Resetting in the new normal

The onset of the COVID-19 pandemic bought about the most significant impact to global economic activity since the Second World War. Whilst global GDP is estimated to have shrunk by 3.3% in 2020, this rate of contraction is markedly below the worst-case scenarios forecast in the early stages of the pandemic.

Looking ahead, as global vaccination programs continue to be rolled out and economic and social mobility being to return to historic norms, global GDP is expected to expand by 6.0% in 2021.

In the UAE, this stronger global economic backdrop combined with the world’s second-highest vaccination rate and the enactment of a host of residency visa schemes, business-friendly regulatory, and diplomatic initiatives is expected to underpin a strong rate of economic growth, both in the short and long run.

Whilst, this recovery in economic activity and the resultant resurgence in business confidence will help underpin performance in the UAE’s real estate markets, the pandemic has no doubt accelerated already shifting fundamentals in sectors such as the offices, retail and industrial, and logistics sectors.

In other sectors, we are likely to see longer-term changes brought about by the pandemic. For example in the hospitality sector, the pandemic is likely to have long-lasting impacts on both demand and supply, creating challenges and opportunities alike. In more nascent alternative sectors, as a result of accelerated changes in consumer habits and consumption trends, we have seen a surge in demand for real estate assets such as cold stage facilities and data centres.

Below we explore some of the major themes, which CBRE feels are set to define key real estate sectors going forward:

Residential

• UAE increasingly a tenant-led market, with occupiers having greater bargaining power and flexibility in negotiating with landlords. Incentives seen more frequently include rental reductions and the possibility of rental payments in multiple cheques.
• Developers are offering rent-to-own schemes, fee waivers, attractive post-hand-over payment plans to attract investor and owner-occupier demand.
• Millennials emerging as a key consumer class, with the reconfiguration of residential spaces expected as well as increased demand for digitally enabled homes and larger unit sizes to accommodate home offices.
• Increased working from home and the Dubai 2040 Urban Master Plan are expected to further accelerate the shift towards green housing, with end-users increasingly motivated to reduce utility costs as they spend more time at home.
  
  

Offices

• Post COVID-19, Dubai to remain the preferred regional hub for multinational occupiers in the region, for the short term at least, given it remains the most mature and secure market for occupies to operate in.
• Physical offices here to stay; portfolio optimization via the right mix of traditional, flexible spaces and any relevant remote working strategy.
• Flexibility to be critical – sustained flexibility in lease terms and tenures expected. Flexible spaces to remain attractive options in the short term.
• Environmental, Social and Corporate Governance (ESG), health and wellness likely to be at the forefront of CRE strategies; employee productivity to be key.
  
  

Retail

• Prominent stakeholders to remain focused on the sector; focus on reinventing the “experience”; realignment of existing spaces expected as emphasis on outdoor and open areas to increase. Store size optimization expected to allow for faster recovery and better profitability.
• Flexibility to remain key to success – landlords with flexible lease terms, malls with flexible/convertible/open spaces to witness greater retailer interest.
• The rapid growth of online shopping is resulting in more omnichannel retail, however preserving the “physical experience” will be a critical component of these omnichannel strategies, particularly in the Middle East.
• Omnichannel strategies to push retailers to streamline supply chains and focus on workforce planning, automation, inventory management, and flexibility in production cycles. Initiatives such as Click & Collect and product returns via the store expected to increase significantly.
  
  

Hospitality

• On the rise before COVID-19, the pandemic was a catalyst for accelerated growth in the domestic tourism sector. The trend is here to stay, and further growth is expected for the segment in the medium term.
• Hoteliers have made cost reductions, mainly through salary cuts and efficiency creation. Whilst salaries are reverting back to normal, reductions and rationalizations are here to stay as they have little or no impact on a guests’ experience, but do contribute to higher GOPs.
• Despite the troubles industry players have gone through, investors remain confident in the UAE as a tourism destination, and the development pipeline of new hotels is still strong.
• Industrial and Logistics
• E-commerce and 3PL expected to continue to drive the demand for Grade A warehousing. There will be an increase in demand for such space outside of the customs bonded Free Zone, to enable servicing of the local market.
• Diversification away from under performing traditional asset types, such as residential, office and retail will be the focus for investor activity. The challenge will remain a shortage of medium to long-term income, paired with institutional-grade real estate.
• Focus on food security and cold storage space is expected to form a key component of speculative development in the industrial and logistics market.
  Increased investment in automation and robotics for supply chain and warehouses will be essential with the wider application of technology to drive efficiencies across the entire supply chain.
  
  

Alternative Sectors

Flexible office spaces to remain key to increasing portfolio agility, providing short-term solutions, and catering to headcount volatility; managed spaces to drive demand.
Post COVID-19, Data Centres demand to be augmented by the increasing need for data storage, sustained policy impetus, and nationwide digital initiatives; third-party colocation and cloud demand likely to witness high growth.
A reconfiguration of the traditional student housing layout is expected; larger rooms/single occupancy rooms and larger common areas to allow for compliance with social distancing norms.

For more information on the UAE real estate sector, visit CBRE.

Or contact Taimur Khan for further research insights.

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