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The Dubai real estate industry is witnessing a surge in the number of off-plan properties being launched by developers both in the luxury and affordable segments. As more new stock enter the market, how will the demand and supply get affected?
Adam Wisher, Head - Development Advisory and Real Estate Research, and Sofia Underabi, Head - Residential Valuation at Cavendish Maxwell, throw light on the Dubai market trends and discuss a continued softening of sale and rental prices this year.
The lower transaction volumes witnessed during the fourth quarter of 2014 created a downward pressure on prices. It led to reductions in the first quarter of 2015 as sellers began to lower expectations to get their deals through. The extent of this trend is not a one-size-fits-all generalisation with established locations Business Bay, Dubai Marina and parts of Downtown Dubai showing the most resilience.
Secondary apartment locations like International City and end-user villa communities have been the hardest hit with significant year-on-year drop.
End-user villa communities like Arabian Ranches and The Springs, despite a drop in sales prices, continue to witness high occupancies and attract one of the highest rates per square foot in the rental market.
Strong investor performances are noted in Downtown Dubai, Dubai Marina and Emirates Living.
Peripheral areas like International City, Discovery Gardens, Dubai Sports City (DSC) and MotorCity can provide good returns of about 8 per cent for those entering the market now, but these areas have had lower overall performance because of price compression.
Although rental yields offer investors a reasonable level of return, well above current interest rates, rental yields in Dubai are volatile and arguably unsustainable.
Current gross rental yields (on average) range from 6 to 8 per cent, with secondary locations reflected at the higher end of the scale. We anticipate a decline in rental values in line with the new supply, which is scheduled to enter the market in the near future.
Transparency of information and a secure legal framework are vital to help protect investors and stabilise the market. As the Dubai real estate market matures, investor decisions need to be driven by fundamentals rather than speculative and political factors.
The volume of mortgaged deals had peaked in Q1 2014. Around this boom phase, we witnessed a spike in the level of refinanced mortgages following a drive from the local banks with new products targeting the new segment.
We understand the dip in transactions relates predominantly to Central Bank regulations related to mortgage criteria. This has continued to impact affordability and has shifted the demand towards the off-plan market which offers property investors more attractive payment plans.
It appears that demand outweighs supply in the affordable housing category; however, consumers may face difficulty with repayments if not supported by banks in the given time frame. Perhaps, this is a niche area for financiers if they are willing to take on the risks involved.
The Central Bank mortgage rules limit home loans for expatriates. Increasing the loan-to-value ratio remains an option to stimulate the market in the run-up to Expo 2020.
There is still appetite in the off-plan market with several successful product launches in the secondary market in locations like DSC, Dubai Silicon Oasis and Dubailand.
Developers in these locations had to offer flexible payment plans alongside good developer track record and marketing exposure to drive absorption.
Supply will continue to have an impact on rental and sales prices, with opportunities for residents to upgrade in emerging locations.
What to expect this year and beyond
• About 23,000 new residential units will enter the market this year
• About 7,885 luxury units are expected to be delivered in the next two years
• Significant additions are expected in secondary locations between 2015 and 2018.
These areas include Dubai Investments Park, Dubai Sports City, Dubailand and Jumeirah Village Circle. About 43 per cent of the new stock is located in Dubailand. Around 2,299 new residential units are expected to be handed over by various developers in Dubai Sports City in the current calendar year
Source: S. Dhar, Special to Freehold