Rents fell 13% in Q3 and likely to fall further

Dubai’s short-term lease rates will continue their decline throughout the fourth quarter and into the next year as the demand and supply imbalance across the emirate’s property sectors will continue, consultancy CB Richard Ellis has said.

“The supply and demand imbalance is expected to keep rentals depressed in the near future,” Matthew Green, Head of Research & Consultancy UAE, CBRE, told Emirates 24|7.

The mandatory 5 per cent housing tax, which comes into effect across the emirate from January 2011 will add to investor woes, he said. “Some areas are already paying the tax and so it wouldn’t affect them,” he said. “But for other investors, the 5 per cent additional levy over and above the already high maintenance charges means that yields get shaved off further,” he said.

“It might not be ideal time for such a levy,” Green suggested. The Emirates housing tax of 5 per cent will become mandatory for all residential units from January 2011. The calculation of the rate is based on the annual lease amount while for properties being used by investors in freehold areas, it will be based on the average RERA Rental Index.

“Properties which remain vacant in freehold areas are also subject to the tax, which means investors have to shed extra value on top of service charges. At a time when levels of market activity are already low, this ruling is likely to act as a further deterrent to investment in the residential market,” CBRE said.

Asked if the government could somehow catalyse recovery in the sector, Green said that extending the validity of the visas for property investors from six months to “perhaps 2-3 years might help.”

“The residential sector is expected to feel further aggravation during the fourth quarter of 2010 and the first quarter of 2011, with completed properties awaiting entry into the market from the developments of Business Bay, Dubai Sports City and Jumeirah Village,” CBRE said in its latest Dubai MarketView report.

 “Downward pressure on leases continues across virtually all areas of the Emirate,” CBRE said. The consultancy said average rental rates for one, two and three bedroom apartments across the 12 locations its surveyed “have dipped by an average 13 per cent on a quarterly basis, whilst on an annual basis they have declined by 18 per cent.”

According to CBRE data, “[t]he biggest drop has been for one bedroom units with a 20 per cent decline. This can be attributed to the relocation of tenants to bigger unit types as lease rates have fallen away and become more affordable.”

The firm added that the situation in the office market is “somewhat worse”, with 65 per cent of the total expected office space for 2010 already in the market and the remainder to enter during the fourth quarter.

“Office lease rates experienced a further decline across all business districts during the quarter [Q3] as new supply hit the market,” CBRE reckoned. Dubai prime office rents in Q3 fell by 5.4 per cent, the most in the EMEA (Europe, Middle East and Africa) region, CBRE said in a separate report.

Weak prime commercial property rental levels across most markets in EMEA saw yields fall slightly in the third quarter of 2010, CB Richard Ellis said in that report. Yields for the office, retail and industrial sectors fell between 7 and 11 basis points over the period, while rents held steady in 116 markets, against 21 markets where rents rose and 13 where they fell, a CBRE report showed.

“While prime rents in many markets have now stabilised, there is an absence of widespread upward momentum. This is one of the factors now tempering the downward movement of yields,” said Richard Holberton, CBRE’s director of EMEA Research.

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