Dubai on alert as distressed assets become a real possibility

• Residential landlords feeling the squeeze from high interest rates
• 9,720 property sales in August – the best month in 12 years

Dubai’s real estate sector may be hitting record highs but rising interest rates are putting the squeeze on some landlords, leading to increased opportunities to snap up distressed assets in the coming year.

“I had that conversation actually a couple of days ago with one of the local banks,” Thierry Leleu, chief executive officer of Equitativa, told AGBI.

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Equitativa manages real estate investment trusts in the UAE, including Emirates REIT, the country’s largest listed Shariah-compliant REIT, with $758.6 million in assets under management across 11 Dubai properties.

“Hiking interest rates, which increased more than 200 basis points over the past 12 months, will take a toll on a lot of owners which are, for some, over-leveraged,” he said.

“I think it’s probably something that will take another year to happen. But I wouldn’t be surprised if in H2 2023 you started to see some distressed seller opportunities,” Leleu said. 

The Equitativa CEO’s comments come as online platform Property Finder reported that the Dubai property market in August recorded 9,720 total sales worth AED 24.3 billion ($6.62bn), the highest performing month in terms of sales transactions volume and value in 12 years.

The figures showed volume growth of around 69.6 percent year-on-year, while the value of sales grew 63.6 percent year-on-year.

“Distressed assets I typically don’t like because that means the assets are not of good quality. But distressed sellers are obviously something that, if you find the right asset, with a seller who has a difficult position.” Leleu said.

Faisal Durrani, partner and head of Middle East research at real estate consultancy firm Knight Frank, agreed that some landlords were being impacted by the rise in interest rates by the UAE Central Bank, in line with increases in the US and designed to combat inflationary pressures.

“Yes, clearly rising interest rates puts pressure on leveraged buyers, or owners of real estate, but when it comes to Dubai’s commercial market, there are other complex factors to overlay. 

“The most important consideration is around the quality of stock. Grade A, best-in-class buildings are in highest demand amongst occupiers in Dubai. However, this stock is in very short supply. Most grade A buildings are running at pretty close to 100 percent occupancy. 

“More secondary stock however has been much slower to see rents recover since the pandemic began, which is fueling a distinct two-tiered market.”

Divided market

In July CRC (Commercial Real Estate Consultants), an affiliate of Dubai real estate conglomerate Betterhomes, reported that the commercial real estate market saw an 89 percent year-on-year increase in sales value in the first half of 2022, with the number of units transacted up 38 percent year-on-year over the same period.

Andrew Elliott, head of CRC Dubai, said there was certainly no oversupply issue within the commercial sector.

“I’ve met a lot of our key landlords, and they’re all at their highest occupancies, some of them the highest they’ve ever had.

“Buildings that handed over in maybe 2014, 2015, who happily had been at sort of 85 percent, 80 percent, they [are] now 100 percent.

“I’ve had two banks that we work quite closely with on the industrial [property sector], one of them has said to us, ‘we’re terminating the contract because we’re at 97 percent occupancy, we don’t need agents to help us anymore’.” 

However, Elliott did agree that interest rate rises were squeezing some landlords who are over leveraged and in secondary, less attractive markets.

“We had this conversation about a landlord that’s got two buildings. He wants to sell, both of them completed in 2019, and he hasn’t got 50 percent occupancy. He’s starting to feel the squeeze of interest rates.”

Elliott pointed out that the distressed sellers were primarily within the residential sector.

“I’m not sure we’re going to see that so much in commercial. There are already landlords under the squeeze with the low rents that they’ve had in single title residential buildings. 

“I’m not talking about a landlord in Dubai Marina. I’m pretty sure there will be some landlords in Bur Dubai or Deira who are under pressure because rates haven’t really recovered there, [and] they’re not getting the uplift that they thought they would.”