil price, reducing the fund available for new property as well as dampening interest in the UAE. Furthermore, higher US dollar prices have pushed up the UAE dirham, due to it being pegged to the dollar, affecting buyers with currencies that have suffered relative devaluation.

Average residential sales transactions values

Continued decline

In terms of value, the largest drop between 2014 and 2015 was in the 2 million to 4 million category, whose share of total sales transactions fell from 23% to 16%. The 4 to 6 million category saw a drop of 2%, while the 6 million plus category saw a 1% fall. The gains were made in the up to 2 million category, which saw sales jump from 68% to 77%.

While lower commodity prices and general instability within the global markets contributed to prices in Dubai’s property market falling, the market is also entering a more mature phase, which is likely to see the end to growth spurts and another year of declines. The authors note that, “Data for the first six months of 2016 shows that residential sale prices have continued to decline in Dubai. Prices for Palm Jumeirah apartments declined by 3.8% between January 2016 and June 2016, while prices for Downtown apartments declined by 1.8% over the same period. Year on year data indicates that overall, residential sales prices in Dubai declined by 3.8% between June 2015 and June 2016.”

News