Saudi Arabia, Dubai top yields in realty market

Average yields in Saudi Arabia's real estate market in the range of seven to 15 per cent are the highest in the GCC followed by Dubai's yields of nine to 14 per cent, new data has shown.

Abu Dhabi property comes with a yield ranging between eight and 12 per cent while Qatar is between seven and eight per cent, Colliers International research has revealed.

"The real estate sector in Saudi Arabia is expected to recover the fastest among all other GCC real estate markets due to higher liquidity position than others," said Ian Albert, Regional Director, Colliers International. "Saudi Arabia is currently resisting the real estate downturn more than other GCC markets," said Albert.

John Davis, Chief Executive Officer Middle East, Colliers International, said within the UAE, the Abu Dhabi market would recover faster than the rest of the emirates.

Dubai, for a long time taken as the measure of the Gulf's real estate market, experienced the first signs of the downturn in post-summer 2008, which was then firmly established during the fourth quarter of 2008 into the first quarter of 2009," said the Colliers report on the GCC Real Estate Overview for the second quarter of 2009.

"Abu Dhabi has a better liquidity position than the rest of the emirates and hence will recover faster than the other markets. From an investment perspective, Dubai's real estate sector is perceived far more risky than other GCC markets," said Davis.

The impact of the global liquidity crisis on demand in the GCC's most advanced real estate market has been two-fold. On the one hand, transactions have slowed to a trickle due to negative investor sentiment and a lack of available financing. On the other hand, additional supply that was scheduled for delivery in 2009 has been met with a downturn in end user demand, due to corporate downsizing and visa regulations.

The extent of the impact felt by each of the GCC's property markets is dependent upon three primary factors; the level of global integration, the benchmark price of oil/gas revenues set in that particular state's fiscal budget and the level of property speculation prior to September, said the Colliers report.

Also, currently the various regional markets are at different stages of reaction dependent upon the interrelationship of the key factors.

However, most markets, except for Saudi Arabia, are suffering from a chronic lack of liquidity.

There has been, in Dubai and Abu Dhabi for example, a limited reintroduction of consumer finance with some banks tentatively re-entering the residential mortgage market. However, the two largest participants, Amlak and Tamweel, who between them represent 50 per cent of the market and who are in merger discussion with one another, have as yet remained on the sidelines.

The Colliers report said the primary change within each of the real estate markets is the importance of the professional investor.

"These investors look at real estate returns solely as a means of revenue and, in time, capital appreciation – removing some of the hedonic factors that end-users attribute to property values," said Albert.

Historically the market was speculator driven, distorting values as the hold period was significantly shorter than in the case of either end-users or investors.

Rental yield as a determinant of price had become secondary to short-term, speculative gains. As the markets have cycled through the speculator and end-user phases, it is the professional investors' requirements that now need to be satisfied and addressed.

To stimulate the GCC markets, aside from improved liquidity and sentiment, there has to be a convergence of purchasers' and sellers' prices. This gap, known as the price-yield gap, is still some way from parity due to a lack of any significant number of transactions and the reluctance of sellers to rationalise portfolios and assets in the light of global changes.

Having previously been a major pillar of property values, the diminution of the importance of capital appreciation as a factor of value has inevitably had to be compensated for by a rise in the cash-on-cash return. Further price depression is being contributed to by the on-going fall in rental rates. Investors required yields have risen by an average of 25 per cent to 40 per cent to accommodate the risk borne by the investor of falling rentals and the removal of capital appreciation as a yield component.


ABU DHABI

In Abu Dhabi, according to the Colliers report, the asking prices for off-plan office space in Al Reem Island in Abu Dhabi have increased despite adverse market conditions, though secondary market transactions have remained depressed since the fourth quarter of 2008. Less than 5,500 square metres of new office space was delivered in 2008 in Abu Dhabi, though an overall supply glut is still anticipated by the fourth quarter of 2010.

Aside from introducing international standard leases of between five and 14 years, and providing more reasonable parking allocations, the standard of space available within these developments is expected to be category A. The availability of institutional investment-grade office stock will remain limited, however, as these developments are only marketed for leasing at present and are planned to be retained by the respective developers.

Office space under construction on Al Reem Island has been sold primarily under strata title on a piecemeal basis, further constraining the stock of investment grade buildings for sale. Despite the recent decrease, asking prices have stabilised at an average of $6,700 (Dh24,602) per square metre per annum. "We expect total office space supply to increase by 67 per cent over the next three years, assuming developments currently under construction complete to schedule," said Albert.

Almost 241,000 sqm of new office supply is delayed stock which was meant to be completed in 2007 and 2008, heightening the risk of a market glut at a time when demand has softened.

"Accordingly, we expect a short-term oversupply of office space by fourth quarter of 2010 in Abu Dhabi," said Albert.

Current asking rental trends in Abu Dhabi indicate that a peak rental price was reached in the first quarter of 2009, following an increase of 13 per cent over the fourth quarter of 2008. Preliminary evidence from March indicates that new rental transactions have stabilised in Abu Dhabi at an average of $570 per sqm in the high-end segment and $520 per sqm per annum in the middle-income segment.

Based on demographic growth projections, the report from Colliers International estimates that Abu Dhabi will require over 120,000 additional residential units by the end of 2012, when factoring in current unmet demand of 70,000 units of which 50,000 units are required for the middle-income segment.

Rents are to remain static in the short term, given that we expect less than 15,000 new units to be delivered to the market in the next two years. This new supply should absorb current unsatisfied demand, assuming our base case scenario where Abu Dhabi does not suffer the same expatriate "unemployment-emigration" paradigm currently being experienced in Dubai. The achievement of demand-supply equilibrium – for the high-end segment, but not for the middle-income segment based on existing development patterns – is expected between 2011 and 2013, depending on the volume and phased delivery of residential units over this period.

DUBAI

According to a survey conducted by Colliers, less than 15,000 new units are expected to be delivered to the Dubai market between 2009 and 2011, due to downward revisions of stock by 65 per cent. Development of affordable housing is crucial to meet unsatisfied demand for housing units serving the middle income segment, said the report. Rents are expected to remain static throughout 2009, following asking rental increases of 48 per cent between 2007 and 2008, as prospective tenants opt to commute from neighbouring Sharjah.

The impact of the global financial crisis on Dubai has manifested itself in widespread corporate downsizing in terms of both staff numbers and operational spread. The financial services, real estate and construction industries have been particularly hard hit, but support industries such as marketing, public relations and information technology have also suffered under the ripple effect. This has resulted in reduced office occupancy levels in a market that saw a 45 per cent increase in supply between 2007 and 2008.

An Office Occupancy Survey conducted by Colliers International in the first quarter of 2009 indicated that average demand for unit size has shrunk from an average of 750 sqm previously to 300 sqm of area currently.

The result has been a rapid shift from a landlord-driven to a tenant-driven market with reductions in asking rentals, attractive payment terms, offers of rent-free fitout periods as inducements.

Newly completed buildings in areas such as Jumeirah Lake Towers (JLT), Tecom, Silicon Oasis and Outsource Zone had an average occupancy ratio of 40 per cent. It must, however, be explained that, in calculating this average, the data included flag-ship, purpose-built office buildings with an 80 per cent occupancy alongside office buildings launched without any pre-letting, and which had a 20 per cent occupancy. The result is that asking rentals have dropped by as much as 45 per cent year-on-year in many cases.

Residential property prices in Dubai peaked in the second quarter of 2008 but the news of a looming global credit crisis subsequently curbed investor appetite from the summer of 2008 onwards. This, coupled with increased market supply, initiated a slowdown in capital value growth in the third quarter of 2008. As liquidity shortages in the banking sector took hold and banks clamped down on lending to both consumers and developers, the market went into sharp decline during the fourth quarter of 2008. Announcements of projects being indefinitely deferred or cancelled further fuelled negative investor sentiment and the continued decline in prices into the second quarter of 2009.

Corporate downsizing and the resultant departure of large numbers of expatriates from the UAE, coupled with growing job insecurity and reduced consumer confidence amongst the remaining population has led to reduced consumer spending in the emirate.


Falling rental market

QATAR

The office market in Doha can be split into three distinct categories; namely the primary market, which is the new high-rise developments in West Bay, the secondary market, which is the ribbon of developments along C Ring Road and Grand Hamad Street and finally the tertiary market which includes areas such as the A, B and D Ring Road.

In the West Bay area, supply has continued to grow with the completion of new developments, but absorption rates have been low. The reasons for this are varied. In the first instance, landlords do not want to lease space to government departments because of the low rentals they offer (the Qatar Government generally leases space rather than develop their own properties, so they are a very large and important tenant in the Doha market). Typically, the rentals paid by the government will fall into a band ranging between $530 and $590 per sqm whilst the asking rentals for Grade A office space is between $720 and $820 per sqm. Tenants are reluctant to commit to new lease contracts in a falling rental market. Rental rates for Grade A space have softened by between 10 per cent and 15 per cent over the past quarter and the general expectation is that rentals will decline further.

RIYADH

Office supply glut delivered in 2008 along King Fahad Road forces rental rates to drop by 10 per cent. As market conditions continue to shift from landlords to tenants, building owners are offering easier rental payments schemes as a means of incentivising and attracting occupiers. Rental rates grew by 13 per cent up until the third quarter of 2008. Currently, King Fahad Road enjoys premium rental rates reaching an annual average of $400 per sqm for primary grade office space and $226 per sqm for secondary grade products. Average occupancy rates until the first quarter of 2009 remains robust averaging 91 per cent across primary and secondary CBDs.

JEDDAH

With the inception of the Foreign Ownership Law, Jeddah's residential market has slowly begun moving away from a rental market to an owner-occupied market. In the first quarter of 2009, average sales price of residential units as part of large-scale developments reached $2,300 per sqm. With the decline in construction costs and present market conditions, land prices in Jeddah is expected to slightly soften. As of first quarter of 2009, lease rates in Jeddah reached an average of $62 per sqm per annum. Rental and sales prices in the city have been reported on an average growth reaching 30 per cent since the third quarter of 2008.

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