UAE property prices to soften in 2010 - Emirates24|7

UAE property prices to soften in 2010

(JOSEPH J CAPELLAN)   



Rental rates and property prices will start softening in 2010 when 70,000 residential units enter the UAE market, followed by a similar number in 2011, according to a new report.


“This is expected to lead to a decline in prevailing rental levels in 2010 and 2011, especially of the current stock in reflection of the lower comparative qualities with new master-planned supply,” Shuaa Capital said in a report titled Vision 2008.


A downward adjustment is expected in property prices after an initial resistance to market forces from the prevailing price levels in 2010-2011. The Dubai-based investment bank anticipates that pent-up demand will free up with the price and rental rate correction and allow the market to balance. All in all, it expects a healthy net gain post correction over today’s property prices.


Planned projects indicate that developers in Abu Dhabi are over-focusing on high-end apartments, and Shuaa believes most demand is in the low-to-mid income groups. As a result, many opportunities are being missed in the lower income groups that represent the majority of the population.


The residential segment continues to be the premier destination for real estate investments in the UAE, with Dubai, and increasingly Abu Dhabi, being the major attractions. Over the past year residential property prices and rents have continued to increase, fuelled by growing demand, supply delays and a degree of incompatibility between supply characteristics and the demand profile, the report said. However, the Dubai and Abu Dhabi scenarios are not identical. Abu Dhabi is witnessing a similar pace in demand growth to Dubai’s, with one major difference – no material supply before 2010.
 
The first is anticipated to move into a stabilisation mode with easing prices targeting the high-end apartments segment, Abu Dhabi is simply shifting into full acceleration.


Property prices have reached new highs, with downtown Dubai properties selling in the range of Dh25,000-30,000 per square metre, up around 30 per cent over the past 12 months. Average property prices in Dubai are estimated to have increased by about 15-20 per cent in 2007.


Properties in Abu Dhabi are being launched in the range of Dh12,000-20,000 per square metre. Occupancy levels in both cities remain around the 98 per cent level, as rents increased in Dubai by 15-20 per cent and about 20-25 per cent in Abu Dhabi.


Dubai and Abu Dhabi have knocked off a further two per cent from the rent cap, bringing it down to five per cent. Both governments seem to be trying to hold back rent inflation, but a mixture of construction delays, “innovative” landlords, low tenant awareness and lack of proactive enforcement coupled with a flood of new tenants is pushing rent inflation well beyond the targeted caps. Dubai is expected to see supply of almost 56,000 new units in 2008, followed by about 60,000 in 2009. In 2010, Shuaa expects about 37,000 units to be delivered. This results in a total of 153,000 units over the next three years, taking into account adjustment for potential delays.


“Our experience suggests that around 40-50 per cent of planned supply is missing the target by roughly 12 months. We have assumed that 50 per cent of planned supply will miss by 12 months in 2008, decreasing to 30 per cent in 2010. We believe developers will gradually improve their delivery performance as the implementation of the escrow account framework gains momentum,” the report said.


The escrow account, in theory, means advances received for off-plan sales will be deposited with an approved third party financial institution. Funds will be released to developers in tune with progress in funding requirements for the specific project, subject to construction progress verification by an independent surveyor. The underlying assumption is that developers want the money sooner rather than later. However, the escrow account alone will not solve the entire problem, as a construction capacity restraint is another major reason behind delays. The result is probably “fewer delays” rather than “no delays”, Shuaa said.


RESIDENTIAL SEGMENT

High-end apartments, outside the emerging downtown Dubai area, are expected to be the premier target with a price correction in the range of 15 to 20 per cent.

The investment bank estimates a cumulative demand for the three-year period (2008-2010) of 119,500 units. Demand in 2008 is estimated to be almost 35,000 followed by 39,500 and 45,000 units in 2009 and 2010, respectively.

The composition of the coming supply indicates that more than 30 per cent of the units are made up of high-end apartments and a sub-segment has started to show signs of declining occupancy. A fourth-quarter 2007 survey by Colliers International found about 30 per cent of high-end apartments in the upscale Dubai Marina area vacant, with competition between different high-end offerings – Dubai Marina, The Palm Jumeirah and Downtown Dubai – heating up.

A recent survey by a leading recruitment agency, found that those in the highest paid group, which earns more than Dh18,000 per month, made up 11 per cent of the total workforce.

Even with cash-rich foreign buyers boosting demand for this type of properties, it is expected that the segment will see average occupancy levels drop to around the 70 to 80 per cent level.

The exception, according to Shuaa, will be units around the emerging Downtown Dubai flanked by the Dubai International Financial Centre and Business Bay. These properties are expected to find strong demand powered by the new central business district (CBD) rising in the area. Occupancy rates in the other segments are expected to stabilise around 90 per cent. However, given the growth pace of the UAE population and economy, demand will be able to absorb most excess supply, going back to the 2006 and 2007 supply levels by 2011.

In Abu Dhabi the story is different, as supply is scarce and demand is rising. Landlords are sitting on gold, tenants are plenty and rents are skyrocketing, the report said.

Abu Dhabi residential property stock is not community/master-plan based, of a lower grade than Dubai, typically excludes parking space and rents are at a 10-20 per cent discount compared to Dubai.

However, in terms of value for money, the two are roughly the same.

Abu Dhabi rents have increased by about 25 per cent annually since 2004. Despite all this growth, supply is expected to be limited in the run-up to 2010. As a result, rents will continue to rise at a rapid pace and could very well exceed those of Dubai over the next three years. Property prices will follow, as pent-up demand continues to pile up.

OFFICE SEGMENT

Dubai’s office market is continuing to suffer from a shortage of office space, especially in the free zones such as the Dubai International Financial Centre (DIFC). The waiting list for offices in DIFC is reportedly so long that it takes anything from 12-24 months to get an office for qualified companies. Occupancy rates are around 98 per cent.

Annual office rents are estimated to be in the range of Dh2,400-4,000 per square metre, depending on location and office quality.

The DIFC is reportedly the most expensive area closely followed by the rest of Sheikh Zayed Road. On the lower-end of the range it is areas like Bur Dubai and Deira that dominate, with typically older office buildings, lower standards and heavy traffic congestion.

Going forward, the investment bank estimates oversupply starting in 2008 and culminating in 2009 and 2010. However, it expects most of the new supply in 2008 to be picked up rapidly, given the supply shortage experienced over the past three years. “Starting in 2009 we expect to start witnessing a more rapid switch for many companies from the older CBD to the new one along Sheikh Zayed Road and further down to the Tecom area. However, these large supplies are expected to apply downward pressure on rents, especially around the Bur Dubai and Deira region.”

In Abu Dhabi, the current office stock is estimated to be around 1.4 million square metres. The city lacks a defined business district and suffers from low standard office stock. Yet, annual office rental rates in Abu Dhabi are estimated to be in the region of Dh2,500 per square metre, up around 20 per cent over the past 12-month period. The office stock continues to enjoy full occupancy levels and companies are outgrowing their existing offices with no clear alternative.

Based on the investment bank’s revised projections, Abu Dhabi is expected to see limited supply of office space in 2008 before an expected jump in 2009 and 2010. “We expect most office supply to be pre-let well in advance of completion and do not at this stage envisage a price correction. On the contrary, we expect prices to continue rising albeit at a lower pace in 2009 and 2010.”

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