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It's a familiar story. Falling oil prices, challenged global economies and currency crises. They all have an impact on Dubai's real estate sector. But are dark days ahead, or are we falling prey to the latest round of media hype?
According to the latest Dubai Economy Tracker, published by Emirates NBD, private sector businesses are increasingly optimistic about the second half of the year, with positive sentiment hitting a 19-month high. The tracker also noted a rise in employment, the strongest since last October.
That's not to say that there hasn't been a softening in terms of overall business activity with ongoing lows recorded in terms of rates of expansion, plus the impact of falling oil prices, the rouble crisis and international economic woes all affecting investor potential.
Slowdown in activity
An interesting point to note from the Economy Tracker report is the movement in the construction sector, which posted increases in business activity, new orders and employment, edging out all other sub-sectors. The travel and tourism sector is also sending out positive signals, with June having been a bumper month in the second quarter.
Translating this into real estate activity, there has been a slowdown in transactions this year to date, most keenly felt in the residential sector, although we have seen new movement in the second quarter. It is also important to flag the other mitigating factors coming into play such as the mortgage cap and hike in property transaction fees.
Investors are adopting a cautionary position with one eye on global economic influencers and the other on market prices, with Dubai still going through its extended period of correction. Property owners eager to sell are being forced to either sit it out for the short to medium term or adjust their price expectations to secure a sale.
On the flip side, for nonoil producing economies, declining oil prices mean prospective higher levels of investment plus increased outbound tourism activity, which could send investors this way.
If you look at our latest UAE Property Review Q2 2015 Dubai report, the emirate's real estate market is transitioning. Rental rates for apartments and villas across the city declined by an average of 2 per cent quarter on-quarter, and 5 per cent year-on-year for villas, with marked declines at the higher end of the market.
Homes for sale also recorded an average fall of 2 per cent, with some areas performing worse than others, dropping 11 per cent year-on-year for villas with apartments decreasing by 7 per cent. This softening appeared earlier than we originally anticipated and offers tenants a chance to recoup after several tough years of high rental rates.
The decrease was felt throughout the market and areas with a significant amount of completed new supply were the most affected. Some buyers of nearly completed buildings were keen to sell at negative premiums due to the imminent completion of the building, which required final payment.
The highest quarter-on quarter apartment rental declines were recorded on Shaikh Zayed Road (7 per cent), Palm Jumeirah (6 per cent) and Jumeirah Beach Residences (7 per cent).
Conversely, International Media Production Zone (IMPZ), Dubai Sports City and Dubai Silicon Oasis recorded higher rentals of between 6-13 per cent compared with last year, due to the completion of community infrastructure and increased occupancy levels, making them popular in midmarket residential areas.
Lower rental rates
In the villa segment, the handover of projects such as Casa Villas at Arabian Ranches brought rental rates in the area down by 7 per cent quarter-on-quarter, and 15 per cent year-on-year. At the Mudon community, the ongoing handover of its three and four-bedroom town houses, with competitive pricing starting at Dh175,000 per year, placed pressure on landlords of neighbouring developments to secure and retain existing tenants.
We even saw a 6 per cent decline for the usually steady Palm Jumeirah, with the handover of the lower specification Palma Residences' town houses impacting rental rates. All of these translate into the emergence of a tenant-friendly trend in the broader villa market, with more flexible instalment plans for example, and this is set to continue as areas like Dubailand continue to deliver new supply.
Switching to apartment sales, the second quarter this year was marked by a shift towards more affordable properties with locations such as IMPZ, Dubai Silicon Oasis, International City and the recently handed over Queue Point and Sky Courts developments in Dubailand witnessing sustained demand, as yields for studio and one bedroom apartments in particular remained attractive.
Affordability was also a priority for villa investors, with Jumeirah Village recording a high number of transactions for some of the town house properties by Nakheel and in Indigo Ville, priced from Dh700,000 up to Dh1.2 million.
In comparison, larger properties, including five and six-bedroom villas, saw minimal transactions in communities such as The Villa or Dubai Sports City despite strong rental demand.
Although there is a seemingly upward trend with strong transaction levels, the increasingly competitive market environment and arrival of plenty of new supply mean that the 2 per cent quarter-on-quarter decline is not going to be a temporary blip.
We've also seen an emerging trend where a limited number of purchasers were advertising off plan properties not yet in the construction phase at negative premiums, in an attempt to relinquish financial obligations.
Owners take note: there will be more pressure to review your selling prices.
For the long term, with ambitious infrastructure projects well under way and increased positive consumer sentiment predicted through to year end, Dubai remains an attractive investment proposition for the future.
Source: John Stevens, Special to Property Weekly
The author is Managing Director of Asteco