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05 December 2023

New supply to drive rents down

Apartments fell a modest four per cent in 2010, villas were hit hard, dropping 14 per cent. (GETTY IMAGES)

By Parag Deulgaonkar

Upcoming supply is likely to put pressure on rentals over the medium term in Dubai despite a stronger economic growth this year in the UAE will support demand, HC Brokerage said.

“The restructuring of Nakheel, despite the re-initiation of some projects, is bound to lead to further project delays and cancellations, which supports sector dynamics. We estimate that Nakheel controls 50 per cent of expected supply.Also there appears to be a further slowdown in construction activity, more recently due to reported restrictions on the development of raw land. Given the tight liquidity, developers continue to consolidate their projects,” the Egypt-based brokerage firm said in a report.

A number of local and international research companies have already predicted a decline in rents, but have refrained from giving a percentage fall, citing lack of official data. Dubai-based Landmark Advisory expects 48,000 new homes due to come on to the market in the next two years, while Colliers International expected 33,000 new units to be added on to the market by 2010-end.

Statistics shared by Real Estate Regulatory Agency (Rera) in February said 31,003 and 43,880 units were likely to enter the market in 2009 and 2010. However, it added that 20 per cent of the units would not enter on time in 2009, while 40 per cent of 2010 residential units will be delayed. In December 2010, Rera said 202 projects had been cancelled in Dubai.

In its report, HC Brokerage said rents appeared to have stabilised in 2010, and fell merely three per cent against 37 per cent in 2009.

“Since rentals are a pure reflection of demand/supply dynamics, the stabilisation suggests that the market is reaching equilibrium despite additional supply coming on. Unlike prices, rentals in Dubai were helped by the spillover from neighbouring emirates, particularly Abu Dhabi,” the report said.

Dubai's economy is expected to grow 3-3.5 per cent in 2011, Sami Al Qamzi, director-general of Dubai's Department of Economic Development, has said, while Standard Chartered Bank expects Dubai economy to rebound with a four per cent growth in 2011. As for the Mena region, the International Monetary Fund expects GDP growth of 5.1 per cent this year, which is higher than the forecast global average of 4.2 per cent.

Agreed prices fell five per cent during the year to reach an average of Dh8,800 per square metres. This took the overall decline since the September 2008 peak to 35 per cent at the end of 2010.

“It is important to point out that over the last two years volatility appears to have abated with prices trading within a narrower range,” the report said.

Apartments fell a modest four per cent in 2010, villas were hit hard, dropping 14 per cent.

The take up rate in Dubai also shortened to an average of three months in 2010 from 5.5 months in 2009 due to a 39 per cent fall in available-for-sale stock. This was largely driven by a reallocation of stock to the lease market as yields improved.

Lease listing in Dubai were up 37 per cent in 2010 with overall listings (sales and lease) down 20 per cent despite supply coming on stream, which suggests able investors were “holding on” to their properties.

Off-plan listings, HC Brokerage, said continued to decline, dropping 90 per cent in 2010. Off- plan now make up only two per cent of total listings, compared with 16 per cent in the same period last year.

“We believe this is partly a reflection of projects put on hold, deliveries taking place during the year, and a weaker demand for unready units.”

Asking prices declined nine per cent year-on-year (45 per cent since 2008 peak) to an average Dh12,800 per square metres. The bid/ask spread compressed 300 basis points to 44 per cent in 2010 a sign that volatility is abating after expanding to 51 per cent following the standstill announcement.