In the current property and housing scenario in Dubai, it makes sense to buy into affordable developments such as International City and Discovery Gardens, since it costs the same as staying rented, say experts.
Emirates Business sat down in a round-table interview with Andrew Macfarlane, Research Analyst at Cluttons; Louise Pitt, Director of Leasing with Landmark Properties; Peter Penhall, Chief Executive Officer of Gowealthy.com; Iseeb Rehman, Managing Director of Sherwoods Property Consultants; Rose Marie Kilzi, Leasing and Resale Director at Great Properties; and Alaa Nagawa, Marketing Head with Leo Sterling, to find out more about these property developments – apparently two of the most affordable in Dubai at the moment.
They said rental and sales values had dropped considerably at International City and Discovery Gardens, making them more affordable to middle-income groups. Where previously certain people could only afford low-rent housing, they may now be able to stay in more upmarket locations across Dubai at the same rent, they said.
Do you expect International City and Discovery Gardens to be sought-after affordable developments in Dubai? Is there a need for affordable housing today in Dubai?
Macfarlane: In terms of what affordable actually means in Dubai's context, we seem to be following a model whereby providing affordable housing has meant significantly marginalising the development's location and services – such as reducing the quality of fit and finish and the amenities.
This marginalisation then fails to translate appropriately into a rental value and will impact the longevity of a development.
In saying this, I think Discovery Garden is a more attractive investment choice than International City. The overall amenities and the geographical location put it in a much better position.
Pitt: While there is a need for affordable housing in Dubai, this does not necessarily mean that additional units should be built at this time. The market is still experiencing a redefinition of quality with many projects around the city being reclassified based on fundamentals such as location of the master development, location within the master development, build quality, facilities and general consumer preferences.
Penhall: At present these two developments offer an attractive scenario to both purchasers and tenants. Certainly, there is a shortage of affordable housing in Dubai, which is a positive driver for sustainable pricing structures in such developments.
There are a number of affordable housing schemes currently "on the drawing boards" to be released into the market. However, one of the main differentiating points between these two existing developments and those that are coming in the future will be the value proposition as defined by quality of the finish and the facilities offered.
Rehman: There is a definite demand for affordable units such as in International City and Discovery Gardens. However, Dubai also needs a mixed-use affordable community development.
Kilzi: International City and Discovery Gardens are currently the most affordable residential areas and they will be the most popular destinations for relocating residents from other developments as rents and sales prices are falling in these two projects. People seek cheaper accommodation, even if it means breaking current lease agreements.
Nagawa: Looking at the rental trend in the past three years, rents have gone down considerably. These two locations have aroused considerable interest in many investors, including retail, multinational companies and real estate developers.
Would you say rents in International City and Discovery Gardens have been hit the hardest of all developments?
Macfarlane: Although rents in Discovery Gardens and International City have fallen by a large percentage when compared to other areas of Dubai, you have to remember that prices there had a lower base to begin with. When you analyse the numbers in nominal terms, the fall is not that much.
For example, a decline from Dh50,000 to Dh40,000 means only a 20 per cent fall, even though it means a significant Dh10,000 drop in price. This can influence people's perceptions on what is going on in the market place.
Dubai is witnessing a flight to quality. Where previously certain households could only afford certain developments because they offered economical rent levels, they may now be able to afford a better specification apartment across a number of other developments in Dubai offering similarly rents.
Pitt: People are selecting other units over these two areas due to lack of facilities in these communities, lack of security in the buildings and poor quality of the units. International City was also plagued by the stench from the sewerage plant.
Penhall: In both developments, initial property investors were able to enter at comparatively low values and position themselves to secure a tenant at very affordable rents. Since inception, the base rentals were low in the open market in comparison to other high-value rental options in other residential nodes. Recent rental adjustments left both developments very exposed, with little room to maintain rental values.
The result is that tenants have now identified International City and Discovery Gardens as good value for money. Discovery Gardens attracts more potential tenants than International City due to its location, the level of fit and finish and its natural surroundings.
Rehman: They haven't been hit particularly more than others, but these two locations are affordable and they are where a majority of transactions are occurring.
Kilzi: There can be two reasons for the drop in rents in these two developments. The first is that they were the newest areas available in the market, as well as the cheapest compared to more developed residential areas in Dubai. Therefore, when the slowdown in the market occurred, prices in these areas dropped as well, keeping them the cheapest.
Secondly, several new buildings have been launched within both developments over the past few months, and, coupled with recession and slow demand, there currently is an oversupply of units. This means that prices are competitive.
Nagawa: With a lot of residents losing jobs in Dubai, rental demand has fallen and these two developments are part of the slowdown.
Sale prices on these two developments have fallen as well. Is it a better time to buy or rent in these developments?
Macfarlane: This depends on the investor's investment horizon – whether the investors is here for the long-term or the short-term. Wider supply and demand dynamics will also have an influence on investors' decisions. The current reality is that there is significant downward pressure on sales prices. With these factors in mind, cash buyers would probably opt for a better return through other investments, whilst those with a deposit may also be sitting on their cash for the same reasons, or they may be stymied by having to raise additional finance.
This would drive these groups of people to rent when they would rather purchase, assuming they are not already living in another property.
On the other hand, an end user with a long-term plan positive view of staying and working in Dubai may see this as a perfect opportunity to purchase, and thus take the necessary steps to that end, pending credit and cash availability.
Pitt: What we're seeing now is a sharp, but needed price correction. Leasing prices have declined approximately 25 per cent in International City and 45 per cent in Discovery Gardens since the market peaked.
Sales prices have declined about 45 per cent in International City and 35 per cent in Discovery Gardens.
Indicative rental yields for both are between eight to 10 per cent. It is an investor's choice whether to stay rented or purchase a unit in these developments.
Penhall: I would advise anyone who was considering to purchase to enter the market today, as we predict that the drop in prices will abate fairly soon and the great value propositions are all being snapped up by discerning investors looking at the medium- to long-term opportunities on offer today.
Prices in both these developments have fallen substantially from their peaks in June 2008 and now offer a particularly attractive proposition for both the end-user and the investor.
Rehman: It's a great time to buy if the property purchaser is an end-user. Finance options are becoming flexible with Mashreq bank lending up to 70 per cent.
Kilzi: If the potential homebuyer has access to capital or financing, the market now provides a good opportunity to buy. With no access to financing or liquidity, it is better to rent.
Nagawa: Rents are expected to drop further next year, albeit at a much lower rate. That could be the beginning of a trend back towards higher rents.
As a tenant, another option to consider is home ownership. For example, International City has now offered on the resale market a studio apartment for the average price of Dh370,000, while a studio in Al Barsha is being rented out for Dh60,000 per annum. This means six years' worth of rent can lead to ownership.
What are the current occupancy levels in the two developments?
Penhall: The average occupancy levels throughout the completed phases in International City are high at around 90 per cent. Discovery Gardens has a much lower occupancy level at around 20 to 30 per cent as a direct result of the ongoing construction activity.
Rehman: The new placements we do in International City are for units handed over and from our end we are seeing International City occupancy levels at around 80 per cent to 90 per cent.
Discovery Gardens, on the other hand, is nearly complete. However, most of the buildings are awaiting final payments and handover. The stock we have received in the last few months is not more than 75 buildings.
Kilzi: The occupancy levels for buildings that were delivered over the past two to three years are 90 per cent. For newly-delivered buildings, it is still quite low.
What are the buyer profiles and the kinds of income groups occupying International City and Discovery Gardens?
Macfarlane: In the past we have seen companies purchase whole buildings or large chunks of buildings to provide housing for workers. However, we are seeing other groups of people upgrading into these developments as the cost barrier for entry is lowered.
For potential investors, falling prices in these areas may allow people to enter into these developments either as end users for long term capital gain or for rental income.
Pitt: These units were built to suit lower to middle income occupants.
Penhall: Generally these developments attract the middle to lower-end of the market, mainly working couples currently living in Sharjah and working in Dubai.
Rehman: People who have been putting 50 per cent or more of their salary into housing costs.
Kilzi: Most one-bedroom apartments and studios are occupied by young professional expatriates .
Nagawa: The group whose monthly salary is at least Dh8,000 to Dh10,000.
WHAT DO YOU THINK? Does it make sense to buy into affordable developments in the current scenario in Dubai? Have your say by posting a comment below, or emailing us at online@business24-7.ae.