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Supply figures and rental yields play important roles in attracting real estate investors to Dubai, but industry insiders claim the emphasis on oversupply has been exaggerated in many cases and has created unwarranted backlash against investor sentiment.
''The issue here is that year after year these numbers have proved to be significantly inaccurate, not by a couple of percentage points, but by as much as 60-70 per cent on a regular basis,'' says Niall McLoughlin, Senior Vice-President at Damac Properties, claiming that the publication of such figures has had a detrimental effect on market sentiment.
McLoughlin cites reports at the beginning of this year that placed expected deliveries at around 25,000 units by year end. ''If that number were correct, it would mean an additional 6 per cent to the total housing stock in just 12 months,'' he says. ''This is clearly a huge number and one which would be alarming for any investor.
''Our property consultants regularly meet prospective clients from overseas who are under the impression that Dubai is set for a deluge of property flooding the market and artificially driving down prices. This is simply not the case and damages [the status of] Dubai as a global destination.''
He says recent estimates have now placed the total number of deliveries this year at around 10,000. ''That is 2.2 per cent additional stock, something we feel is much more sustainable and reflective of the current market,'' says McLoughlin.
According to John Stevens, Managing Director of Asteco, newly launched projects are counted as part of expected supply, but he points out that many of these are not delivered on time, which results in contrasting figures in the market.
''The critical point to clarify when addressing figures is the differentiation between units handed over and delivered in the market, as opposed to those that are just launched. Projects can be launched but for a range of reasons do not come to fruition, therefore distorting the numbers,'' says Stevens. Asteco predicted at the start of the year around 12,000 apartments and 2,000 villas to be delivered by year end, but has adjusted its forecast to 7,000 apartments.
Number interpretation is subjective and relative to other variables, changing as developers adapt their plans to prevailing market conditions. According to Ozan Demir, Data and Research Manager — UAE at Reidin, around 60 per cent of projects Reidin has tracked in the past three years have been delayed.
Reidin, a real estate information provider, collects initial project information and completion dates from developers and project managers, and sends out a team every quarter to check on the progress of the projects. This year it has tracked more than 300 projects and reported around 12,000 unit deliveries in the first nine months, with 3,000 due for handover by end of the year.
''When a project is completed within the period, it is being marked as such,'' says Demir. ''If there is a delay, we get a new completion date from the developers or project managers. If construction is fully stopped, we mark the project as on hold or cancelled to remove it from expected supply list.''
Meanwhile, Faisal Durrani, Head of Research at Cluttons, points out that reports, including those by Cluttons, usually don't take into account leasehold units, which he says have an equally influential role on market sentiment, particular in the rental segment. He adds that the stabilisation of rents and prices this year could not be attributed to an increase in supply alone, but also to other factors such as affordability.
''Affordability has been an issue that has bubbled away for some time now,'' says Durrani. ''We have calculated that the average household income is around Dh200,000 a year, which can afford a few studios and one-bedders at around Dh800,000. You can't buy a family home with that.''
The sharp increase in both residential sales and rental values in the past years significantly outpaced salary increments, making Dubai a far more costly place to live, and this has likewise contributed to the current market dynamic, according to Erik Volkers, Associate Director of Research and Consultancy at CBRE Middle East.
''Investor speculation has been pushing both rental and sales prices to levels beyond the reach of many low and mid-income households,'' says Volkers. ''The rising cost of housing in Dubai has consequentially driven a flight to affordability, with many residents choosing to relocate to the border areas of Dubai and Sharjah and even into parts of the northern emirates in search of cheaper accommodation.''
Volkers says the slowdown in the global economy also has an impact on delivery dates and consequently the actual number of units delivered in the market. ''Since the first half of last year, Dubai's residential market has experienced a slowdown in activity, attributed to a combination of local and global events, which have effectively dampened demand and negatively impacted the market sentiment.''
But Volkers says there is a silver lining amid the market slowdown. ''Against the strong growth achieved during 2013 and 2014, we consider the current period of stabilisation and small declines to be healthy for the market, and it is a reflection of Dubai's maturing status,'' says Volkers.
According to CBRE, which uses data from Reidin, the Dubai Land Department and its own research, approximately 9,000 units were delivered in Dubai during the first half of the year. Volkers says it is also important to consider where the new projects are being built. ''Much of this supply comes from smaller sub-developers and is located in the submarkets of Dubailand and other secondary locations.''
As reports of potential oversupply have somehow led to a decline in sales prices, on the flipside rents have stayed strong, ensuring viable property investments. ''Prices have reduced by 5-6 per cent year-on-year, but rents only by 0.5-1.1 per cent,'' says Durrani. ''Yields are actually strengthening in the region of 6-8 per cent, improving the appeal of buy to-let property. That is attractive by global standards.''
Durrani says many landlords continue to hold on to higher yields and thus keep rents high. ''However, those who have mortgaged properties have to adjust rents downwards,'' he adds.
Recent estimates put the total number of residential units in Dubai at 70,000 by 2020, with 13,000 apartments anticipated next year, assuming no construction delays, according to Stevens. ''In addition to the developers who [account for] a large volume of the additional units, there is a significant number of small and medium developers whose cumulative units make up a substantial amount,'' says Stevens.
Keeping an eye on construction progress, Cluttons predicts 20,000 units to be delivered by the end of 2017, with around 60 per cent of the pipeline skewed towards the villa market.
''It's a meticulous process. We are fully aware that more often than not handovers will be delayed, or projects handed over in phases,'' says Durrani, adding that expected population growth and forecast delivery of units seem balanced. ''If global economic growth continues to slow it could potentially have implications on job creation in the UAE. However, the World Expo is looming and we're waiting for infrastructure contract announcements, which will create a lot of work and could support residential growth.''
More than talk of an oversupply, affordability remains a major driver for rents and sales. Stevens says Asteco recorded a high number of transactions for more affordable town houses by Nakheel and Indigo in Jumeirah Village, although larger properties, including five- and six bedroom villas, saw minimal transactions in communities such as The Villa and Dubai Sports City, despite strong rental demand.
The villa market, with an expected delivery of 9,000 units next year, could see further substantial rental declines, according to Asteco.
In established areas such as older communities in Arabian Ranches, rents have already come under pressure, seeing a 2 per cent drop according to Asteco, as tenants move to newer locations such as Mudon and Arabian Ranches phase two communities. In Arabian Ranches, Al Reem and similar communities, three-bedroom properties fell by up to 6 per cent, according to Cluttons. In light of the flight to newer communities, some tenants have also negotiated rent reductions with landlords.
The downward pressure on rents in general could continue as new stocks steadily come online in the run-up to 2020. ''This makes Dubai once again a more affordable place to live, as it also forces landlords to become more competitive,'' says Stevens. ''Some landlords have increased the number of instalments and in some cases even offered rent free incentives.''
Source: Nicole Walter, Special to Property Weekly