Dubai rents decline to accelerate through the summer

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Today, Phidar Advisory released its Q2 mid-quarter Dubai residential and office research notes. The reports show that residential prices dropped in the first quarter of 2016 and projects further declines. Office rents also declined, particularly Strata office rents, but the market is undergoing fundamental shifts in development strategy.

“Talk of a house price floor is entering the media again, yet our research indicates rent declines are accelerating and will likely continue through the summer” said Jesse Downs, Managing Director of Phidar Advisory. “This will inevitably pull sale prices down,” she added.

The report reviews monthly rent data. Rent declines accelerated in May and indicates housing may become more affordable in the coming months. Since rents peaked in May 2014, the decline has been gradual, equal to a compound monthly growth rate of -0.3%. However, in May 2016, the monthly rent decline reached -1.3%. In a down-cycle, the lowest advertised rent is particularly sensitive to market shifts and can be the harbinger of market trends. By the beginning of June, the lower limits of asked rents decreased by 4.1% compared to the same week in the previous month.

“This is a significant shift in rent trends” said Ms. Downs. “and is an indicator the housing market is about to get significantly more affordable.”

Turning to the office sector, in spite of 21% vacancy, new office developments are underway due to the undersupply of Category A buildings owned by a single owner. Only 4% of current office supply is both Category A quality and a Single Owner Asset (SOA).

“There is plenty of office space available, but most of this space does not meet tenant needs” said Ms. Downs. “This has created long term opportunities for professional developers that can implement high spec, tenant-oriented strategies,” she added.

Gross lease rates and sale prices declined -4.6% and -7.3% QOQ respectively, pushing yields up to a two year high of 7.5%. Declines were driven by large supply expansion in the second half of 2015 – approximately 3 million square feet – as well as the expected completion of a further 5 million square feet before end of 2016.

“Greater affordability in both the residential and office sectors will support businesses and the economy in the short and medium term,” concluded Ms. Downs.

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