Is there any rent relief in the UAE?

Is there any rent relief in the UAE?Image Credit: Supplied

Having weathered double-digit rental hikes, tenants in Dubai felt relief when rents appeared to have stabilised in the past quarter. For investors, the promise of high rental yields of about 6 per cent has not impacted the market enough to prevent a general slowdown. However, residential, office and retail markets in Abu Dhabi and Dubai show markedly different trends, attributed to economic developments particular to each sector.

According to the Dubai Real Estate Market Overview report by Abu Dhabi Islamic Bank (ADIB) and its real estate advisory subsidiary MPM Properties, rents in Dubai have fallen by 2 per cent in the third quarters.

Even 6-7 per cent yields seen until the third quarter have not influenced investor sentiment, going by the slowdown in transactions. The ADIB report says that the total value of residential apartment transactions fell by 8.6 per cent quarter-on-quarter, from Dh4.62 billion in the second quarter to Dh4.22 billion in the third quarter. The report attributes this to historic trends, which see the third quarter of the year being a relatively quiet period for the real estate market because of the peak summer and holiday season.

Tariq Bsharat, Executive Director of Strategy and Operations at MAG Properties Development (PD), says the magic number is 7 per cent, with conservative risks. ''I keep hearing that yields are stable and prices are going down,'' says Bsharat. ''Over the past year we see that population is there, job growth is there, demand is there and prices are coming down. That tells me that there is more supply coming online or that people are interested in better yields.''

However, the market may not deliver these returns to investors or sales. Bsharat says, ''It makes sense that if rental rates stay the same and prices go down, then that means investors foresee greater risk in the future and are demanding an even higher yield before they buy.''

Dubai residential

The ADIB report attributes the decline in Dubai apartment rentals to the 2,000 new units added in leasehold areas. The market data and rental indices are collated from transactions within MPM's management portfolio of over 23,500 units.

Real estate professionals have different opinions on whether rents will match reduced property prices. In some cases it is mostly a matter of calling the glass half full or half empty.

This data suggests that prices are falling in some communities, particularly in the outskirts, whereas prime areas continue to command strong rental values.

The Cavendish Maxwell report lists areas such as Business Bay and Dubai Sports City where rents came down by -3 per cent in the third quarter. According to a report by Land Sterling, apartment rentals in Dubai increased 2 per cent quarter-on-quarter in the third quarter, with second-tier communities such as Dubailand absorbing price-conscious tenants with affordable rental options and infrastructure improvements.

''Except for a few areas that witnessed rental softening, that too only for certain unit categories, residential rental performance in 2015 has been exceptional amid prevailing negative market sentiment,'' the Land Sterling report states.

Rents in Dubai are subject to another factor — many real estate professionals say that landlords would rather leave units empty than compromise on the returns. David Godchaux, CEO of property consultancy Core Savills, Dubai, says rents should have adjusted by 5-10 per cent already. ''Rent should be lower — you have less demand. Market has been softening. You have friction in the market because people don't want to bring rents down,'' says Godchaux. ''In the past 12 months it did lose some thing; it was visible. Officially, it has not adjusted.''

However, most agree that rates are not likely to go any higher. According to a recent survey by Cavendish Maxwell, only 4 per cent of polled agents said that apartment rents in Dubai will increase in the fourth quarter, compared to 64 per cent who said that rents would remain unchanged. As many as 28 per cent said rents would decline by 5 per cent or more. When it comes to villa rentals, 44 per cent said rates would remain unchanged and as many expect a decrease by 5 per cent or more.

Sameer Lakhani, Managing Director of Global Capital Partners, says rental decline will catch up with property prices. ''Evidence suggests that rents follow prices with a lag. This is a relationship that has always asserted itself; prices fall first, and rents fall with a lag,'' says Lakhani. ''We are of the opinion that this trend will continue, and that there will be a continued softening in rental rates in the next 12-18 months.

Villa rentals are following similar trends with minor fluctuations across the board. The Land Sterling report says quarterly and yearly rental fluctuations were limited within the 0-10 per cent range. ''Rentals for five-bedroom villas remained stable across all communities,'' the report states. ''Limited supply in this segment against the two- and three-bedroom categories has helped sustain stable rent levels.''

2016 forecast

Pegging the decline to low double-digits over the first half of next year, Lakhani says this trend is accentuated by a general economic slowdown. Much depends on whether the non-oil sector is able to retain the momentum after the announcement of Dubai as host of the World Expo 2020. Minor fluctuations in rents are only visible when new tenants receive quotes.

''People only move if rents are cheaper by 30 per cent or so. The tenant does not move for 5 or even 10 per cent, which means that the market does not move. And then it suddenly adjusts,'' says Godchaux.

Dubai office and retail

According to ADIB's Dubai Real Estate Market Overview report, ''Controlled supply of new office space, coupled with continued positive occupier sentiment, is helping to maintain Dubai's healthy rental and occupancy levels in the office market.'' The report says that the Dubai office market has remained stable quarter-on-quarter despite new supply, as demand for office space continued to show an upward trend mainly from start-up companies.

Prime Central Business District (CBD) rents ranged from Dh110-Dh220 per square foot per year, while secondary locations have recorded rents from Dh70- Dh200 per square foot per year. While Dubai's retail sector saw a marginal drop in footfall and spending during in the third quarter, with a number of major retailers reporting slower sales year on-year, the report says that the outlook is good.

''Overall prime retail assets remain strong performers and demonstrate positive growth with waiting lists for space still oversubscribed despite expansions,'' says Paul Maisfield, CEO of MPM Properties.

However, retail rentals might go down due to subdued activity. ''The retail market remained subdued over the third quarter as annual rental growth rates across all mall types continued to slow down,'' says Craig Plumb, Head of Research at JLL Middle East and North Africa.

''There are signs that landlords have recognised this softening and have adjusted rental levels to more realistic levels to differentiate their offerings in the face of strong competition. We expect rents to drop over the next 12 months as the market moves through its cyclical peak.''

Office rentals are sharply skewed across the range. According to a JLL report, the fragmented nature of supply in the office market results in varied levels of occupancy. ''While the CBD continues to see strong demand and command higher [but stable] rents due to better amenities and parking, stock in secondary locations suffers from lower occupancy rates and rents,'' says the report.

Furthermore, tenants, particularly large, single floor occupiers, are increasingly demanding single owner rather than strata buildings. JLL says this will result in excess supply of strata-owned office buildings that are likely to remain vacant in the short term.

''Elsewhere across the market tenants are migrating between free zones because of the lack of quality,'' states the JLL report. ''The limited available supply in Tecom for example has prompted tenants to take up space in Jumeirah Lakes Towers. This trend is likely to continue as demand for quality office space continues to grow.''

Now that developers have taken note of demand and focused their energy on grade A office spaces, expect to see more of them. ''In line with this demand, developer activity is likely to focus on delivering more grade A office space,'' according to the JLL report. ''The Dubai Trade Centre District and ICD Brookfield Place are already among those due for completion between 2015 and 2018.''

Among affordable areas, Dubai Silicon Oasis remains a favourite for those looking for quality, affordable spaces. Land Sterling notes that project launches over the past two years have been skewed towards the residential and hospitality sector. ''Two to three years prior to the World Expo 2020, more office-oriented projects will need to be launched to avoid supply troubles that may end up in abnormal price escalation in the sector,'' the Land Sterling report states.

Abu Dhabi Residential

Stability with an inclination to decline defines Abu Dhabi residential rents. Reidin's residential property price index released last month showed a decrease by 0.2 points, from 66 to 65.8, which represents a decrease of 0.23 per cent in September. Prices decreased 1.1 per cent year-on-year.

Apartment rental prices registered a decrease in September. Prices decreased 0.42 per cent month-on-month and also decreased 1.7 per cent year-on-year. Villa rental prices registered an increase in September. Prices increased 0.07 per cent month on-month but decreased 0.1 per cent year-on-year.

Meanwhile, JLL's third quarter report states, ''Residential rents have remained stable — while demand has been relatively flat, supply remains in balance with minimal vacancies in high-quality, well-located schemes.''

Abu Dhabi's residential market is also likely to be affected by reduced government spending, cost controls and any job cuts. ''Further increases to the cost of living [through the removal of utilities and fuel subsidies combined with suggested potential measures to introduce taxes] may further impact future end-user demand,'' the JLL report says.

However, weaker end-user demand next year will be balanced by lower than usual annual supply completions.

Office and retail

The office market in Abu Dhabi is more likely to react to spending cuts being seen in oil and gas companies and in government entities. The JLL report points to suppressed demand: ''Average grade A office rents have remained stable this quarter although some rental growth has been recorded in those grade A buildings with limited vacancies. While we expect grade A rents to be upheld, grade B rentals may soften as further grade B space enters the market over the next 12 months.''

The retail sector, flush with supply, is also stable. According to JLL, ''Retail rents remained stable and are expected to remain so over the next 12-18 months. While significant retail space is set to enter the market from 2018, the development pipeline has reduced and demand growth remains positive, particularly linked to hospitality growth.''

Backed by legislative reform, some areas are likely to peak in demand. Abu Dhabi Global Market (ADGM), the financial free zone, has published additional draft legislation on insurance, takeovers and data protection. The Securities and Commodities Authority has also signed a memorandum of understanding with the Financial Services Regulatory Authority to exchange information and enhance mutual cooperation regarding market supervision, investor protection and oversight of financial markets.

The JLL report says, ''The ADGM has also announced that they remain on track to receive the first Financial Services License Applications later this year, which will improve leasing momentum for vacant space at Al Maryah Island.''

Get a glimpse on the considerations when renting office space

Source: Shalini Seth, Special to Property WeeklyPW


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