Jones Lang LaSalle, the world's leading real estate investment and advisory firm, today released its latest ‘Dubai Real Estate Market Overview – Q2 2011’ covering the Dubai office, residential, retail and hospitality market segments. According to the report, the Dubai real estate market is showing signs of stabilising, although this varies between market segments.
Craig Plumb, Head of Research, Jones Lang LaSalle MENA said: “Considering all real estate sectors in Dubai, performance was mixed this quarter, with some sectors – such as hospitality and retail – on the way to recovery, while others continue to decline. With GDP forecasts at 5% for 2011, Dubai’s economy is already recovering and general market confidence remains buoyant, which is illustrated by the oversubscription of Dubai government’s new US$ 500 million bond issue. Supported by improving investor confidence and increased liquidity, we anticipate progressive stability for most asset types.”
In Q2 2011, Dubai’s hotel market, which reached the bottom of the market cycle in Q1, continued to perform well, with occupancy rates rising to 81% and Average Daily Rates (ADRs) stabilising. Beach hotels registered the strongest improvement, evidenced by a 3% growth in ADRs and 11% growth in revenue per available room compared to the same period last year. Although supply is still expanding, the upward trend in tourist arrivals is expected to sustain the recovery.
The retail mall sector also performed well and has reached the bottom of the current cycle. Since there is no new major mall supply entering the market until 2014 and supported by the increase in tourist arrivals, rents levels, currently at AED 1,885 per sq m, are expected to remain stable in the coming months.
Turning to Dubai’s office market, rents and occupancy levels stabilised in Q2, but this is only temporary as anticipated supply deliveries will put downward pressure in the short term. During 2011 alone, 600,000 sq m of new space is expected to be added to the current office stock of 5.6 million sq m. Over the next three years, office supply is anticipated to grow by over 30%, which will ensure tenant-favourable conditions in the coming years.
In Q2, Dubai’s residential market performance diverged as villa rents grew by 4%, whereas apartment rents declined 1%. For villas, rent growth was led by higher-end villas in established locations such as Palm Jumeirah and Arabian Ranches. For apartments, stability in select locations such as Burj Khalifa Downtown and Palm Jumeirah was offset by city-wide reducing trends, especially in secondary locations. While pockets of selective stability emerge, residential supply growth over the next three years will keep average rents soft.
Jesse Downs, Head of Management Consulting, Jones Lang LaSalle, concluded: “While recovery will be gradual, the bottoming out of two main sectors, hospitality and retail malls, is positive and reflects buoyant tourism and economic trends. In the race to the bottom, only the office and residential sectors are left. Although the office sector has the furthest to fall to reach the end of the market cycle, the softening of rents is positive news for occupiers, who will have a select, but finite window of opportunity to leverage the tenant favourable conditions to upgrade space and manage costs.
The residential sector is approaching the cycle trough and select pockets of stability are emerging, but, on average, sale prices and rents will continue to decline. The announcement of the three year federally backed resident visa will assuage investor and homeowner concerns as well as improve overall market confidence, but it will take time to directly and significantly impact residential demand.”
The investment market continues to polarize, with most interest coming from private rather than institutional investors. Jones Lang LaSalle’s recent Investors Sentiment Survey (ISS), confirms there are more buyers than sellers active in the Dubai market. Activity levels remain minimal due to the lack of good quality product with strong tenant covenant, thus there have been few significant sales in the Dubai market during Q2.
Despite minimal new supply handovers in the office market in Q2, conditions remain heavily in favour of tenants. Vacancies remained unchanged compared to previous levels (44% Citywide and 27% in the CBD), providing a wide range of choice for occupiers and strengthening their position in lease negotiations with landlords.
Prime office rents also remained stable over the past two quarters at AED 1,615 per square metre, but this is likely to be a temporary position as further declines are expected once new supply deliveries occur later in 2011.
The Arab Spring has not yet spurred significant new demand for office space in Dubai. However, the regional turmoil has already had a positive impact on Dubai’s hotel, retail and residential sectors.
Residential sector performance diverges as some assets experience selective stability. In Q2, sale prices and rents increased marginally in select upper end established villa communities such as Palm Jumeirah and Arabian Ranches.
The majority of the residential market (apartments and mid-market villas) continued to see sale price and rent declines. Landlords are becoming increasingly flexible, with more widespread use of rent free periods (13 or 14 months for the price of 12) and other inducements including payment of tenant’s air conditioning charges and flexibility on the number of rent cheques required.
Retail mall rentals have remained unchanged over the past quarter, with the increase in tourist arrivals and the lack of new supply contributing to stability. Since many retailers expect better business in the third quarter, we anticipate that rental levels will remain roughly stable over coming months, marking the bottom of the current retail mall rental cycle.
Hotels continue to experience improved performance as tourist arrivals increased in the first four months of the year. All three performance indicators, (ADR, RevPAR and occupancy) improved compared to the same period of 2010, marking the bottom of the cycle and indicating that the hotel sector is now in the process of a cyclical upswing.