The long-term outlook for the office market in Dubai remains positive despite a global downturn hitting the sector in recent times, according to a report.
"We expect further correction in office rents in the range of 10 per cent to 25 per cent. However, the long-term outlook for the office market remains positive, given the current shortage of supply, especially in primary grade office. In addition, project delays will add to the shortage of supply," Global Investment House said in report on Gulf Co-operation Council real estate sector.
Office market in the emirate had been growing at double digit growth rates since the start of the property boom in 2002, driven by the economic boom and the influx of foreign business into the country. Vacancy rates did not exceed two per cent, reflecting the demand-supply gap in the market.
Deira has been Dubai's traditional business district, including Bur Dubai and master developments along the Sheikh Zayed Road.
However, the recent establishment of economic free zones such as Dubai International Financial Centre, Dubai Media City, and Downtown Jebel Ali has gradually fragmented the office space in Dubai away from Deira.
Until the third quarter of 2008, prices and rents saw an increase. According to Asteco, sales prices in economic free zones such as Dubai Silicon Oasis and Downtown Jebel Ali grew by 33 per cent in third quarter 2008 on quarter-on-quarter basis. Office sales prices in Dubai ranged from Dh1,100 to Dh8,000 per square foot with an average of Dh2,500 during 2008. In fourth quarter of 2008, office price sales did not experience the sharp correction witnessed in residential property prices. The average growth in office sales prices in 2008 was 10 per cent, Asteco said.
Meanwhile, freehold properties in Dubai will see a further price correction of 15 per cent to 30 per cent this year as "panic selling" continues, adds the report.
Given the lack of financing in light of the recent global financial crisis, Global believes the slowdown in the market to continue in the short term in line with the economic slowdown that will result in project cancellations or delays.
Also, massive layoffs and the freeze in business activity will likely to result in lower expatriate population growth and therefore lower demand on both residential and commercial properties.
Developers who will weather the storm are those with solid branding, good track record, and available financing. On the upside, project cancellation and delays will increase the pent up demand as supply is delayed.
Nevertheless, market correction will allow buyers who were previously deterred by high prices, to enter the market at more affordable prices.
"Going forward, we expect the UAE property market to be dominated with end users rather than speculators, especially with the government's commitment to introduce legislations regulating the market."
Global further expects the government to continue supporting the market, and inject liquidity when needed.
"Therefore, we believe that despite the downturn in the market, the outlook is still positive in the long term supported by strong fundamentals, and proactive government policies, which will drive away speculators and stabilise the market.
"Once the market stabilises, opportunities will arise for investors with long-term perspectives who are willing to pay higher down payments and settle for lower returns than those achieved in the boom period."
For the past five years, the Gulf Co-operation Council (GCC) region enjoyed an unprecedented property boom. Construction projects planned or under development in the GCC have crossed the $1 trillion (Dh3.6trn) mark, and two thirds of these mega projects are concentrated in the UAE.
The real estate sector in UAE has been shooting up by double-digit growth rates on a year-on-year basis and contributing around 15 per cent to the country's gross domestic product (GDP).
A lot of controversy emerged recently regarding a possible correction and an oversupply situation in the real estate market, especially in Dubai, which is witnessing most of the activity.
There were a lot of predictions of price stabilisation or possibly a correction once the new supply come on stream by 2009-2010.
However, the correction started in 2008 and the reason was not an oversupply. After five years of unrelenting growth, the global financial crisis has casts its shadows over the much debatable UAE property sector.
For the first time in years, the UAE property market is slowing down as credit tightens, projects are scaled down, jobs are cut, and prices fall following the global credit crunch of September 2008.
However, the prices of projects towards completion are not expected to witness sharp drops as those seen in off-plan sales, the report added.
Total credit extended to the real estate sector has been growing at a double-digit growth rate. The latest published figures revealed that real estate mortgage loans stood at Dh87.5 billion in June 2008 growing by 49 per cent compared to Dh58.8bn at the end of 2007.
However, the recent credit crunch forced UAE banks and lending institutions to toughen their lending criteria. HSBC lowered its loan to value ratio to 70 per cent, down from 85 per cent. Lloyds TSB has stopped loans for purchase of apartments and dropped its loan to value ratio on villas in the UAE to 50 per cent.
Responding to the liquidity situation, the UAE Government has been proactive in introducing policies aimed at regulating and stabilising the market and restoring investors' confidence, most important of which was the decision taken by the UAE central bank in October 2008 to pump Dh120bn into the banking system.
"We believe is a positive step for both the lending and construction sector as it proves the government's support and gives confidence to investors," the report said.
The real estate market in the capital has been less affected by the global financial crisis. Unlike Dubai, the real estate market in Abu Dhabi is somewhat in a different stage of the real estate cycle, and still lags behind Dubai.
The residential market in Abu Dhabi is deeply undersupplied, with a population of 930,000 at the end of 2007, and only 180,000 units available as estimated by the Urban Planning Council at the end of 2007.
According to Colliers the supply of residential units is expected to increase by 213,000 by 2010. An additional 140,000 units are expected between 2011 and 2013 following the completion of residential components within Al Raha Beach and Al Reem Island mega projects in the capital.
Vacancy rates in Abu Dhabi's residential market have dropped from an average of 2.5 per cent to less than one per cent. Property sales prices have grown by 89 per cent between fourth quarter of 2007 and fourth quarter of 2008, on the back of sales of properties in premium developments such as Al Raha Beach, which witnessed an average price increase of 130 per cent since its launch.
Rents on the other hand witnessed the highest year-on-year increase since 2001, growing by 65 per cent between fourth quarter of 2007 and fourth quarter of 2008, despite the revision of the rental cap imposed in Abu Dhabi from the seven per cent cap introduced in 2007 to 5 per cent in 2008, as landlords were revising their asking rents.
In fourth quarter of 2008, rental rates in Abu Dhabi increased slightly by one per cent on a quarter-on-quarter basis for one and two bedroom apartments, while rents for three bedroom apartments were stable.
"With the addition of new residential units to the market, we expect the residential market in Abu Dhabi to stabilise with the new supply coming from mega projects such as Al Reem Island and Al Raha beach in 2009," the report said.
The office market in Abu Dhabi is undersupplied especially primary office space. Office rental rates have appreciated by 14 per cent between fourth quarter of 2007 and fourth quarter of 2008 according to Colliers international, with vacancy rates of almost one per cent.
Rents in the Central Business District ranged from Dh2,500 to Dh4,000 per square metres in fourth quarter of 2008.
"We do not foresee any decline in emirate's office rental rates in the medium term. However, a slowdown in the rate of growth is expected due to the lack of demand in line with current financial crisis and the slowdown of economic activity," according to the Global Investment House.