Covid-19 impact on the GCC’s real estate sector: Are there any housing concerns?

Real estate has been a key driver of economic growth during the past few decades in the region.

Although it was arguably one of the worst affected sectors during the global economic slowdown in 2009, with Dubai’s property market particularly hit, the industry has since matured, and was finally on the path to bottoming out this year in anticipation of Expo 2020.

But the coronavirus pandemic is taking a toll on real estate developers and home-builders as they enter the second quarter of the year, normally a strong season for sales, ratings agency S&P said in a recent report.

“Weakening economies and longer operating cycles resulting from social distancing measures should affect both offer and demand of newly built properties in 2020,” it said.

“The real estate sector is an important part of the UAE’s activity. The current supply-demand imbalance in the sector, particularly in Dubai, has been exacerbated by the pandemic’s effects. We now expect to see international demand for property in the UAE to be subdued and the fall in residential prices to be steeper than we had expected, and lingering well into 2021,” the report added.

In Dubai, transactions were rising with volumes up 41 per cent year-on-year in February. However, volumes for March dropped roughly 25 per cent year-on-year, pointing to a “significant yet logical contraction in the market as potential domestic and overseas buyers stay at home”, says Matthew Palmer, managing director with consultancy Alvarez & Marsal in Dubai in the Strategy and Performance Improvement practice.

Dubai-based real estate platform Property Finder recorded a decrease in listing volumes and searches by consumers, states Lynnette Abad, director of Research and Data at the Property Finder Group.

“Prices, however, did not move much during the Covid-19 situation. In fact, pre-crisis, we started seeing prices stabilise across many communities in Dubai and that has remained stable during the crisis,” she adds.

Looking wider, the property sectors of the Gulf countries will see varied impact depending on the local conditions and how long the crisis lingers.

“Some countries will see deeper impact than others due to a number of socio-economic factors. It also depends on how developers regain investor trust in each country. Since Dubai is the most cosmopolitan city with the most regulated real estate market, we expect it to recover faster than others. Demand in affordable homes will also pick up faster than that of the luxury properties,” opines Josef Kleindienst, chairman of Kleindienst Group, which is developing the $5bn Heart of Europe island project in Dubai.

With “almost all of the units” sold out on the project, the company has not been under “too much pressure in terms of sales and cash flow,” he says.

The project – which was initially slated to begin deliveries in 2018, now aims to handover the first phase in the fourth quarter of this year.

Outside of residential real estate, Covid-19 has had a similar impact on retail which, in the short-term, may manifest as vacancies and loss of fixed and turnover rent for mall operators.

“Fortunately, many operators have been supportive towards their tenants,” says Palmer. “Regrettably, inevitable job losses combined with economic uncertainty will reduce demand for most asset classes in the near-term, with hotels in particular needing the triple stimuli of a relaxation of restrictions (at the appropriate juncture), and the return of economic confidence and consumer willingness to travel.”

RATIONALISE PIPELINE, CONSOLIDATE
Given the uncertain nature of the virus, how can developers best adapt to the current situation?

“The most important thing for any business during the crisis is to remain consolidated, limit the damage and keep moving forward. As developers, we need to be focused on delivering previously launched projects,” opines Atif Rahman, director and partner at Danube Properties.

Kleindienst also stresses the need for developers to ensure they have a sustainable business model by having limited exposure and risk.

“The key for every developer is to be able to develop the units they have sold off-plan and to sell their inventory, collect the down-payment and deliver properties on time and with the best quality.”

Palmer advises developers to adapt both externally and internally.

“Until certainty returns and given the overhang of stock in the market, developers may be well served to pause or at least rationalise their pipelines until the size and shape of demand is better understood. Regrettably, developers should also reprofile their organisations and cost bases, if they haven’t done so already,” he says.

THE MAGIC QUESTION
While experts are understandably reluctant to predict a definite answer to when the market will recover – since it is tied to the development of a Covid-19 vaccine, Palmer expects to see a cautious return towards the end of the year, potentially accelerated, if a vaccine becomes available sooner.

Kleindienst similarly anticipates that the UAE’s real estate market will start picking up by the end of the current year. Looking ahead, the industry can expect to see significant changes.

“There will be a new normal for everything, for how people search for properties, the type of properties they are looking for and how developers design their properties,” says Abad.

Adds Rahman: “Developers, investors and property buyers will be cautious. I expect less off-plan property launches in 2020 and 2021. Investors will be very careful and will only invest when prices crash further, or wait for distress sales. We will continue to see greater focus on creating affordable solutions not just for real estate but across all industries. That’s what consumers will want with every pocket being affected negatively.”