Downgrades to single-asset developers may affect prices

A deficit of grade A developers exists in Dubai and Abu Dhabi as low-ranking developers are likely to contribute to the ongoing price divergence within the asset classes in each markets, Landmark Advisory said yesterday.

Jesse Downs, Director of Research and Advisory Services, Landmark Advisory, said: "To date, much of the supply already delivered was built by master developers, which ranks high. However, these developers constitute the minority of the total pipeline of units within the next several years. The single-asset developers currently building the bulk of the forthcoming supply have a significantly lower rank and may suffer further credit downgrades as their product is forecasted to overpromise and under deliver.

"This phenomenon will create a bifurcation between integrated, high-quality units and those poor-quality units within fragmented communities where many builders have postponed their developments indefinitely."

The evaluation was based on three basic criteria: product quality, customer service, and overall perception.

"Product quality refers to each individual developer's track record and ability to deliver the product quality promised during the marketing and primary market sale of the unit. In some cases, developers have not delivered any projects locally. In this case, they are graded based on the anticipated quality of their projects," said Downs.

In Dubai's residential property market, quarterly sale prices of villas remained unchanged and apartments declined 4.3 per cent during the fourth quarter of 2009.

"While villa prices remain unchanged on average, there is a variance of pricing emerging based on location," Downs said. "Sale prices for villa communities along Sheikh Zayed Road – coastal communities – have increased while inland communities have decreased.

Location and quality are driving the prices of apartments; while average prices decreased, select communities, including The Palm Jumeirah and Downtown Burj Dubai, experienced slight increases.

According to Downs, residential leasing in Dubai has also regressed. "Average villa rents declined 2.2 per cent while average apartment rents declined three per cent. In select new residential areas, apartment rents have increased, which is primarily due to all available residential units having been handed over recently. This type of marginal rent increase usually follows apartment deliveries, propelled by gradual occupancy gains after handover," she added.

Turning to Abu Dhabi, residential sale prices held in the fourth quarter 2009, but sales volumes increased relative to previous quarters. Landmark expects prices to remain stable in the first quarter of this year.

For the leasing market, the research company had previously predicted a market-wide decline across Abu Dhabi during the fourth quarter of 2009, which was confirmed by the onset of a rental correction during this period. "Even high-end units saw rents fall up to 15 per cent, but, as we predicted, it was low-quality units that fared worst," Downs said.

"Since second quarter 2009, the supply and demand dynamics of Abu Dhabi's rental market have been changing. The rent declines observed in fourth quarter 2009 are consistent with Landmark Advisory's analysis throughout 2009."

Landmark believes rents are expected to keep declining throughout the first quarter of this year as more supply is handed over and landlords become increasingly flexible. "We expect continued relocation from Abu Dhabi to Dubai, which will put further downward pressure on Abu Dhabi rents," Downs added.

In terms of commercial property, leasing volumes for office space remained low in Dubai whereas they increased in the capital.

"Office leasing transactions in Abu Dhabi have slightly increased during the fourth quarter 2009 as more companies try to settle in the local market. This follows a slowdown witnessed during the second and third quarters, particularly during the summer months," Downs said.

"The rent levels for office space in Abu Dhabi are likely to keep declining as more supply is delivered and landlords become increasingly flexible in order to guarantee good occupancy rates.

"Quality and location will determine whether rents hold, and poor-quality units in areas such as Tourist Club Area, Electra Street and the east side of Salam and Hamdan Street are likely to be the hardest hit," she added.

In Dubai, commercial sales and lease rates declined. Volumes have remained extremely low with existing sales activity primarily in Jumeirah Lakes Towers. "We expect pricing in both the residential and commercial real estate markets to bifurcate based on quality. This will become an increasingly critical factor in the local real estate markets," Downs said.

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