Residential rents in Dubai are coming down with the preliminary data analysed by Phidar Advisory for the first half of Q3 2014 showing average lease rates falling 2.9 per cent for apartments and 5.6 per cent for single family home (villas).
“Although the market is technically undersupplied, rent inflation has slowed. This is likely due to ambitious expectations in H1-2014 that pushed up asked rents beyond affordability constraints. Housing demand is relatively elastic, but alternatives, like sharing and relocation to other emirates, exist and form an – albeit pliable – ceiling,” the Dubai-based property consultancy said in a new report.
Year-on-year, however, rents are up.
Nominal average apartment lease and SFH rates are up 14.9 per cent and 0.9 per cent in first half of Q3-2014 compared to Q3-2013.
For the apartments tracked, Q3 nominal rates remained resilient in beach front communities such as Jumeirah Beach Residence (1.0 per cent) and Shoreline (2.7 per cent). For SFHs, Palm Jumeirah and Jumeirah Islands showed positive signs with 3.3 per cent growth in nominal rates, while other communities declined.
Based on transaction data from the first six weeks of Q3 2014, the consultancy reveals nominal prices for single family homes (SFHs - villas) declined four per cent and apartments declined 0.6 per cent.
Apartment and SFH sale price performance varied across Dubai. For apartments, the Greens increased by 0.26 per cent, but Uptown Motor City decreased by 0.94 per cent. For SFHs, Jumeirah Islands declined 8.4 per cent, but the Lakes increased 6.4 per cent.
Stalled project restarting
The slowing prices and lease rates has led to yield compression, Phidar mentions, saying, as many as 30,000 additional units are needed through 2018 to maintain rent stability.
“Residential development opportunities are still ample in Dubai, but the market would benefit exponentially from developer specialisation, particularly in the most under-supplied assets (middle income housing),” the report says.
The consultancy believes that over this period another 15,000 units could be reactivated from stalled projects thereby creating a viable supply gap of as much as 20,000 units.
The report forecasts housing demand by correlating gross domestic product (GDP) growth with job creation by industry ad these projections use a conservative demand scenario based on a 5-year average GDP growth of 3.6 per cent.
The International Monetary Fund has said even if the global economy slows, Dubai can still achieve 3.5 per cent average GDP growth, but, if the global economy remains robust, Dubai’s average GDP can reach 5.6 per cent. The conservative GDP projections result in a population compound annual growth rate (CAGR) of 5.5 per cent and a residential housing demand CAGR of 3.7 per cent.
In April, HSBC Global Research said Dubai will see a supply of 90,000 new units by 2018, but the market will absorb – fairly easily — the new supply even if the population grows less than 5 per cent per year.
“We believe that we have not yet reached the peak of the cycle, and that the market can continue to absorb the expected supply additions over the next few years, even at a population growth rate below 5 per cent,” the global bank had said.
Dubai Statistics Centre’s data shows the non-labour population rose by over 7 per cent in 2012 and 2013, while the number of households grew by 7.6 per cent in both years.
The report says it is time for developers to focus on providing affordable housing, especially for middle-income expatriates.
“Development trends are tapping into Dubai’s relatively top heavy income distribution (compared to other mature markets) and second home demand, but it is not adequately addressing supply gaps for the main drivers of Dubai economy: middle income expatriate residents,” the report says.
“This trend should be a serious concern for business owners and government bodies: rapid rent inflation increases labor costs and can stymie job and real economic growth.”
Many of the developers are still far away from announcing affordable houses, Emirates 24|7 did reported earlier that Tasweek, an Abu-Dhabi-based developer, had finalised plans to sell two-bedroom townhouse in the country for Dh650,000.
(Read: Affordable housing in UAE: Townhouses for AED650,000)
Phidar says long-term capital appreciation is foreseeable for some assets, the current supply trend and affordability constraints pose challenges to sustained long-term growth.
“Based on current market dynamics, short term speculation is the factor that could fuel further sale price appreciation. Long-term capital appreciation is certainly foreseeable for some assets, but considering demographics, affordability and depreciation, it will be difficult to sustain real capital appreciation across all areas, asset types, and qualities. In other words, another round of price bifurcation is on the horizon,” the report adds.