Rental demand to slow as prices soften in first half
"We expect rental prices to remain relatively stable in 2009, but they will likely soften in the first and possibly the second quarter," said Charles Neil, Chief Financial Officer of Landmark Properties.
"There is still demand for rental properties across all the emirates in the UAE, including Dubai and particularly Abu Dhabi, where there is a scarcity of readily available units," added Andrew Chambers, Managing Director of Asteco Property Management.
According to real estate agents in Dubai, so far in 2008, the villa market in the UAE has seen the highest increase in rental prices owing to the limited availability of villas.
"Villa rentals have seen the largest increase over the past 12 months, increasing on average by approximately 35 per cent, while apartment rentals have increased by approximately 25 per cent over the same period," said Andrew Macfarlane, Research Analyst at Cluttons.
Emirates Business spoke to a cross-section of real estate experts including Asteco's Chambers, Cluttons' Macfarlane, Landmark's Neil and Hesham Al Qassim, Chief Executive Officer of wasl and Dubai Real Estate Corporation, all of whom, said rental yields in the UAE remained attractive in comparison to the international markets. The experts, however, felt the market was now more demand driven. Meeting customers' preference would be the key for growth in the future, they added. Investors should do their research and invest not only in areas preferred by end-users, but also in buildings with design elements, finishing and layouts that customers prefer.
What are your projections of rental prices in Abu Dhabi, Dubai and the Northern Emirates for 2009?
Chambers: Rental demand is expected to remain robust as potential buyers adopt a wait-and-see strategy. This is exacerbated with the lack of mortgage financing currently available in all the emirates.
Neil: For Dubai, we do expect rental prices to remain relatively stable in 2009, but they will likely soften in the first and possibly the second quarter of 2009. In general, we are seeing the market shift to more demand-driven fundamentals. As the market moves in this direction, it is experiencing a "discovery of price". It will take a few months for the prices to settle and achieve equilibrium. Customer demand will start to drive value and the key demand variables are expected to be location, quality, and branding.
Macfarlane: In Dubai, we forecast that rentals will continue to increase, but at a slower rate. However, with the uncertainty surrounding global economies having more of an impact on Dubai than was first anticipated, we may see some softening of rents in the coming quarters.
Al Qassim: A recent report by global real estate consultancy Colliers International indicates an increase of five per cent in the overall house price growth during July to September. The year-on-year overall growth between third quarter 2007 and third quarter 2008 was 80 per cent in Dubai, adds the report. Thus, rental and property prices that have been very dynamic in Dubai in the recent years, will see some variation in trends. The impact of the global market conditions and key economic factors in the region including crude oil prices will significantly influence rental prices in Dubai and the UAE during 2009.
How much have rental prices increased in the past one year in Dubai, Abu Dhabi and Northern Emirates? Have rental prices been affected particularly in the last quarter?
Chambers: In Dubai, rental rates for apartments have been levelling off throughout 2008 with an average growth rate (quarter-on-quarter) of four per cent. Rental rates have remained the same over the last quarter. Rental rates are expected to remain robust as potential buyers have been unable or reluctant to buy during the transition period.
In Abu Dhabi, rental rates for one and two-bedroom apartments increased by one per cent between the third quarter and the fourth quarter, whereas three-bedroom apartments did not show any growth due to low tenant movement.
In the Northern Emirates, Ras Al Khaimah particularly recorded the highest average rental growth of 12 per cent for all unit types in the apartment segment. Apartment rental rates in Sharjah and Ajman peaked during first quarter to third quarter of 2008 but remained almost constant during fourth quarter 2008, resulting in an average growth rate of six per cent for 2008.
Neil: Our average lease prices have remained relatively stable with little variability when comparing the quarterly data over the past year. When looking at the data over the past three months, we saw a steep increase in prices in Dubai between October and December. This is because there was a shift from smaller units, one to two-bedroom apartments to villas in latter half of fourth quarter.
Macfarlane: In the past year until October 2008, rental prices for villas and apartments in Dubai have increased by approximately 30 per cent, while in the last quarter rentals increased by around seven per cent. This can be attributed to strong demand and limited supply coming to market. This situation is changing as more projects reach completion and come to market. In Abu Dhabi, prices have increased by around 75 per cent over the year leading to October 2008, as the housing shortage in Abu Dhabi is extremely acute in comparison to all other Emirates. In the last quarter, Abu Dhabi rents have either held steady or increased slightly.
Al Qassim: As the asset management group owned by Dubai Real Estate Corporation (DREC), our operations cover only the emirate of Dubai. However, we also believe that it is in the best interest of our group to have a database of an important industry that has registered extraordinary growth over the last few years in the UAE. We are currently in the process of compiling information on all aspects of the industry and we will share these details with the media in the future.
Which emirate has seen the highest surge in rentals in 2008 among Dubai, Abu Dhabi and the Northern Emirates? Has any emirate levelled in rentals?
Chambers: Earlier this year, we had seen the Northern Emirates with the biggest surges in rental rates for studios and one-bedroom units. These increases were often double-digit figures. Dubai and Abu Dhabi, primarily Abu Dhabi, often saw the largest increases in two, three and four-bedroom units. Currently, we are witnessing single digit growth in all emirates across all unit types. The main increases have been in studio and one-bedroom units.
Which particular segment of the market – apartments, villas, or townhouses – have seen the highest increase in rentals?
Chambers: Villas have seen substantial increases due to the limited number of units available. Townhouses with three-bedrooms in developments such as Arabian Ranches, Springs and Mirdiff has seen increases ranging between eight per cent and 18 per cent in 2008 (quarter-on-quarter). High-end luxury villas on Palm Jumeirah have seen increases of approximately 10 per cent for four and five-bedroom villas. One, two and three-bedroom apartments have seen increases of four per cent on average in 2008.
Neil: Rental rates for smaller apartments have risen the most. Volumes for these smaller units of one and two-bedroom apartments have been on the rise. October was a particularly strong month for leasing volumes of smaller units. On average, rents for one-bedrooms rose the most with almost 24 per cent increase in rates from the first to the fourth quarter last year.
Macfarlane: Villa rentals have seen the largest increase in rental levels over the past 12 months (to October 2008), increasing on average by approximately 35 per cent. In comparison apartment rentals have increased by approximately 25 per cent over the same period. This is largely due to the lack of new villas coming to market and demand outstripping supply. It is not likely that this situation will improve over the coming year as new villas are only expected to account for approximately 10 per cent of completed projects.
Al Qassim: Throughout 2008, wasl experienced a huge demand for villas around Dubai. This was complemented by a similar trend – demand for apartments, mostly in the city's central business districts. I would like to add the UAE's continuing appeal to expatriates for jobs and its high standard of living, security and laws will continue to keep the demand up for the leasing sector.
What are the current rental yields in Dubai, Abu Dhabi and the Northern Emirates? Do you still find international investors entering the market for rental yields especially in the last quarter?
Chambers: There is still demand for rental properties across all the emirates, particularly Abu Dhabi, where there is a scarcity of readily available units. Villas continue to provide rental rate yields of more than 10 per cent. Al Reef Villas (Arabian phase) is expected to provide yields between 10 per cent and 15 per cent. We will still see international investors entering the market as rental yields are still attractive here when compared to yields in the rest of the world.
Neil: Rental yields are still strong. While the lease prices are softening now, the sales prices are declining as well. Overall rental yields in Dubai are still attractive and we are seeing ongoing interest from international investors. Of course, the market is now more demand driven so tapping into customer preferences is key. Therefore, investors should do their research and invest not only in areas preferred by end-users, but also in buildings with those design elements, finishing and layouts that customers prefer.
Macfarlane: Rental yields for good quality apartments across Dubai are currently sitting at around six per cent (October 2008). Yields have been falling in Dubai since 2004, albeit at a slowing rate, as sales price growth has outstripped the growth in rentals. In Abu Dhabi, yields have been consistently higher sitting at seven per cent to eight per cent.
Al Qassim: The rental yields depend on several factors and vary from one place to another. There are many underlying aspects that contribute to rental rates including maintenance, location and the area (size) of the property. wasl's leasehold properties include a wide assortment of residential and commercial space, which have experienced significant demand from investors and residents. At the same time, it must be pointed out that our properties are leased at very competitive rates and are located in some of the most prime locations in Dubai.
Dubai remains a very lucrative destination for international investors as it has maintained its status as a global hub. Backed by strong economic fundamentals, the real estate sector in Dubai continues to offer great investment opportunities and we believe strong rental yields will underpin this trend in the future.
Year 2009 will see a big intervention by the government to regulate Abu Dhabi's real estate market, a top official said yesterday.
"The year 2009 will see a big intervention by the government to regulate the real estate market. The Department of Municipal Affairs has finished the draw-up of a legal system and regulatory authority to regulate the real estate sector," said Salah Al Shamsi, Chairman of Abu Dhabi Chamber of Commerce and Industry (ADCCI). "I expect the new authority to be set up during the second quarter of the current year. Undoubtedly, this legal system will draw up strong mechanisms to supervise the work of developers and all parties in the realty sector."
Inflation in current year will drop by five per cent and economic growth will fall by four to five per cent. The falling inflation will lead to a drop in the prices of properties, he said. "This drop will be either slow or quick depending on the quick or slow completion of new projects. The prices during 2008 increased in double-digits and the market will return to its natural situation within at least six months.
"It is important for the emirate that the prices of properties fall so inflation does not rise again. It is also important Abu Dhabi maintains stability to complete its top projects, especially in the field of infrastructure and industry," he added. (Abdel Hai Mohamad)