Supply-demand dynamics

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After three years of value appreciation, Dubai’s real estate market has been correcting its prices over the past three quarters and analysts expect this to continue until next year. The average residential sales price has dropped by around 2 per cent quarter-on-quarter, mirroring the fall witnessed in the first quarter, according to the CBRE’s Dubai Market Overview report.

Furthermore, Standard & Poor’s foresees housing rates to fall moderately between 10 and 20 per cent over the next 12 months, due to factors such as declining global oil prices, fall in demand and new supply. In its report, Inside Credit: The UAE’s Property Market Is Prepared For The Current Correction, the ratings agency says real estate companies are now well equipped to deal with a slowdown than during the 2008-09 downturn.

Market overview

The first half of the year saw around 11,000 residential units completed, according to Knight Frank, which also forecasts about 23,000 units to be delivered this year. However, new supply delivered in the first half of the year was not substantial when taking into account the emirate’s existing stock, says Khawar Khan, Research Manager of Knight Frank.

“The softening of housing prices over the past three quarters has resulted from a combination of lower levels of demand stemming from the cooling measures introduced at the end of 2013 and the recent strengthening of the US dollar as well as new supply,” he says. “Although values have softened, most view this as a natural phase in the house price cycle — with prices adjusting to levels in line with fundamentals after the 2012-13 boom.”

Rocky Real Estate’s General Manager Suraj Rajshekar agrees with Khan that new supply in the first half did not have a significant effect on prices and demand. He points out that stock handed over during the period was mainly from projects delayed since 2009. Moreover, those launched in 2013-14 are mostly not due for handover this year. “The market now is very realistic and matured with sellers having holding power and an investment horizon of 5-10 years, compared to the pre-crisis market that was momentum-driven and without strong fundamentals,” says Rajshekar.

Demand and supply

Simon Gray, Managing Director of Chestertons Middle East and North Africa, believes around 12,00015,000 units will be delivered by the end of the year, which would affect prices and act as a cooling measure. “There has been a correction of 1020 per cent [year-on-year],” says Gray. “We expect this to continue in the near future. Property rents are still holding up as most of the projects are still due, however, we expect correction in areas such as Dubailand, Jumeirah Village Circle and Dubai Sports City as completions and handovers are announced.”

When supply exceeds demand, it eases rents and softens prices. However, in Dubai there is a mismatch between rental values and selling price - despite sales prices declining, rental rates are not dropping.

“In Bur Dubai, apartments are not easily available for rental, highlighting that demand in the business district is still very high as one pays around Dh80,000 for a two-bed apartment in an old building, going up to Dh120,000-Dh130,000 for a new unit of the same size,” says Sunil Saraf, Managing Director of Tanjay Real Estate. “I do not see much pressure on rents, even in new areas, as there is a lot of demand for residential rental units in Dubai Marina, Jumeirah Lakes Towers, IMPZ and other new Dubai areas on Emirates Road. What is seen in the past six months is that the rental supply is getting absorbed.

“Rentals are sustaining, whereas selling prices in certain locations have softened in the past six to eight months, correcting itself between 5 and 15 per cent. This variance shows either this is a transition period where rentals will start falling or there is enough influx [of new residents] willing to rent.”

Saraf says one of the reasons there are more residents who rent than buy property is demographics - there are a lot more young working residents, who may not have the economic resources to buy property.

“Traditionally this country was driven by rentals,” says Saraf. “[Due to strengthening rental rates] now even the freehold segment has seen two kinds of buyers: end users and those building a rental portfolio. Even though rents have sustained and prices have corrected, I don’t see anything alarming in terms of supply that will disturb the market.

“Rental population is strong to keep the demand sustaining and the correction of prices is healthy, which gives enough opportunities for people to review and enter without taking undue risk.”

The quality and outlook of buyers has also improved. “The quick-flip phase is over and we have increased interest from people who want to build their rental portfolio, similar to what we see in a more matured market like London,” says Saraf. “End users who [resisted] entering the market in the past three years have now become comfortable, looking at converting their rental expense into asset creation as the market has become sustainable.

“We also see individual buyers becoming small landlords, as several people who don’t want to move their residence from Bur Dubai area chose to buy property in the freehold areas to lease and offset rental expenses.”

Source: Hina Navin, Special to Property Weekly


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