Dubai rents falling; oversupply fears ruled out: Report

Rents in Dubai have been falling since the fourth quarter 2014 and have continued to slide marginally in the first quarter 2015, according to Cluttons.

“Residential rents have continued to slowly soften. During Q4 2014, rents dipped by -1.9 per cent, leaving the total rental value growth last year at a marginal 0.4 per cent. This has however been completely negated by the -0.4 per cent dip in average rents during the first quarter, which now leaves rents -1.5 per cent below this time last year,” the real estate consultancy said in its Spring 2015 update on the emirate’s real estate market.

It said apartment rentals declined by 0.3 per cent while villas dipped by 0.5 per cent in the first quarter, but many households are “yet to feel the benefit of this.”

“With the Rera rent index system yet to evolve into a complex rental matrix that factors variables such as views, size of units, age of the building, etc., it will continue to lag reality, leaving tenants somewhat constrained by a rental index that does not fully reflect market conditions,” the report said.

Emirates 24|7 reported earlier that rents for apartments across Dubai remained stable as per the second update of the official rent index. We have reported that the new index was planned for release this year, but no update has been released by the Dubai Land Department.

Though previously global real estate consultancies had pointed to an oversupply in the residential segment, Cluttons said supply threat may be over exaggerated though supply levels will edge up, leading landlords of the growing wary of the threat of longer void periods.

“This may trigger a period of ‘off-grid’ deals, where landlords and tenants agree to rents that are not in sync with Rera’s recommendations,” it added.

Oversupply fears exaggerated

The report states that over 12,600 units are expected to come to market by the end of next year with another 15,800 completions scheduled between 2017 and 2018.

“The risk of an oversupply appears to be minimal, given the expected growth in population of just under 400,000 over this period. However the supply-demand equilibrium is likely to be maintained as the population grows in tandem with the rising number of completions, suggesting that any strong turn around in rental value growth is unlikely, given the current projections,” its elaborates.

Besides as the sources of current and pipeline tenant demand remain robust and underpinned by the growth in new jobs, linked to both economic growth and diversification, and the reverse migration from Sharjah, Cluttons believes the “current stabilisation in rents is expected to persist.”

In terms of price growth, house prices increased an average of 3.4 per cent in 2014 compared to a whopping 51 per cent rise in 2013. However, headwinds in the form of an upward creep in completions, the delayed impact of the implementation of the federal mortgage cap and the general dent to sentiment as a result of the slowing rate of house price growth have persisted into 2015, the report states.

Prices fall

The first quarter 2015 saw overall prices fall by -0.8 per cent, taking the annual change to -0.5 per cent, which has left values 19.4 per cent below the third quarter 2008 market peak.
 
Villa prices are expected to continue slipping by 2 to 4 per cent per quarter over the second half of the year, apartments, which have shown more resilience, are also expected to weaken by 0.51 per cent each quarter this year. But the lure of 6-8 per cent yields and the growing proportion of apartments priced in the Dh300,000-500,000 bracket is likely to help dampen any sharp declines.

Despite this sluggish outlook, Cluttons asserts demand is expected to remain “very stable in the medium to long term”, particularly as the government continues to drive economic diversification that will fuel job creation levels.

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