CBRE Dubai Real Estate MarketView Q3 2012

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• Average CBD office rents have fallen for the first time in six quarters
• The relocation of occupiers from poor specification buildings to emerging quality accommodations, has forced some landlords to drop rates in order to attract new tenants and limit exposure to void periods
• Occupancy rates within some secondary office locations have started to improve as areas have become more established and as infrastructure has improved
• The residential market continues to perform well with both apartments & villa rents showing an upward trend during the quarter

OVERVIEW

According to the latest forecast from the UAE Central Bank, the country’s non-oil sector is expected to register 4% growth during 2012 largely due to increased public sector spending in the Northern Emirates.

Both business and consumer confidence are on the rise in Dubai, validated by the ongoing growth in new business licenses and the high number of real estate transactions compared to the same period last year.

The residential market continues to show positive growth after a sustained period of decline post the financial crisis in 2008.

Historically, the third quarter of the year is characterised by low activity levels as a combination of the peak summer holiday season and the Holy month of Ramadan suppresses demand. However, this year the Dubai real estate market has shown more resilience to post further positive growth figures during the period.

Over the past three quarters, off-plan sales have started to re-emerge with a number of high profile product launches within established communities.

This trend portrays a significant shift in sentiment from both investors and developers over the past year, although this is not necessarily seen as a positive change for the Dubai real estate  market.

The emergence of better quality office space is exerting pressure on lease and occupancy rates in ageing properties across the emirate. This is likely to lead to an increase in the availability of incentives as landlords try to retain or attract new tenants amidst growing competition.

Lease rates in the CBD which had remained flat for six quarters have started to see a marginal drop, with average rents now AED1,453/m²/annum, reflecting an overall drop of 4% during the quarter.

A broad range of rents is apparent in the core area reflecting the disparity between high quality dedicated office spaces and inefficient residential conversions.

The drop in CBD lease rates is attributed to a substantial increase in new stock rather than a reflection of the emirate’s current business environment. Information sourced from the Dubai Statistics Centre shows that the number of new licenses issued in the commercial and professional categories increased from 7,001 in H1,2011 to reach 8,676 in H2,2012, representing a 24% growth year-on-year.

Emerging areas which had been witness to an explosion of new office accommodation over the past two years are now finally showing promising signs of stabilisation with modest improvements in the occupancy rates recorded.

This trend has been most apparent in locations such as Business Bay, Jumeirah Lake Towers and Tecom C. However, vacancy rates in these areas remain exceptionally high and above market average as a consequence of historic supply imbalances.

Looking at the level of vacant space and the remaining development pipeline, a widespread return to rental appreciation is unlikely in the near term, although secondary rates have remained relatively flat over the past 12 months, at around AED807/sq m/annum.

Office stock continues on its upward surge, with around 157,000 square metres of new accommodation entering the market during the quarter, of which 45% was held on a strata title basis.

RESIDENTIAL MARKET

The transactional market for residential properties continues to improve steadily with sales rates broadly static over the quarter but rising in some of the more attractive community areas, a prominent trend throughout the year.

According to data sourced from the Dubai Land Department, total residential transactions during the third quarter reached 2,876 as compared to 1,578 in Q3,2011. This represented a 82% increase on the same period last year.

Nearly 62% of all recorded transactions during Q3,2012 occurred in master communities such as Emirates Living, Palm Jumeirah, Downtown Dubai, Dubai Marina, Jumeirah Lakes Towers and Arabian Ranches. In value terms, these areas recorded AED2.74 billion worth of deals representing 84% of the total volume for Q3,2012.

Renewed investor interest in established locations is further validated by recent off-plan launches in Palm Jumeirah, Emirates Living and Downtown Dubai, that have achieved strong absorption rates, albeit with low deposit requirements and limited transparency over the actual unit phasing of sales programmes.

Historically, Dubai real estate markets remain constrained during the summer and Ramadan period. However, this year the market continued on its upward trend with apartment and villa lease rates increasing by around 6% and 4% respectively quarter-on-quarter. However, the increase in well established locations was found to be even higher in some cases.

Average apartment lease rates across residential districts registered growth of around 6% quarter-on-quarter whilst on a year-on-year basis the increase was 7%. The continued influx of quality workforce and the migration of tenants from neighbouring emirates continues to influence occupancy and lease rates in the emirate. Although, it will be interesting to monitor the impact of a recent ruling by the Secretariat General of the Abu Dhabi Executive Council, instructing all employees of government departments and agencies to reside inside Abu Dhabi.

Quality lifestyle, well developed educational and hospitality infrastructure, premium real estate offerings and competitive lease rates in developments bordering Abu Dhabi, such as Dubai Marina, International Media Production Zone, Discovery Gardens, Jumeirah Village, Green Community and Dubai Sports City has over the years attracted a portion of the Abu Dhabi workforce to reside in Dubai and commute to the capital. However, this trend may start to see some reversal moving forward, although the impact of the Secretariat General’s ruling will not be immediate with existing lease commitments in place and a grace period of one year offered to employees.

Rental rates for villa properties have maintained their upward tack as demand remains high. Quarter-on-quarter growth registered around 3% while the year-on-year increase is close to 8%. The highest step up in rents of 11% year-on-year, was for two bedroom properties with larger units seeing lower growth levels.

Outlook

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The Dubai residential market will remain fragmented during the final quarter and into 2013 with mixed patterns of growth and decline still apparent depending on the location and product. Rental rates now appear to be fixed on an upward curve in the majority of sub-markets although for many districts and secondary locations, these increases remain modest at this stage.

The office sector continues to suffer from widespread oversupply and although opportunities exist for quality single ownership properties in prominent locations, the market as a whole remains under stress. A significant overhang of vacant space and a considerable supply pipeline loom over the next few years and will further hamper growth prospects. As a result, rents and occupancy rates will see further deflation over the remainder of the year, although prime assets in central areas will hold firmer, underpinned by solid occupancy performance and higher levels of demand.

As new inventory is delivered in bulk, many older properties are struggling to retain their tenants, with the quality of facilities, parking and building management key determinants of movement to newer buildings. This trend is expected to continue, particularly in and around the CBD as a number of new properties are delivered over the next 24 months.

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