Dubai Property Market: The soft landing

Rental pricesRental prices in Downtown Dubai have resisted the general slowdown seen in several other areas of the emirate l Image Credit: Supplied

Rental prices for residential real estate in Dubai have declined at the start of 2016, especially for one-bedroom apartments, according to the recently updated rental index of the Dubai Land Department’s Real Estate Regulatory Authority (Rera). Areas such as International City, Jumeirah Village, Discovery Gardens, Greens, Jumeirah Beach Residence, Dubai Marina and the Palm Jumeirah have now become cheaper with rents dropping 2.3-14 per cent, while Business Bay and Downton Dubai have seen an increase of 2.7 per cent and 2.4 per cent respectively. The total number of new villa lettings had also declined, while volumes were flat in the apartment sector according to the Emirates NBD tracker in October. Although the segment has seen higher rental prices in the past quarter, the rate of price rises has eased since the summer.

The volume of sales has also declined over the past quarter with sellers reluctant to reduce prices, while buyers remain cautious given the economic uncertainty. “After significant growth across average sales prices over the past three years, Dubai’s residential market experienced a natural slowdown and market correction in the first half of 2015,” explains Mansoor Ahmed, Director of real estate firm Colliers. “Contributing factors include devaluation of the Russian ruble, weakening oil prices, mortgage cap announcement and a decline in foreign investment.”

Micro-market overview

According to Colliers, average rental rates across Dubai have experienced a slowdown of approximately 3 per cent in the first half of 2015. “This slowdown is the average across Dubai, and varies significantly from development to development,” says Ahmed. “It is likely that the high-end residential market is expected to continue experiencing a market correction, while the performance across more affordable middle-market housing is likely to remain positive.”

The biggest declines were recorded by three bed-room villas in areas such as Springs, Jumeirah Village, Al Reem, Falcon City and The Villa, where rents slipped by nearly 6 per cent between January and September 2015, according to property consulting firm Cluttons’ Residential Market Outlook Winter 2015-16.

“Dubai’s economy is now more intrinsically linked to the global economy than ever before and is slowing in line with global growth,” says Faisal Durrani, Head of Research at Cluttons. “However, with mega infrastructure projects both linked to the hosting of the World Expo 2020 and [efforts] to boost growth still ongoing, the medium-term prospects for the residential and commercial markets are brighter.”

While new enquiries for apartment rentals continued to rise, it remained slower compared to the first half. New enquiries for villa rentals were lower on average in October. Around 2,000 new units were completed in the second quarter, mostly in leasehold areas. The Emirates NBD Dubai Real Estate Tracker reported that more than two-thirds of consumers polled said they paid more rent for leases renewed in the August-October period, higher than the August survey. The report added that households remain much more positive about “both current property values and the outlook over the next 12 months than estate agents”.

Marginal drop in rents

It is quite normal for rentals to remain more stable than prices in most real estate markets and this is being witnessed in Dubai. While property prices are more driven by investor sentiment, which reverses quickly, rental demand is more resistant as it is end-user driven and changes with a lag time. Experts point out that the main reason for this is that prices were exaggerated (upwards and downwards) by speculative investors; meanwhile, rentals were more closely linked to long-term end-user demand, which tends to be more stable over time. Lower transactions in the Dubai residential real estate market are thus attributable to a significant number of speculators who exited the market.

The increase in transaction fees and more stringent mortgage guidelines have also contributed to the lower transaction volumes. The impact on rents has, however, been only marginal.

“Rental rates are driven by the need for accommodation. With population growing at approximately 5 per cent per annum, it is unlikely that Dubai will experience a significant slowdown in rentals. However, given that the market is becoming more competitive, developments offering quality, affordable units in a well-serviced community are expected to perform better compared with other developments,” says Ahmed.


Forecast for 2016

Market performance in terms of average sales prices and rental rates are expected to remain subdued as tenants and investors have become increasingly price sensitive.

This is expected to be reflected by the performance of developments, where more affordable communities will experience higher demand, and less-affordable communities are expected to witness a correction. “We expect rents to soften this year, led by economic conditions that are readjusting in the light of persistent low oil prices and revision of government budgets,” says Declan McNaughton, Managing Director of Chestertons UAE. “As indicated by the latest Rera report, rents are expected to correct 11 per cent. We expect the rental correction to be higher in secondary locations as supply increases. We expect the rents to adjust down between 10 per cent and 15 per cent from current market levels during the year.”

Also, high rental yields are expected to encourage buyers to return to the market. “While the Dubai residential market has seen a fall of 10-15 per cent in sale prices over the past year, the rental market has performed more strongly, with average rents remaining largely unchanged,” says Craig Plumb, Head of Research at JLL. “This has resulted in an increase in rental yield and could encourage more buyers this year. Rents are expected to trend down by 5-10 per cent over the year as tenants have increased options.”

Rents in established areas, particularly apartments in Jumeirah Lakes Towers apartments and villas in Arabian Ranches, are likely to remain unchanged this year. The overall average is likely to be driven down by the release of more projects in Business Bay, Dubai Sports City and Dubai Motor City.

A number of projects initially scheduled for handover in the second half of last year has been delayed to 2016-17, as the market continues to soften and developers phase projects in line with demand.

“In a market as volatile as Dubai, many factors can influence the direction of real estate,” says Dima Isshak, Research Manager at Cavendish Maxwell. “Buyers are taking more time to make purchase decisions and wait out for more options with an abundance of off-plan projects to be delivered in the coming years. We have seen many development completion dates delayed to 2016-17. Developers will closely monitor the absorption rates and sale price movement in the market to make strategic decisions.”

A slight turn around in rents is expected from the end of this year onwards as the infrastructure development ahead of Expo 2020 will fuel job creation, thus moving demand upwards.

Source: Manika Dhama, Special to Property WeeklyPW


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