The end of the tunnel

Covid-19 has caused significant disruption across all real estate sectors in 2020 with owners and occupiers having to make necessary adjustments to business operations in response to the statutory restrictions on capacity and mobility. It remains unknown whether the pandemic will result in structural shifts for different use classes. However, with the Covid-19 vaccine now available, the planned Expo starting October 2021 and the 50th National Day in December 2021, there is an opportunity to showcase Dubai during 2021 in a post-Covid world to both visitors and residents.

Impact of travel and mobility restrictions

The inflow of tourists to Dubai has been disrupted due to travel restrictions and lockdown measures that came into effect in March 2020, and which had a direct impact on the hospitality sector’s performance. The YTD (year-to-date) September 2020 occupancy for Dubai averaged 45 percent, compared to 73 percent for the same period in 2019, while the average daily rate (ADR) over this period declined by 12 percent year-on-year to AED 455. This remains higher than the majority of the regional and international markets, as shown in figures 1 and 2.

Demand from tourists in 2020 also impacted retail centers, which have relied on resident footfall and spend during the year. The Dubai Mall and Mall of the Emirates have historically been the most popular malls with tourists, collectively capturing 51 percent of total tourist retail demand in 2019. For residents, “other malls” that include smaller community centers and convenience retail, as well as “non-mall” outlets continued to dominate in 2020 due to their convenience and proximity to residential areas.

Mobility restrictions have also forced residents to make more online purchases in 2020, including setting up online accounts across multiple platforms and familiarizing themselves with the payment and return process, among others. This trend is expected to continue even when restrictions on movement ease.

Changing role of the office

As companies were pushed to test remote working during the lockdown, varying models of work from home and onsite presence are expected to emerge with return to work.

In a survey conducted by Deloitte in October 2020 among companies across the Middle East, more than 70 percent of respondents stated that they do not expect a change in their office space requirement once their office lease expires. For those considering a reduction in office space in the future, reduction in staff numbers due to the Covid-19 business impact was noted as the primary reason.

The relative importance of having traditional office space versus a remote working model is expected to vary by industry. It is possible that companies may gravitate towards a hybrid model combining the core leased/owned space and additional on-demand flexible offices, while incorporating a higher ratio of work from home policies than pre-pandemic.

The resizing of a firm’s footprint is largely dependent on existing leases or the amount of owned office space. The extent of reconfiguration or changes in office space will depend on a combination of factors including technology readiness, company culture and expected benefits of real estate savings.

E-commerce and logistics opportunities

Growth in the e-commerce segment has increased the requirement for storage and fulfilment centers, thus boosting the demand for warehouses. The challenges posed by lower spending and fewer shoppers in bricks and mortar retail stores have driven faster adoption of digitization and online sales among many retailers. 

In Dubai, e-commerce players such as Amazon, Noon and Namshi already occupy fulfilment facilities and warehouses in locations such as Dubai South, Dubai Investment Park and Umm Ramool. Notably, the e-commerce market in the Middle East and Africa is expected to reach US$26billion in 2022, with the UAE accounting for 18 percent as further expansion in industrial accommodation footprint is expected from key players.

In addition to standard specification warehouses, the growth of segments such as online groceries is also expected to increase the requirement for cold storage facilities.

Residential demand and affordability

Decline in capital values and rents for residential property in Dubai has continued into 2020 from the last market peak observed in Q2 2014. A combination of factors including new stock additions averaging 15,000 to 20,000 units per annum in the last five years has contributed to this trend. 

The pandemic has also naturally impacted global investment sentiment. Capital protection has been the priority for the majority of real estate investors in 2020. Covid-19 caused a disruption in transaction activity from Chinese buyers in Dubai, the fastest growing segment among residential property buyers in the Emirate in recent years. To offset the decline in transactions from Chinese buyers, developers have renewed their focus on local market segments including young Emirati buyers, GCC nationals, Indian, Pakistani and Russian expatriates, among others.

More than 90 percent of Dubai’s population is expatriate, and their participation in the residential market is a key determinant of housing demand in the Emirate. Data on expatriate residents’ participation in the Dubai residential market as buyers was unavailable at the time of reporting, however, if we consider the mortgage transaction volumes as a proxy for evaluating expatriate home ownership, it is clear that there is an opportunity to attract a wider base of buyers from this segment.

Looking ahead, an improvement in transaction volumes is predicated on demographic and economic factors alongside targeted offerings from developers and banks to enhance participation from both the investor and resident owner/occupier segments.

Outlook for 2021

The Deloitte Middle East Hospitality Sentiment survey conducted in September 2020 suggests that the market recovery to 2019 levels is not expected until the end of 2023, or later. Many companies are using this downtime to revise their business strategy and build resilience towards the new normal.

In the short term, cash management and financing/lender considerations are some of the main priorities across all real estate sectors. Macro-economic and demographic factors as well as related government initiatives are likely to define the shape and pace of recovery for the real estate sectors in 2021.

by Manika Dhama, Assistant Director and Dunia Joulani, Assistant Director, Financial Advisory, Deloitte Middle East