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There are various apprehensions in the property market with regard to the ongoing price correction in most of the communities.
So, where are the investors buying today? With the slow momentum witnessed in premium communities, where property investors have been active from the year of recovery in 2012 to most of 2014, investors have been taking a smart approach with a long-term outlook on the Tier 2 segment of the market.
Investors realise that there is room for growth in this sector, provided the product offering is good, and the need for middle income housing is at an all-time high.
Communities such as Discovery Gardens, Dubai Sports City, Dubai Silicon Oasis, International City, Jumeirah Village Circle and the International Media Production Zone (IMPZ) have had a sustainable balance in pricing for the last couple of months, with reasonable rental demand.
Today’s investors have a long-term approach, with them looking at good rental returns. They are well aware that this sector will remain active for years.
Today, Tier 2 communities can command an average net return of 7% to 8% on current price trends.
If one analyses the property launches post-recovery in 2012, majority of these belong to the Tier 1 segment. There have been minimal launches in the Tier 2 sector.
Most Tier 2 units coming to the market are projects that have been reinstated from the backlog of 2008, which means the anticipated supply of units in this segment will not happen at least until 2017.
There is a price median where investors are mentally confident to invest in these Tier 2 communities, with more optimism in rates that are below Dh1,000 per square foot.
They find value in properties with price brackets ranging from Dh400,000 to Dh550,000 for studios, Dh650,000 to Dh750,000 for one-bedrooms and Dh900,000 to Dh1.2 million for two-bedrooms.
The rental return is at an average of Dh40,000 to Dh45,000 for studios, Dh60,000 to Dh75,000 for one-bedrooms and Dh85,000 to Dh110,000 for two-bedrooms.
Moreover, as with the demand, the occupancy rates in these communities are increasing, giving way to increased investor confidence. There is also a bit of tenant migration from Tier 1 to Tier 2 communities.
Apart from the general tenants, one spectrum of new consumers not covered in most of these investments is the students.
Currently, Dubai is home to numerous internationally acclaimed universities and most of them have their own housing facilities for students from abroad.
But generally, these are never sufficient as these universities have student exchange programmes wherein international students from other countries spend a couple of months in Dubai and vice versa.
To create the right environment for their students, institutions are eyeing at keeping them in housing with good standards, and Tier 2 communities suit them well. For them, Tier 1 can be expensive, while Tier 3 can be substandard accommodation not in line with their vision.
Unlike investors building projects exclusively for corporate staff accommodation or executive accommodation, the investor market has not geared towards creating accommodation exclusively for students.
Universities would surely want their students to live within a 30-minute travelling radius, and Tier 2 communities can be their best choice.
It would be right to say that the Tier 2 market will keep the momentum of the Dubai property market alive.
Source: Parvees A. Gafur, Special to Freehold
The writer is CEO, Propsquare Real Estate