'Residency visa clarity to boost realty sector'

Resolving issues linked to the residency status of expatriate property purchasers will provide a floor to the Dubai realty market, according to a new report.

"Measures such as a removal of the current link between employment and residency status, and a clarification of the law providing for residency for expatriate purchasers may be required to provide a floor to the market," Jones Lang LaSalle (JLL), a real estate advisory firm, said in a report titled "Dubai City Profile – A Review of the Dubai Property Market."

The report expects activity in the residential sector to slow further in the first half of the year as nervous investor sentiment coupled with lower rental rates will encourage residents to lease rather than buy. As investors continue to adopt the "wait and see" approach, landlords are also becoming more flexible with payment terms, accepting cheques on a quarterly or even monthly basis.

The government is taking various measures to try and alleviate the effect of the global financial crisis such as the rental cap has been replaced by a rent freeze. Rents can only be increased where they are significantly below the average as set out in Real Estate Regulatory Agency's recently launched index.

According to JLL, the residential market is currently undergoing a price correction and rental yields have fallen from around nine per cent to six per cent over the past six months. Since the third quarter of 2008, asking prices for both villas and apartments have seen an average decrease of 10 per cent to 20 per cent, but prices of villas have declined by less than those of apartments due to their limited supply.

"Given the absence of speculators and the inability of end users to raise finance, it is not surprising that transactional prices have declined even further over the past six months, with transaction prices typically 30 per cent to 50 per cent below asking prices."

Rental rates registered an average increase of around 20 per cent for both villas and apartments in the third quarter, but decreased by four per cent to eight per cent in the fourth quarter.

"We estimate that market-wide physical occupancy currently averages around 70 per cent for residential units that have been completed and handed over, although this figure is significantly lower in some projects."

According to JLL, approximately 32,000 new residential units were completed in 2008, bringing the total residential stock across to around 253,000. The majority of completions were in projects such as Discovery Gardens, International City and the Marina Promenade.

"If all the announced residential supply between 2009 and 2011 were to complete on schedule, an additional 190,000 new units would enter the market. Declining demand, tight liquidity and reduced financing options are making it increasingly difficult for developers to complete announced projects on time."

Project delivery schedules too have been revised with several iconic residential developments such as Palm Deira and Jumeirah Gardens have either been delayed or put on hold indefinitely.

JLL estimates that cancellations and construction delays will reduce total announced supply by more than 50 per cent, with around 90,000 additional units entering the market between 2009 and 2011.

According to Real Estate Regulatory Agency's statistics, 29,319 residential units were delivered in 2008, as 31,003 and 43,880 units are set to enter the market in 2009 and 2010.

The global financial crisis has also deeply impacted demand dynamics, forcing most speculators out of the Dubai residential market in the second half of 2008. The lack of mortgage finance and reduced loan-to-value ratios (down from 90 per cent to 60-70 per cent over the last six months) have resulted in a major shift towards end users over the second half of 2008. "The past six months saw a drastic drop in the volume of sales transactions as speculators and investors have been largely absent from the market."

Data from the Dubai Lands Department show that the number of sales of residential units has declined by almost 40 per cent between October 2008 and January 2009.

Office market

An additional 4.7 million square feet of office space was released into the market in the second half of 2008, bringing the total stock to 29.5 million square feet. This is an increase of almost 20 per cent over six months.

Projects completed within this period include The Galleries in Jebel Ali, Cayan Business Centre, Executive Heights, and Grosvenor Business Tower within Tecom, and the Reef, HDS, Tamweel and Silver Towers at Jumeirah Lake Towers.

There has been a major correction in future supply levels over the second half of 2008, with approximately 50 per cent of the proposed supply for 2009-2011, now considered unlikely to come forward over this period, the report said. "As a result we have reduced our estimate of total additional supply over the next three years from 70 million square feet to around 34.6 million square feet."

Projects announced as recently as October 2008 such as Meraas's Jumeira Gardens and Nakheel Tower have already been scaled back, delayed or phased over a much longer period in view of the prevailing market conditions. Work on many developments already under construction in projects such as Jumeirah Lake Towers and Business Bay has been placed on hold and few projects where construction is not already underway are unlikely to commence in the current environment.

The lack of liquidity is likely to especially impact small, single asset developers. This is expected to result in better-delivered quality as a consequence of the heightened competition amongst the remaining large, well-established players in the market, JLL said.

Active demand for new office space has weakened over the past six months. Many companies have delayed previously announced expansion plans, while others have reduced the size of their existing operations.

With the completion of an additional 4.7 million square feet of office space in second half of 2008, the overall vacancy rate across the Dubai market has doubled from seven per cent in July to around 16 per cent at the end of 2008. Due to the special status of the free zones, there are higher vacancy in areas such as Tecom and Jumeirah Lake Towers/ Dubai Multi Commodities Centre.

While demand has definitely slowed, there were a number of notable leasing transactions completed with the Boston Consulting Group (BCG) occupying around 25,000 square feet within The Office Park at Tecom and Areva leasing 75,000 square feet within the Acico Business Park in Garhoud, over the past six months.

There has been a growing divergence in rentals between prime and secondary locations over the past six months. Average prime net rents in the commercial business district (CBD) recorded an increase of approximately 10 per cent over the last six months of 2008, rising to Dh550 per square feet per annum. This increase was recorded mainly in third quarter, with a minimal change in average rentals in the final quarter in the CBD.

Conversely, average rents for Grade A space in secondary locations, such as Tecom, Jumeirah Lake Towers and Jebel Ali decreased by approximately 20 per cent over the second half of 2008. The average asking price for prime freehold office property increased over the past six months by around 32 per cent to Dh4,900 per square feet.

Moreover, landlords have become much more flexible in negotiating transacting prices, with the gap between asking and actual prices widening to around 30 to 40 per cent. As a result actual prices for prime office space declined over the second half of 2008 and this trend has continued into 2009.

JLL believes market dynamics will continue to shift in favour of tenants as more new stock enters the market in 2009.

"Rents are likely to decline in most locations over the first half of the year while the future supply will continue to decline. Completions are likely to exceed demand in 2009, resulting in a further increase in vacancies, particularly in poorer quality buildings and those in secondary locations."


Retail market faces challenges

A combination of tightening credit standards, coupled with a lack of job security and an increase in consumer saving are likely to result in a challenging retail market in 2009.

"The market dynamics will start shifting in favour of tenants as rents soften and we see an increase in vacant units in some centres. Besides, cancellation and delays are expected to impact projects in the planning stage, reducing future supply levels," JLL said.

Average rental levels continued to increase in the second half of 2008, albeit at a slower pace of two per cent to five per cent in contrast with the six to nine per cent range experienced during the first half of 2008.

"With further developments in the pipeline, a weaker economic growth outlook and the likelihood of increased vacancies, we expect average retail rentals to fall this year," the report added.

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