Prime office rentals in Dubai and Abu Dhabi grew 29 per cent and 30 per cent respectively year on year in 2008, according to a report.
"Correction in rents is expected in the first quarter with adjustments less prominent in the prime locations such as Dubai International Financial Centre and Sheikh Zayed Road," Mohammed Faheem, Research Analyst, CB Richard Ellis (CBRE) Middle East, said in a report titled "Property insight for Dubai: Q4 market review."
"As rent is normally paid half-yearly/full year and with limited new office supply entering market, a drop in lease is not yet apparent. We expect other districts to see notable declines and marked increases in the availability of landlord incentives."
In terms of stock, much of new entry during the quarter was located in Al Barsha and the freezone developments of Tecom.
"The current crisis has resulted in falling demand for office space with the majority of enquiries over the past two years stemming from architects, real estate firms and construction companies. Due to the pent up demand from other sectors staying strong occupancy rates remain very high," he said.
According to the report, real estate asset prices witnessed the first notable and prolonged decline since freehold properties went on sale in Dubai. The most significant effects being felt in the off-plan sector.
There was return to reality as new measures deterred speculators such as tightening mortgage availability, reducing loan to value and rising lending rates.
"The changes have driven a decline in prices, affording greater opportunity to true end-users," Faheem said.
On the residential side, average rents saw an increase of 17 per cent in the period between quarter one and quarter fourth of 2008.
"Q4 was largely muted in terms of new projects with Cityscape seeing just a fraction of the past project launches," Faheem said.
As Abu Dhabi's market remains under-supplied across all property sectors, it essentially offers an environment conducive to continued growth, albeit at less aggressive pace. The year ahead offers an opportune time for government to lay-down the much awaited property regulations befitting for a mature market. This should not only push the appeal of the market but also put Abu Dhabi in a competitive stance internationally, Arlene Isito Jimenea, Research Analyst, CBRE Middle East said in a report "Property insight from Abu Dhabi – Q4 market review."
"This year represents a challenging period but one cannot underestimate the underlying capability of Abu Dhabi to withstand forces at work." According to Jimenea, the current conditions present opportunities to developers and end-users as developers become more cautious and pursue only well-planned premium quality projects. And end-users will also benefit from a better quality of property product as a result."
Regardless of the slowdown, supply of residential accommodation in the capital, on and off island, continued to lag behind demand. The rental market, in particular, suffered with limited residential stock with rents escalating in 2008 with no immediate sign of slowdown.
Overall average asking rates registered an increase in excess of 85 per cent in 2008 compared to 2007, putting pressure on the affordability levels of residential housing.
"Current capacity, even taken in conjunction with planned developments, is not expected to satisfy existing and new occupier demand based on present population projections," the analyst said.
This perceptible gap signals a real need for developers to address housing across all income segments, especially the lower to mid level. Uncertainty is evident in the relatively subdued office rental market as demand for office accommodation fell specifically in the prime segment, impacting rental rates.
According to the report, Abu Dhabi ended 2008 subject to mixed market sentiments along with the rest of world as it faced up to uncertainties promulgated by the global crisis. The fourth quarter was not entirely shrouded in negative sentiment. A relatively successful Cityscape Dubai saw the launch of Dh7 billion in new projects particularly on Reem Island.
"Judged on current market indicators, Abu Dhabi continues to capitalise on the extreme market imbalance, but the changing economic conditions has seen speculators falling away sharply as end-users take centre stage."
While Abu Dhabi has strong government support with a healthy financial position, a shrinkage in domestic secondary property sales volume and prices reflects the effect of the downturn.
"There are emerging signs of diagnostic correction to property prices and inflation. However, there is no simple solution, but one of the main challenges ahead is ensuring any form of intervention acts as an effective stimulus to confidence in the market," Jimenea said.