Landmark Advisory, one of the leading real estate companies in the Middle East, today released its Q3 2010 Dubai and Abu Dhabi Real Estate Report, which identifies that accelerated rent declines are helping to improve affordability in both emirates. The latest quarterly report, available at www.landmark–advisory.com, forecasts that declines in residential and office rents will help make the UAE a more attractive place to live and work.
According to Ms. Jesse Downs, Director of Research & Advisory Services at Landmark Advisory commercial office supply is set to virtually double in Dubai and Abu Dhabi over the next 3-4 years: “New commercial properties coming online will infuse the market with higher quality office supply and drive down office rents, making both cities more attractive centers for business. The market now needs stimulus initiatives to leverage the improved affordability and to encourage the growth of industries that will diversify the local economies and fill the expanding vacancies projected over the next 3-4 years.“
Dubai
Residential oversupply in Dubai is also set to peak in 2012 with vacancies projected at 25%-28%. Meanwhile the commercial oversupply will continue to grow, with up to 45.9 million square feet of empty office space by 2014. Vacancies are expected to reach 53% in 2011 and peak at 58% in 2013/2014.
In Dubai, there has been a slight reversal of the coastal-inland villa bifurcation, however, coastal properties have maintained significant premiums. “The coastal-inland bifurcation abated marginally in Q2-10 with steeper sale price and rent declines in coastal villa communities compared to inland communities. Nevertheless, coastal communities still maintain rent premiums up to 61%, depending on the unit type,” said Ms. Downs.
According to Landmark Advisory, distressed sales are leading to accelerated price declines. “As prices are falling faster than rents, this is pushing up yields,” explained Ms. Downs. “This is positive for the market as higher yields are required to attract investors wary of the weak market fundamentals and perceived downside risk. At the moment, financing remains limited, which means investors continue to dictate market trends.”
The report found that sale volumes slowed in Q2-10 compared to Q1-10; sale price declines accelerated to 5.0% for villas and 5.8% for apartments in Q2-10, a result of limited mortgage-backed transactions, particularly for apartments, which, based on Landmark’s transactions, were almost wholly cash transactions. In addition, limited buyer interest has forced motivated sellers to slash price expectations during the slower summer months.
In terms of leasing, villa rents fell 4.4%, while apartment rents fell 5.8% during Q2-10. Commenting on this trend, Ms. Downs said: “Amid a strong sale price decline, the ongoing yield compression trend that has been witnessed since early 2009 reversed in Q2-10. Net villa yields increased from 4.9% to 5.7%, while apartment yields increased from 5.4% to 7.4% based on actual sales and rental transactions.”
Abu Dhabi
Quality issues in Abu Dhabi may lead to rapid reshuffling of the market as the new higher quality supply is delivered, according to Landmark Advisory’s latest report: “Only 20% of pipeline properties advertised as high-end will actually meet that standard, and short-term price/rent performance of medium quality deliveries will behave as though they were higher-end. However, we predict that this trend will be temporary, with performance weakening and not recovering once the truly high-end developments are delivered,” said Ms. Downs.
Sales demand for Abu Dhabi’s investment zones has remained weak due to further project delays and the lack of appropriate regulatory framework, which in turn has caused concern among potential owner occupiers and investors. Current sales demand in the capital is price-sensitive and largely focused on Marina Square, according to the Landmark Advisory report.
Rental decline sharply increased in Q2-10 with an 11% decline compared to the marginal 3% decline observed in Q1-10. “These declines are supply driven following new on-island deliveries such as Khalidiyah Palace, Al Aryam Tower, Silver and Wave Tower,” explained Ms. Downs. “Static sales prices and declining rents have resulted in further yields compression; currently at 5.1%, and we anticipate that yields will continue to compress in the short term.”
Turing to the commercial office segment, sale prices have remained stable while office rents fell 10% since March 2010. Offices in the City Center and Tourist Club Area witnessed the biggest declines – up to 20% – especially for low-quality space. “Stagnant sale prices are attributed to virtually non-existent transaction volumes and sticky asking prices,” concluded Ms. Downs. “In the leasing market, office rents will continue to decline on the back of rapidly expanding office supply; in 2010 alone there will be a 32% increase in supply.”
