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Dubai’s property market is currently witnessing a softening of prices. Jesse Downs, managing director of Phidar Advisory, gives her insights on the current market conditions and gazes at the crystal ball to predict what lies in store in the next couple of years.
Demand versus supply
If we take into account the residential projects which are under construction and launched, there is an equilibrium between market demand and supply.
However, the situation can alter in the next five years if we consider the base case figures for GDP growth and growth in residential demand. If Dubai maintains an average GDP growth of 3.4 per cent, the residential demand will witness a compound annual growth rate (CAGR) of 4.6 per cent. When all the announced projects are completed, the market will reach an oversupply of 7 per cent in five years. Even a more bullish scenario of 4.1 per cent average GDP growth rate over the next five years will not be able to absorb the new stock including under construction, launched, announced and stalled projects.
Developers are launching a slew of new projects. At this rate, supply will significantly overhaul demand. The most affected will be the housing segment which currently fetches an annual rent of Dh100,000 to Dh160,000. Residential units in this could be oversupplied by up to 40 per cent in five years.
There are two demand segments to be factored in: investors and end-users. Developers primarily consider investor demand which can vacillate, often driven by factors like market sentiments. Since the Dubai property market is heavily dependent on foreign investment, factors like currency exchange rates and those related to the investors’ home countries can have a bearing on the demand.
Demand from end-users should also be taken into account, but developers seldom consider this when coming up with launches.
Current market trends
According to the Q2 2015 figures, apartment rents have come down by a nominal 2.4 per cent while sale prices have decreased by 1.5 per cent from the last quarter. Rents of villas or single family homes decreased by 0.6 per cent; sale prices fell by 2.9 per cent from the first quarter. The softening of prices is a healthy correction of the market, but the more significant concern is the scale and nature of the upcoming launched and announced projects which will create market conditions where supply will exceed demand.
According to the initial transaction data from the Dubai Land Department for the first five months of 2015, which is subject to revision, apartment transaction volumes were down by 1.5 per cent compared to the same period in 2014. Transaction volumes of villas fell by almost 25 per cent over the same period. Transactions in villas are restricted due to limited inventory and sticky asking prices. Sellers are holding out for unachievable capitalisation rates, considering macroeconomic, demand and lease rate trends.
The appreciation of the dollar has a significant impact on the demand and price of Dubai property because foreign residential investment drives demand. A rising dollar means an investor from a country like India or Pakistan where the local currency has depreciated will have to shell more to in-vest in a property in Dubai. If the oil prices stay low for two to three years, it is likely to impact Dubai’s GDP, which will in turn negatively affect the property market.
End-user demand for this segment is strong. However, the challenge remains its financial viability.
Affordable housing should be built near public transportation networks, but land costs are often too high in these locations. Development costs need to be reduced through land subsidies and fee waivers for approvals and connection charges. But these cannot be seen simply as subsidies; these are de facto infrastructure investments. If the population is more evenly distributed, especially to optimise the use of public transportation, it reduces the load on infrastructure like road networks. This is a significant challenge in Dubai More even distribution slows the rate of new investment-required factors like roads Plus, if the average commute time is shortened, labour productivity increases.
The office market scenario in Dubai
Overall, the office market has softened and the market is plagued by structural issues. For good projects, the long-term outlook is positive, but there are very limited options for those looking for quality projects. Strata projects are wrought with complications because if you rent an office space, you are dealing with multiple owners. Many single owner assets in investment zones have design or quality challenges. Therefore, investors should be cautious before opting for office space. They should conduct thorough due diligence first to determine the right product for them.
Source: S. Dhar, Special to Freehold