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Dubai: The Hunt for Yields’

Unitas Consultancy (A GLOBAL CAPITAL PARTNERS GROUP COMPANY) Q4 2014

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STRICTLY CONFIDENTIAL

Office No. 103, The Palladium, Plot No. C3, Jumeriah Lake Towers, Dubai, UAE, [email protected] 1

•  As real estate asset prices have stabilized and started to trend lower in certain areas, Dubai has entered the

‘new normal’, with investors beginning to hunt for stable rental returns. Historically, the greatest price appreciaSon has been in the larger bedroom sizes (such as the 3 bed rooms) giving credence to the trophy buying phenomena. However, as prices begin to stabilize, a price growth compression begins within the unit sizes. In addiSon, in the last year we have seen a strong rally in price growth of mid-‐income communiSes, compared to trophy properSes, which historically has not been the case.

•  An analysis of the rental yields by unit sizes across monitored areas shows an inverse relaSonship between

unit size and yields; the higher the unit size, the lower the yields. This trend is empirically observed in most real estate markets; market trends recently indicate that investor buying paWern are changing to account for the larger sizes as owner-‐occupiers become a more prominent force in the market.

•  A comparison between the price and rental growth rates reveals that prices have outperformed in the last four years by 15%, resulSng in a yield compression across the board. The two bedroom has the least gap between the rent and growth growth, whereas studios has the largest. This indicates that the laWer appears to be an out priced size across the board, and investors and developers alike will under perform catering to this area.

•  We opine that as the market matures, the demand for the 2 and 3 bedroom space will be larger relaSve to historical norms, mimicking trends in other developed economies; the supply trajectory will need to adjust accordingly; in the interim period it is likely that this segment for the market will outperform other areas

ExecuSve Summary

2

Table of Contents

A)  Price AppreciaSon Unit-‐wise by Community……….………………………………….………...…......4 B)  Hunt for Yields ……………………………………………..........……………………………………………………9 C)  Prices Versus Rents …….……………..……………………………………………………………………………13 D)  Conclusions………………………………………………….………………………………….……………………….18

3

4

Price AppreciaSon: Unit-‐wise by Community

“Wide diversificaSon is only required when investors do not understand what they are doing” -‐ Warren BuffeW

5

62%

50% 50%

68%

25% 25% 28% 29%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Studios One Bed Two Bed Three Bed

2010-‐2014 2013-‐2014

Price AppreciaSon by Unit Size

A comparison between growth rates highlights that historically studios and three bedrooms have appreciated the highest followed by one and two bedrooms. However, in the last year the larger size units have begun to out perform showcasing the demand driven by owner-‐occupiers.

Price Growth Unit-‐wise: 2010-‐2014 VS 2013-‐2014

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-‐6%

29%

49%

33% 31%

16%

-‐10%

0%

10%

20%

30%

40%

50%

60%

Studios: Historically Dubai Marina has Been the best Performer

1,970 Aed/Sqm

1,688 Aed/Sqm

50

70

90

110

130

150

170

190

210

230

250

2010 2011 2012 2013 2014

Downtown Dubai

Dubai Marina

Dubai Sports City

InternaSonal City

Jumeirah Lake Towers

The Greens

1,560 Aed/Sqm 805Aed/Sqm

2650 Aed//Sqm

1141 Aed//Sqm

Studios: Community-‐wise Price AppreciaSon Index (2010-‐Till Date) Studios: Community-‐wise Price AppreciaSon YoY

Within the studio space, we can see that in the past Marina has been best performer, escalaSng prices to 1,970 aed/sqm. However, in the last year we have seen the highest increase in the mid-‐income housing segment led by Sports City and InternaSonal City. Within the trophy property segment such as Downtown, prices have registered a dip of 6%. Price convergence between JLT and Greens indicate that investors are indifferent between the two communiSes; the outperformance of the mid income communiSes is reflecSve of the fact that the hunt for yields is already underway

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0

50

100

150

200

250

2010 2011 2012 2013 2014

Downtown Dubai Dubai Marina

Dubai Sports City InternaSonal City

Jumeirah Lake Towers The Greens

11%

26%

33%

28% 27% 26%

0%

5%

10%

15%

20%

25%

30%

35%

One Bedrooms: Dubai Marina Redux!

One Bed: Community-‐wise Price AppreciaSon Index (2010-‐Till Date) One Bed: Community-‐wise Price AppreciaSon YoY

2,197 Aed/Sqm

1,515Aed/Sqm 1,512Aed/Sqm

1229 Aed//Sqm 668 Aed//Sqm

824 Aed//Sqm

Similar trends are being seen within the one-‐bedroom segment, where mid-‐income communiSes (using Sports City as proxy) have outperformed Trophy properSes (using Downtown as a proxy) by a factor of 3.. We expect this trend to conSnue, especially in the larger units, as Dubai’s populaSon gravitates towards an end-‐user base. Marina price points in this segment suggests possible overshooSng to the upside and with communiSes such as Creek Harbor being unveiled, augur a period of subdued performance ahead.


8

50

70

90

110

130

150

170

190

210

2010 2011 2012 2013 2014

Downtown Dubai

Dubai Marina

Dubai Sports City

InternaSonal City


The Greens

28%

24% 25%

42%

24% 26%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Two Bedrooms: Greens reigns supreme for mid Ser families

Two Bed: Community-‐wise Price AppreciaSon Index (2010-‐Till Date) Two Bed: Community-‐wise Price AppreciaSon YoY

1552 Aed/Sqm

1,608 Aed/Sqm

894 Aed/Sqm 2061 Aed/Sqm 1175 Aed/Sqm

751 Aed/Sqm

In the two bedroom segment InternaSonal City has been the leader in price growth, which historically has been led by the Greens. It is perSnent to note here that there is near price convergence between the Greens and Marina in this segment, indicaSng that perhaps both communiSes will see subdued growth as buyer preference shims to the more economical areas such as JLT, Sports City and InternaSonal City.


9

60

80

100

120

140

160

180

200

2010 2011 2012 2013 2014

Downtown Dubai

Dubai Marina

Dubai Sports City


The Greens

-‐5%

25%

35%

14%

27%

-‐10%

-‐5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Downtown Dubai

Dubai Marina

Dubai Sports City


The Greens

Three Bedrooms: Investors indifferent between JLT, Greens and Marina!

Three Bed: Community-‐wise Price AppreciaSon Index (2010-‐Till Date) Three Bed: Community-‐wise Price AppreciaSon YoY

1420 Aed/Sqm 1439 Aed/Sqm

1438 Aed/Sqm

2835 Aed/Sqm 1122 Aed/Sqm

Within the three bedroom segment, we can that mid-‐income communiSes conSnue to gather momentum, highlighSng the shortage of affordable housing within this niche. Price convergence between JLT, Marina and the Greens in this segment is indicaSve of the overall lack of supply in this segment.


10

The Hunt for Yields

“Great things are not accomplished by those who yield to trends and fads and popular opinion.’ -‐ Jack Kerouac

11

7.3% 7.0%

6.4%

4.1%

6.3% 5.8%

5.2%

3.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Studios One Bed Two Bed Three Bed

Gross Yeild

Net Yeild

Rental Yields: Unit Wise

The Hunt for Yields in Apartments

A unit-‐wise study of rental yields shows an inverse relaSonship between the size and return, where the smallest unit yields the highest return. Studios net return is more than double to that of three bedrooms. However, within the studios, one bedroom, and two bedroom the gap is minimal of only 15%, making them all a strong income generator.

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5.1%

6.3%

7.9%

8.9%

7.4%

8.3%

4.2%

5.4%

6.9%

7.9%

6.2%

7.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Downtown Dubai

Dubai Marina The Greens Jumeirah Lake Towers

Dubai Sports City

InternaSonal City

Gross Net

Community wise segmentaSon analysis

Studios

One Bedrooms

4.8%

7.4% 7.5% 7.7% 7.9%

6.6%

3.8%

6.3% 5.9% 6.5% 6.7%

5.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Downtown Dubai

Dubai Marina Dubai Sports City

InternaSonal City


The Greens

Gross Yeild

Net Yeild

JLT, followed closely by internaSonal city appears to be the highest yielding assets in this segment size, indicaSng not only tenant preference for these areas but more importantly highlighSng the straSficaSon of market and income segments; the mid and upper mid income class prefer JLT, whereas the budget conscious tenants prefer the InternaSonal City Community. Higher income communiSes such as Dubai Marina and Downtown appear to be offering the lowest income generaSng opSons.

In the one bedroom segment, similar trends are being witnessed. Besides JLT, we can that the mid-‐income communiSes such as Sports City and InternaSonal City yield similar returns. As communiSes such as Marina and JLT become unaffordable, the migratory effect (currently underway) is expected to accelerate towards the MBZ corridor leading us to conclude that the laWer will conSnue to have strong price outperformance.

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Two Bedrooms

Three Bedrooms

As yields drop, JLT remains the preferred income generator

4.7%

6.7% 6.9%

7.8%

5.9%

3.8%

5.6% 5.1%

6.6%

4.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Downtown Dubai Dubai Marina Dubai Sports City Jumeirah Lake Towers The Greens

Gross Yeild

Net Yeild

As expected, the yields in Downtown are consistently the lowest in this space, with JLT being the highest for many of the same reasons (capitalizing on the lack of legacy rent) and qualitaSve factors such as an improvement in the infrastructure of the community. What is missing here are mid income communiSes such as Sports City, JVC and others in the MBX corridor and we expect tenants to gravitate to that spectrum as opSons become available in this space segment.

A granular analysis of the two and three bed room space segment reveals an underlying preference for JLT, indicaSng not only the fact that the laWer had surplus capacity that has been steadily absorbed in the last three years, but also that rents have risen faster than prices in this area, accounSng for the superior yield

3.0%

4.8%

6.1%

4.5%

2.2%

3.6%

4.7%

3.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Downtown Dubai Dubai Marina Jumeirah Lake Towers The Greens

Gross Yeild

Net Yeild

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Prices Versus Rents

"How many millionaires do you know who have become wealthy by invesSng in savings accounts? I rest my case." -‐ Robert G. Allen

40%

33%

47%

54%

62%

50% 50%

68%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Studio One Bed Two Bed Three Bed

Rent Increase Price Increase

15

Prices Outpace Rents in the last 4 years

28% Difference

17% Difference 3% Difference

14% Difference

Across the board, prices have outperformed rents in the last four years, with the largest gaps in the studio segment reinforcing the fact that this segment is expected to see subdued price acSon in the next year. In the 2 bedroom space, price and rents have risen by almost the same amount suggesSng no yield compression and given the paucity of supply, this segment is expected to outperform in the coming year.

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44%

23% 18%

65%

48%

56%

0%

10%

20%

30%

40%

50%

60%

70%

Studio One Bed Two Bed


32%

45%

63%

50%

122%

90%

75% 66%

0%

20%

40%

60%

80%

100%

120%

140%


Rent Increase

Price Increase

Dubai Marina

InternaSonal City

Rents Versus Prices: Community-‐wise Analysis

Similar to the Greens, Marina and InternaSonal City reflect price out performance relaSve to rents over the last four years as these were high occupied communiSes and have had restricted rental growth on account of RERA rental regulaSons of parScular interest is that the outperformance has been highest in the studio segment in both communiSes, suggesSng that yield compression has been the highest in these size segments

I n t h e m i d -‐ i n c om e s e gm e n t , InternaSonal City has recently witnessed strong demand for the 2 bedroom segment as mid Ser families have migrated to areas where the rents have been more affordable, leading to price rises that have surpassed the one bedroom space.

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63%

38%

59%

74% 70%

56%

41%

51%

0%

10%

20%

30%

40%

50%

60%

70%

80%



33% 28%

33% 41%

78%

95% 91%

85%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%



JLT

Greens


In JLT, rents have outperformed price rises over the past 4 years, reflecSng the community’s relaSvely high vacancy rate that have steadily been absorbed over the observed Sme frame. This is the reason why JLT has been the highest yielding asset, suggesSng that as investors look for s upe r i o r y i e l d i n g a s s e t s , p r i c e outperformance in this segment is expected to conSnue relaSve to other high income areas.

In the Greens price rises have far outperformed rental rates, highlighSng that as the community was already fully occupied, rental caps took their effect. With these caps sSll in place, price rises are expected to remain subdued for the most part as investors will look towards newer developments to capitalize on higher trending rents in the city.

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27% 33%

63%

51%

33% 28%

44% 51%

0%

10%

20%

30%

40%

50%

60%

70%



Downtown


The Downtown community presents the most dichromaSc trend; with rents outperforming price rises in all but the studio segment. This illustrates that given the already elevated nature of prices for this upscale community, rents have kept pace with price appreciaSon; however as the community has steadily reached full occupancy, rents are expected to grow at lower rates; implying the same for price acSon as well. With the low rental yields in this community, we opine that price acSon for the upcoming year will remain subdued.

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Conclusions Price AppreciaSon Hunt for Yields

Outlook Price Versus Rents

A comparison between the price and rental growth rates reveals that prices have outperformed in the last four years by 15%, resul<ng in yield compression across the board

A segmentaSon analysis by unit size shows that three-‐bedrooms and studios have outperformed in the market over the last four years. As Dubai’s populaSon gravitates towards an end-‐user base, larger unit size are expected to undergo greater price appreciaSon. Mid-‐income communiSes have out-‐performed the market across the board in the last year, inverSng the historical “trophy” buying phenomenon. This highlights the structural change in Dubai’s populaSon and reveals the lack of supply in this segment.

Across the board, prices have outperformed rents over a four year period; reflecSng the impact of rental caps imposed by RERA and resulSng in yield compression in most s ize segments and communiSes. This relaSve outperformance implies that as Dubai enters a period known as the “New Normal”, asset prices are expected to underperform and yields are expected to play a higher factor in decision making. It is with this in mind that investors are expected to move towards the MBZ corridor and towards the mid market segments catered to mid Sered families.

We expect the demand for the 2 and 3 bedroom space will be larger relaSve to studios and 1 bedrooms conSnuing to push prices and rents on an upward trajectory within this segment. The major beneficiary of this will be mid-‐income communiSes such as Sports City, InternaSonal City, and JVC, as Dubai’s populaSon migrates towards affordable housing As yields push higher within this segment, we expect to see a flurry of new projects in other under developed mid-‐income communiSes such as Arjan, Majan, and Liwan as developers rush to maximize margins

A unit-‐wise study of rental y ie lds shows an inverse rela<onship between the size and return, where the smallest unit yields the highest return

Whilst studios have historically yielded the highest return, the outperformance of prices relaSve to rental yields augur a period of underperformance. When recent trends are looked at, the 2 bedroom space appears to be the most likely poised for price outperformance as a trifecta of forces (job creaSon in the mid Ser segment, lack of supply in this space, and overall paucity for this market) agglomerate to create a market that favors this space the most. In terms of areas, JLT has generated the highest rental yields; as the migratory effect gathers force, this is expected to move towards the MBZ corridor

REIDIN.com is the leading real estate informaSon company focusing on emerging markets. REIDIN.com offers intelligent and user-‐friendly online informaSon soluSons helping professionals access relevant data and informaSon in a Smely and cost effecSve basis. Reidin is the data provider for these research reports Concord Tower, No: 2304, Dubai Media City, PO Box 333929 Dubai, United Arab Emirates Tel. +971 4 433 13 98 Fax. +971 4 360 47 88 www.reidin.com [email protected]

GCP believes in in-‐depth planning and discipline as a mechanism to idenSfy and exploit market discrepancy and capitalize on diversified revenue streams. Our purpose is to manage, direct, and create wealth for our clients. GCP is the author for these research reports

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