Residential rents across Dubai registered no change during the first quarter of 2018, helping improve the annual rate of change to -3.1%, from -7.7% at the end of last year, according to leading international real estate consultancy, Cluttons. This marks the first stable quarter for rents in the emirate in over two years.
Cluttons’ Dubai Spring 2018 Property Market Outlook reports that while the rental market has shown signs of stabilising, the growing volume of off-plan investment stock, destined to be made available for rent after handover, is likely to pose challenges in the future. The ability of the rental market to absorb a high volume of new stock will likely be tested over the next three years, it adds.
Murray Strang, Head of Cluttons Dubai said: “We expect newly completed rental properties to command the attention of tenants, while older and more secondary property will register rent falls. This flight to quality phenomenon will likely result in the creation of a very distinctive two-tiered market. In the short-term, we expect rents to slip by up to 5-7% over the remainder of 2018.”
In the sales market, the first three months of 2018 have shown a decline in average residential values across Dubai, falling by 2.5%. However, more affordable areas such as International City, and Discovery Gardens stood out as bastions of stability in the face of continuing headwinds for the market.
Faisal Durrani, Head of Research at Cluttons, said, “Affordability aside, one of the key factors that has likely contributed to the stability in values in Dubai’s more affordable residential areas is the distinct lack of new supply in these markets. We expect demand to remain firmly centred on new homes priced under AED 800 psf as affordability takes centre stage in the market”.
Of the 134,000 units we expect to hit the market by the end of 2020, just over a third are expected to be priced under AED 800 psf, underscoring the burgeoning affordability issues that the city is storing up for the future. Even if you factor in some slippage in deliveries of circa 20% to 30%, as has been the case historically, supply will still exceed the projected demand resulting from the organic growth in population, which will see 77,500 households created. While one may argue that supply and demand appear to be well balanced, it’s worth remembering that not all new households will purchase a home; many will opt to rent, in keeping with the transient nature of the UAE’s residents. Developers appear to be ignoring this critical issue at present; however, the new proposed law around the restriction of off-plan sales until schemes are 50% complete may well be a blessing in disguise.”
Cluttons expects the new proposed law to curtail off plan sales activity, which has remained surprisingly resilient, despite a cooling in demand levels for secondary market property over the last three years. “At the end of the day, such rules are designed to protect buyers and preserve, and enhance the city’s reputation as an investment hub, especially as new international markets are increasingly being targeted by developers,” commented Strang.
Durrani added, “Developers, both large and small will be forced into rethinking their growth strategies and development pipelines are undoubtedly going to be reviewed. We may at last see an abandonment of the ‘build it and they will come mentality’, with the city seeing more measure, modest and appropriate homes brought to the market that actually matches the underlying demand.”
The report highlights the law may move developers to contain construction costs by cutting corners, which would ultimately impact investors’ confidence in off plan developments. “While this may clearly be an issue, it does present the government with an opportunity to introduce more substantive building regulations around the quality of construction, with a view to raising the warranty offered on newly completed homes, which currently stands at just one year, compared to other international markets, where it is much higher,” added Strang.
Overall, Cluttons expects values to slip by up to 5% or 7% this year and adds that it is quite likely this trend will persist well into 2019, catalysed by the buoyancy of the supply pipeline, before there is the potential for stability in 2020, once the supply pipeline starts to diminish.
Like the residential rental market, office rents across the 24 submarkets tracked by Cluttons have remained largely unchanged during Q1, with just eight submarkets registering falls in upper limit rents of between AED 5 psf to AED 20 psf. On an annual basis, Bur Dubai (-21%) registered the steepest correction in upper limit rents, leaving them at AED 110 psf, or AED 30 psf lower than this time last year.
“We continue to record a range of activity across the board, from companies expanding to some who are consolidating operations – while there are a wide range of new market entrants, some are attempting to regear existing leases. This depth of activity is characteristic of a normal market where rents are neither rising, nor falling rapidly and is indicative of a market that is healthy and mature,” commented Paula Walshe, head of International Corporate Services at Cluttons
“Despite this apparent stability, the city’s global nature means it is, more than ever before, influenced by geopolitical events and tensions. Although we are 4,000 miles away from the UK, Brexit is having quite a unique impact here, with some British occupiers looking to make cost savings at lease renewals. On he other hand, US firms, buoyed by positive economic news at ‘home’ are far more positive in their outlook, with a stream of new entrants from the States being complimented by expansionary activity among many US firms based in the city”, Durrani explained.
According to Cluttons, the somewhat static conditions mean that landlords are keen to demonstrate flexibility for the right occupier, with contributions to fit out costs. The report finds that an increasing number of occupiers are being motivated to relocate purely on the basis of cost, as well as the perception of getting better value for money. Business bay, for instance, has been the recipient of many occupiers departing from Deira and Bur Dubai over the last 18-24 months who have been drawn to this submarket by the attraction of letting relatively more modern and recently completed space.
“However, in some parts of Business Bay, where transportation and pedestrian infrastructure is still playing catch up, the advantages of relocation may be negated by traffic issues as well as the lack of gravitas associated with a more established central business district. The latter of course comes with the added benefit of extensive street level retail and food and beverage outlets, which give rise to a vibrant and desirable place to work. This may well change with the opening of Marassi Business Bay and once the area reaches a certain level of office occupancy.
“The decision to relocate for cost savings is both complex and challenging. Often, regearing existing leases, making more efficient use of existing office space, with flexible break options, may be more beneficial in the long run,” commented Walshe.
“Overall, flat conditions will likely linger through 2018, with any rent falls likely to be contained between AED 5 psf to AED 20 psf. Free zone areas will continue to buck the trend as their position as the most desirable submarkets for most new occupiers remains unchanged and unchallenged. That said, new supply in locations such as the Innovation Hub in Dubai Internet City, Silicon Park in Dubai Silicon Oasis and Brookfield Place in the DIFC will undoubtedly test rental stability in these locations.” Durrani added.
The report shows Dubai industrial rents have continued to drift, following on from a challenging 2017, which saw the market being hampered by an excess amount of speculatively developed supply. This overhang of warehouse stock still remains across all submarkets monitored by Cluttons and is likely to put rents under more pressure as the year progresses.
As highlighted in the report, the market is currently going through a period of normalisation, with occupiers being drawn to more modern, newly completed stock. “Once we work our way through to the end of this upgrade cycle, rents for older stock are likely to continue slipping, which will probably catalyse redevelopment of historic warehousing. Until we get to that stage, rents are likely to slip by up to 5% this year, with any declines contained between AED 3 psf and AED 5 psf,” commented James Lynch, Industrial Agency.
As part of its expanded hospitality sector services, Cluttons has, for the first time, included an outlook on the emirate’s hospitality sector.
The report cites data from Dubai Statistics Centre, highlighting that 10 new hotel properties were added to Dubai’s in 2017, taking the total number of rooms up by 4,854 to a total of 82,733 keys. Overall occupancy levels have also improved, reaching an average of 78% last year; up from 76% in 2016.
Cluttons points out that although the hospitality sector remains a bright spot in the emirate’s property landscape, the rising number of hotel and hotel apartment properties, combined with the rise of Air BnB, is likely to sustain downward pressure on revenue per available room (RevPAR), which has continued to decline in recent months.
“We do expect that occupancy levels will be sustained as the city continues its aggressive drive to deliver enhanced tourism infrastructure, which is materialising in the form of new theme parks, world class hotel resorts and iconic attractions, such as the recently announced QE2 hotel”, said Vikram Malhotra, Head of Hospitality Advisory for Middle East.