'Dubai rental correction will need to go on'

'Dubai rental correction will need to go on'Image Credit: Supplied

There has been a slight correction in the (Dubai) rental market. Average rentals have witnessed a fall of approximately 3-4 per cent in the first-half of the year, a trend attributed to general weakness in the market, which is affecting the sales segment as well.

Many anticipate it as a short-term phenomenon rather than a long-term market adjustment.

This is particularly true for the landlords/property owners who are not releasing their properties in the market at current rentals as they consider it to be ''too low'' and they do not want to be locked in lower rentals for three to four years.

Landlords, therefore, prefer to keep their property vacant rather than let it out at current market rentals.

Artificial scarcity

This behaviour on behalf of the property owners creates an artificial scarcity and obstructs the functioning of the market by keeping units off it. While the number of properties on offer may have reduced rental returns, it does not change the supply situation in the real sense.

All it creates is a false feeling of shortage which sends the wrong signals to the market in terms of the supply-and-demand situation.

Most landlords tend to view such ''rental increases'' as a long-term trend and ''correction'' as a short-term anomaly and hope for the market to return to higher levels before renting their property out.

The ''wait and watch'' strategy adopted by landlords serves them little as the property is left untenanted for three to four months (sometimes even more) and reduces the income-generating ability of the asset.

It has to be noted that the potential rental income from an asset is influenced by economic conditions as much as the asset itself. If the current economic conditions do not allow residents to earn and save over and above the rentals, then they are surely going to get depressed.

A variable such as cost of living also has an impact on a tenant's rent paying capacity. Current rental levels in the emirate are unsustainable, particularly in older areas such as Bur Dubai and Karama.

New supply wave

Rental levels in newer areas are also being influenced by a new wave of supply that is expected to be delivered by the end of the year. This will include areas such as Business Bay, Dubailand, Sports City and Silicon Oasis. With these new units coming in, it can be safely assumed that rentals are adjusting to the new market rates and the market correction is not in its final stage yet.

Rental levels before the 2008 correction were really what one can consider as the peak for Dubai property. The market was then driven by shortage of supply due to unexpected increases in the population and a lack of new supply.

However, post the 2008 correction, the market established a high — but lower than previous peaks. For instance, during 2007, a one-bedroom in Bur Dubai or Karama could easily be leased out for Dh90,000 per annum. However, it fetches around Dh70,000 in current market, which is already considered a ''peak'' and therefore implying that the market has incorporated excess supply with the adjustment in rentals.

This year we are expecting a second wave of project deliveries that will lead to a similar adjustment in the rental market. With 20,000 units to be delivered in 2015, rental adjustments are here to stay.

It is therefore a self-defeating investment strategy to leave the property vacant in ''anticipation'' of higher rentals. The best strategy under current conditions is to go with the market trend as timing the market can be futile and short-sighted.

Here's the renter's manual at your finger tips

Source: Robin Teh, Special to gulfnews.com

The writer is the Country Manager at Chestertons Mena


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