Shrinking population to put pressure on UAE property prices

Knight Frank says pre-coronavirus pandemic population levels in the UAE are not expected to return until late 2022 at the earliest

Pre-coronavirus pandemic population levels in the UAE are not expected to return until late 2022 at the earliest, impacting the country's real estate market recovery, according to new research.

Knight Frank's UAE Property Value 2021 Movement report said the resulting lower level of demand for real estate will be further compounded by a continuing influx of new supply, particularly in Dubai.

This is likely to continue to put pressure on property prices during 2021, Knight Frank noted.

"With population levels in Abu Dhabi and Dubai estimated to have declined by roughly 5 percent in 2020, growing levels of supply and existing vacancy levels, residential property values in both emirates fell in 2020. Whilst population growth is expected to return in 2021, it will likely not be at least until late 2022 before we see population levels return to their pre-pandemic levels," the real estate consultants said.

"In Dubai, this lower level of demand will be further compounded by a continuing influx of supply, which in turn is likely to continue to put pressure on property values," its report added.

On the UAE's hospitality sector, Knight Frank said it has "undoubtedly seen the most significant impact on property values as a result of the pandemic".

Of the two largest tourism markets in the UAE, Abu Dhabi (pictured above) recorded relative outperformance compared to Dubai, the report said, adding that this was underpinned by the size of the UAE capital's market and diverted demand from UAE residents.

"Whereas in Dubai, given the size of the market and the reliance on international source markets, values have declined much more significantly. As the market continues to recover, gradual performance improvements will reflect gradual increases in hotel values," Knight Frank noted.

The report also said that with footfall and retail spending seeing heavy declines, and the evermore common practice of turnover rents, in conjunction with lower base rents, retail property values fell in both Abu Dhabi and Dubai in 2020.

"Looking ahead, in Abu Dhabi, given its relatively low levels of upcoming supply we expect values to remain stable compared to 2020 levels. Whereas in Dubai, given significant levels of upcoming supply and hybrid, or turnover only rental models going forward, we expect values to continue to decline in 2021," the report continued.

While the pandemic will impact the future form and function of office spaces in the UAE, it has been an accelerator of already shifting fundamentals rather than the root cause of these shifts, Knight Frank said.

"In Abu Dhabi, given relatively low levels of new supply and stability in rental rates, overall we have seen values for institutional grade assets remain relatively stable in 2020. In Dubai, with rental rates continuing to fall and a surge in vacancy, office property values have declined materially on average," its report added.

Taimur Khan (pictured above), head of research at Knight Frank Middle East, said: “In the UAE, despite various fiscal initiatives enacted on an emirate level and a wide-ranging federal monetary stimulus package, property values in most parts have seen material declines. However, it is important to note that this is not the case in all segments."

He added: "The pandemic has, in certain real estate asset classes, accelerated pre-pandemic shifts in demand, for example from physical retail to e-commerce, which in turn has helped underpin values in the industrial sector. More so, in certain cases, revaluations have arguably spurred investment activity in what was a largely subdued marked beforehand.

"Looking ahead, we forecast that the vast majority of the UAE’s real estate market will see values remain at similar levels to 2020 or even begin to increase in some cases.”