UAE Property Market: The ripple effect

The Al Majaz WaterfrontThe Al Majaz Waterfront in Sharjah. Analysts say the northern emirates can further capitalise on tenant migration from Dubai by creating good-quality community amenities l Image Credit: Courtesy of Shurooq

The northern emirates’ real estate markets, particularly Sharjah and Ajman, have traditionally been characterised by strong dependence on overflow demand from Dubai. This market dynamic peaked in the first quarter of last year when a huge spike in property values in Dubai forced many tenants to head north, says John Stevens, Managing Director of realty firm Asteco.

Things have started to change this year with a slowdown in property value growth in Dubai. Stevens says this could lead to a potential correction in rental rates in Sharjah and Ajman, although Fujairah and Umm Al Quwain are unlikely to see significant changes as they are less dependent on Dubai.

As per estimates, between 14,000 and 22,000 new rental and ownership units are expected to be delivered in Dubai this year. “Rarely do delivery schedules attain 100 per cent achievement, so a figure closer to 18,000 is perhaps more likely,” says Mohanad Alwadiya, Managing Director of Harbor Real Estate. “The majority of these will be apartment asset types in the affordable segment, which has witnessed growing demand [that is] expected to continue to the end of the decade.”

For apartments, if the bulk of new supply is delivered as expected, Asteco anticipates a significant reduction in rental values this year, leading to more tenants moving to Dubai. Sales transactions are also likely to reduce as buyers become more cautious, especially when purchasing property for lease, and pressure on rents and yields could increase with new supply.

Furthermore, with a substantial number of off-plan schemes launched last year, Dubai is likely to see a reduction in sales prices for off-plan villas this year, while more attractive payment plans will be offered by developers. “Rental rates for villas are anticipated to remain stable in the most [preferred] areas, while marginal decline in less desirable areas can be expected,” says Stevens.

Relocating to Dubai is a subjective lifestyle choice, says Mouhanad Fadel, Manager of the Barsha and Sharjah branches of Better Homes Real Estate. “Those who prefer the hustle and bustle of Dubai would readily return if rents were more affordable,” says Fadel.

“However, some people prefer to live in the northern emirates where there is less construction and development and a slower lifestyle.” But Fadel adds that rent remains an important consideration — for example, for the rate of a standard apartment in Dubai, one can generally find an equivalent in Sharjah, Ajman or Ras Al Khaimah that costs less and offers greater square footage.

Nevertheless, rental rates in the northern emirates will mirror that of Dubai to some extent, says Alwadiya.

“Of course, the effects of supply and demand on rental rates are not homogenous across markets. But as we witnessed during the global financial crisis, a significant decline in rents in Dubai that is sustained for at least 12 months will have a migratory effect due to people wishing to cut commuting time to work, upgrade accommodation types and size and perhaps take advantage of better amenities and proximity to schools.”

Tipping point

The key to the extent of migration is how tenants would value the benefits — particularly the savings on rent — of moving home. Historically, a 15 per cent difference in values has been a psychological tipping point for many people.

“The drastic reduction in rents [that’s] being suggested is going to heavily depend upon the delivery of affordable properties at a rate that will outstrip demand,” says Alwadiya. “While we may see fluctuations in rental rates being driven by a range of factors in addition to supply, we do not predict a drastic fall unless some significant and totally unforeseen event were to shock the market.”

While most people who work in Dubai would like to live here as well, the big issue most have to deal with is affordability. “It is hard to make the case that the lifestyle in the northern emirates surpasses that of Dubai, [more so] when commuting times are taken into account,” says Alwadiya. “For the vast majority of people working in Dubai, living further afield is a compromise necessitated by affordability.”

Other than low rent, what other benefits do the northern emirates offer residents over Dubai? Fadel says access to more affordable amenities that improve the quality of life is one factor. In Ras Al Khaimah, for instance, for a fraction of the cost of similar facilities in Dubai, residents can enjoy beachfront apartments, private beaches, easily accessible shopping communities, exercise facilities and even a championship standard golf course.

Maturing market

Meanwhile, Alwadiya, who is also an instructor at the Dubai Real Estate Institute, says the past year has been vital in that it manifested the maturity of the emirate’s real estate sector.

“It demonstrated to the world that the real estate industry in Dubai has achieved a level of maturity that enabled it to successfully manage the significant challenges associated with being the hottest real estate market in the world without succumbing to [factors that] in the recent past [led to a] crash.

“Last year saw a slowdown that was managed and eventually welcomed by all those who wish to see a market that enjoys healthy and more sustainable growth rates and avoids the boom-and-bust cycles that rapid growth can bring.”

So how will things play out this year? For most tenants, the focus will be on rent, says Alwadiya. “We expect rates to somewhat stabilise

with any decline dependent on location and whether the planned release of new properties scheduled for this year materialises.”

Five-year countdown

But to focus on supply would be too narrow a view. Demand also needs to be considered when estimating the trajectory of property values and rental yields this year and beyond, says Alwadiya. In a sense, 2015 can be seen as a launch pad for the industry as it plays its part in a new period of strong economic growth. And going forward, Expo 2020 will have a significant influence.

“As the first of the five-year countdown to the event, this year will see a significantly more intense focus the requirements and opportunities the expo will bring to the industry and economy,” says Alwadiya.

“[It has been a factor in the development of] new transport systems, waterfront developments, multibillion-dollar theme parks and affordable housing developments that the emirate needs to accommodate a rapidly expanding population.

“The event will be the biggest to be ever held in the emirate and understandably, it will play an important role in helping shape world opinion of brand Dubai.

“For real estate, hosting the expo will provide an impetus to the industry to enjoy continued growth and [predictably lead to a] surge in demand for accommodation of all types, from labour accommodation to apartments and executive villas for the additional 270,000 or so new job holders.

“It will be this increasing rate of demand that will help stabilise rents and prevent any significant falls [in 2015].”

A new era

This year also marks the start of a new era characterised by strong economic growth, major investments in economic initiatives and infrastructural development, an expanding real estate industry and rapid population growth. “In this respect, the achievements of 2015 will have a huge bearing on the degree of success enjoyed by the emirate over the next decade,” says Alwadiya.

Strong levels of growth and high occupancy levels throughout the northern emirates were recorded in the first half of last year as rates were up to 50 per cent cheaper than similar properties in Dubai, and even 60 per cent more affordable in Ajman, says Stevens.

But the second half saw a downward trend as rents started to go up. “Some tenants also relocated to cheaper accommodation within Sharjah’s borders as landlords were unwilling to negotiate rental rates,” he adds.

Ras Al Khaimah differs from the other northern emirates because of its supply of good-quality master planned communities, including Al Hamra, Mina Al Arab and Bab Al Bahr. These offer beaches, an array of hotels, golf courses and malls, and value for money is the trade-off over travelling long distances.

The popularity of the high-profile seafront and golf communities in the emirate is expected to hold firm this year with stable levels of demand from both sales and leasing customers as they become more established, resulting in marginal rate increases.

Ras Al Khaimah had a relatively good 2014 with a selection of quality properties available at reasonable prices and regulatory transparency on property ownership promoting strong demand. Comparatively, Sharjah’s sales potential was stymied to a certain degree by the absence of clear ownership regulations, says Stevens.

However, this is changing with the introduction of a new law last November, allowing non-GCC expats to own property through long-term lease arrangements. Moreover, Rupak Chatterjee, Principal Urban Planner at the consultancy Ramboll, says the northern emirates seem to follow trends in Dubai and Abu Dhabi.

“Some factors determining the current sluggishness of Dubai’s property markets are [low] oil values, downturn in Russia impacting investments, property oversupply in Dubai and stricter housing finance criteria.

“While Dubai’s property sales market is on a downward roll, rents [are] holding up well, ironically. This makes the more competitive rental offerings of the northern emirates more attractive for vast numbers of expats. The near future promises a healthy upward trend in rental markets in [these areas], with more people [looking for] housing.”

Chatterjee adds that the northern emirates would do well to strategically capitalise on this with greater provision of quality housing and community facilities such as more schools, health-care centres and recreation venues. Such community provisions will support a more sustainable development and healthy property market in the long term.

Source: N.P. Khrishna Kumar, Special to Property Weekly


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