Oversupply in residential market to peak in 2012

Landmark Advisory puts home vacancies at between 25 and 28 per cent

Residential oversupply in Dubai is set to peak in 2012 with vacancies estimated at 25 to 28 per cent, Landmark Advisory said today.
Commercial oversupply will continue, with up to 45.9 million square feet of empty office space by 2014 and vacancies likely to reach 53 per cent in 2011 and a high of 58 per cent in 2013/2014, the real estate consultancy said in its third quarter Dubai and Abu Dhabi real estate report.
In Dubai, there has been a slight reversal of the coastal-inland villa bifurcation, however, coastal properties have maintained significant premiums.
“The coastal-inland bifurcation abated marginally in Q2-10 with steeper sale price and rent declines in coastal villa communities compared to inland communities. Nevertheless, coastal communities still maintain rent premiums up to 61 per cent, depending on the unit type,” said Jesse Downs, Director of Research & Advisory Services at Landmark Advisory.
Distressed sales are leading to accelerated price declines. “As prices are falling faster than rents, this is pushing up yields,” Downs said.
“This is positive for the market as higher yields are required to attract investors wary of the weak market fundamentals and perceived downside risk. At the moment, financing remains limited, which means investors continue to dictate market trends.”
The report found that sale volumes slowed in the second quarter of 2010 compared to the first quarter; sale price declines accelerated to five per cent for villas and 5.8 per cent for apartments in second quarter, a result of limited mortgage-backed transactions, particularly for apartments, which, based on Landmark’s transactions, were almost wholly cash transactions.
In terms of leasing, villa rents fell 4.4 per cent, while apartment rents fell 5.8 per cent during the second quarter.
Commenting on this trend, Downs said: “Amid a strong sale price decline, the ongoing yield compression trend that has been witnessed since early 2009 reversed in the second quarter. Net villa yields increased from 4.9 per cent to 5.7 per cent, while apartment yields increased from 5.4 per cent to 7.4 per cent based on actual sales and rental transactions.”
Quality concerns
Quality issues in Abu Dhabi may lead to rapid reshuffling of the market as the new higher quality supply is delivered, according to Landmark.
“Only 20 per cent of pipeline properties advertised as high-end will actually meet that standard, and short-term price/rent performance of medium quality deliveries will behave as though they were higher-end. However, we predict that this trend will be temporary, with performance weakening and not recovering once the truly high-end developments are delivered,” said Downs.
Sales demand for Abu Dhabi’s investment zones has remained weak due to further project delays and the lack of appropriate regulatory framework, which in turn has caused concern among potential owner occupiers and investors. Current sales demand in the capital is price-sensitive and largely focused on Marina Square.
Rental decline sharply increased in the second quarter with an 11 per cent decline compared to the marginal three per cent decline observed in the first quarter.
“These declines are supply driven following new on-island deliveries such as Khalidiyah Palace, Al Aryam Tower, Silver and Wave Tower,” Downs said.
“Static sales prices and declining rents have resulted in further yields compression; currently at 5.1 per cent, and we anticipate that yields will continue to compress in the short term.”
Turing to the commercial office segment, sale prices have remained stable while office rents fell 10 per cent since March. Offices in the City Centre and Tourist Club Area witnessed the biggest declines – up to 20 per cent– especially for low-quality space.
“In the leasing market, office rents will continue to decline on the back of rapidly expanding office supply; in 2010 alone there will be a 32 per cent increase in supply,” Downs said.

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