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We expect to see the following three trends in the Dubai residential market in 2016: continued slowdown and deflationary pressure, fragmented marketplace with specific areas outperforming others, and continued flight to affordability. As a result of both regional and global economic and political conditions, Dubai’s residential sector will continue to be dynamic in 2016. The low oil prices, coupled with geopolitical unrest negatively impacting investor sentiment and the strengthening of the US dollar, makes property more expensive for many overseas investors.
Subdued first quarter
After achieving strong growth in rental and sale rates, transaction numbers and volumes in 2013 and 2014, the market saw a correction last year and this is likely to continue this year. Last year, residential sale rates experienced declines of up to 16 per cent year-on-year for apartments and up to 14 per cent year-on-year for town houses and villas. However, rents have performed better than sale prices in all sectors of the residential market last year, with stabilising average apartment rents and town house/villa rents slightly declining by 4 per cent year-on-year.
The residential market is expected to remain subdued over the first half of the year, with weaker demand leading to stabilisation or even further declines in both sales and leasing rates. With around 20,000 new units planned to enter the market before the end of the year, landlords could face increasing competition in securing tenants, which could accelerate deflationary effects on the market in the coming quarters. However, this is all dependent on the pace of delivery, particularly in relation to handover and physical occupation, which appears to be taking more time in the current environment.
See related story: 2016 a stable year for Dubai property market
As more challenging conditions have emerged, the residential market has seen a gradual slowdown in new and ongoing construction activity, with many projects that were originally expected to complete last year now being pushed further out into 2016. This has alleviated some of the potential downside that would otherwise have impacted the rental market. Still, there is significant supply in the pipeline, although it appears for now that the window for supply and delivery is being elongated as developers take stock of market conditions and as sales volumes slow amid investor uncertainty.
Attractive payment plans
As a result of the continued slowdown in transactions and deflationary pressure on sales prices, we have seen the market evolve, with developers forced to become more creative and to offer more appealing terms to investors, particularly within the competitive off-plan market. Payment plans have become an increasingly important driver of the investment decision for off-plan property, sometimes even outweighing price.
Flexible, back-weighted payment plans have allowed investors and end users to secure property with minimal down payment and low instalments, and a large lump sum paid upon or after completion. However, these types of plan are perhaps not that sustainable in the long term as they place pressure on the developer in terms of their equity requirements to fund a development.
Flight to affordability
One of the biggest trends we expect to continue this year is the flight to affordability. Demand for low-cost housing is currently far outstripping supply, with significant population growth exceeding 6.5 per cent per year over the past five years in the low- to mid-range population brackets. Both residential sales and rental rates have increased rapidly over the past three years, significantly outpacing the growth in salaries and thus making affordability a key concern for Dubai residents.
Existing affordable housing in freehold areas such as International City, Discovery Gardens and Dubailand have experienced sustained growth in demand, despite the slowing conditions in many prime developments, pushing rates up to levels well beyond the reach of many low- and mid-income households.
In recent years, we have seen many residents choosing to relocate to the border areas of Dubai and Sharjah and even into parts of the northern emirates in search of more affordable accommodation. This has consequently placed increasing pressure on the traditional leasehold areas of Al Ghusais, Muhaisnah and Hor Al Anz, which have seen rising interest levels. We expect to see the flight to affordability continue in the short term, with strong demand from low- and mid-income households. This will drive more and more developers into the affordable market.
The main challenge for the market is actually ensuring that these properties remain affordable, in a market that is so often driven by speculation. One of the issues for developers is the profitability of an affordable housing project. This is mainly due to high land values in most areas in Dubai. Affordable housing may not be possible without government support. This could be in the form of lower land prices or preferably gifted/granted land in locations suitable for affordable housing. We could also see a dedicated housing body being created or an existing government developer being given an expanded role.
Ultimately, the affordable housing issue will not be solved by simply selling cheaper freehold properties. There is also a requirement to develop and deliver suitable leasehold options for those who simply cannot afford the current deposit rates dictated by the UAE Central Bank’s mortgage regulations. This process could be made easier by setting up a dedicated housing body that can help manage the rental of property specifically for those in the low- and mid-income groups. This would help ensure that rates are in line with realistic affordability levels.
Besides the fact that sale prices are too high for those in the lower to mid-income groups, one of the biggest problems is the equity. First-time buyers have to cover 25 per cent of the property value as equity (existing properties) and 50 per cent for off-plan property.
Overall, we remain relatively positive about the Dubai residential market in the medium to long term. We consider the current period of stabilisation to be healthy for the market, being a reflection of Dubai’s maturing status. Despite weaker oil prices, the outlook for economic growth remains reasonable and arguably more stable than before, with the UAE economy expected to expand by around 2.7 per cent in 2015 and 2016.
The banking sector certainly looks more robust and less exposed than during the last cycle, with the authorities more aware and more proactive to alleviate potential risks. The projected economic and population growth will continue to be the main drivers for additional future demand for residential units.
Source: Erik Volkers, Special to Property Weekly
Associate Director of CBRE Middle East. He has almost 10 years of experience in financial real estate advisory services. Before joining CBRE Middle East, Erik worked for Fakton in Rotterdam, a Dutch financial and strategy consultant specialised in financial services for real estate and area developments.
Al Nisr Publishing accepts no liability for the views or opinions expressed in this column, or for the consequences of any actions taken on the basis of the information provided.