The apartment prices in Dubai, UAE have fallen 11 per cent in the past one year and will decline further because of tighter regulations, rising inflation and a strong UAE currency, said a report.
Inflows of cash from troubled areas of the Middle East helped Dubai's property sector recover from a crash in the previous decade, but that momentum has sagged since the end of 2013 and prices are again in retreat, according to leading real estate investment and advisory firm JLL.
Apartment sales prices in the third quarter fell three per cent versus the preceding three months and 11 per cent year-on-year, while rents dropped one per cent on both a quarter-on-quarter and annual basis, JLL wrote in a report.
Authorities have set mortgage ceilings and raised transaction taxes to reduce speculation in the property market, while the UAE dirham is pegged to the US dollar, which has gained 13 per cent against the euro in the past year.
These factors have combined to make buying property more expensive for foreign residents and foreign-based investors, while a shortage of middle-income housing in Dubai is a growing problem.
This has led to a slump in the number of sales and a drop in prices "to more sustainable levels", JLL wrote. "Prices are expected to continue softening over the remainder of the year and into 2016," before they again rise ahead of Dubai hosting the Expo 2020 exhibition, the expert stated.
House prices also fell in the third quarter, with sales down three per cent on the second quarter and seven per cent year-on-year, while rents were down two per cent over both time frames.
According to JLL, the real estate market in Dubai continued to witness a slowdown in performance mainly in the residential and hotel markets over the third quarter and is expected to continue its ‘soft-landing’ towards the end of the year.
While residential rents maintained their stability, sale prices continued to decline in the face of lower transaction volumes, and are expected to continue their downturn before bottoming out in the next 12 months, the property expert stated in its third quarter (Q3 2015) Dubai Real Estate Market Overview report, which assesses the latest trends in the office, residential, retail and hotel sectors.
The downward trend in residential performance continued in the third quarter with sale prices falling further and rents registering marginal declines, the report added.
On the overall scenario, JLL said the slowdown continues in Dubai's residential and hotel markets while the retail sector has reached its cyclical peak and the office sector remains stable.
The hospitality market saw further declines in ADRs (average daily room rates) which have negatively impacted revenues.
Meanwhile, growth in the retail sector appears restrained across all mall types while rents in the office market remain stable across Grade A office space, with marginal declines in Grade B space.
While the general Reidin sales index dropped 10 per cent year-on-year in August, the rental index points to a one per cent decline in rental values.
"The Dubai real estate market continued to experience a slowdown in performance during the third quarter, a trend which is expected to continue over the remainder of 2015," remarked Craig Plumb, the head of research at JLL Mena, said.
"Residential sale prices continued to decline (villa prices have declined by 11 per cent over the year to August). For the first time, rental prices have also declined (albeit marginally) over the third quarter," he added.
JLL, he stated, had recently highlighted the region's shortage of middle-income housing. "This quarter, we have seen increased recognition of the issue with the introduction of a number of initiatives from both developers and the government targeting the affordable housing market, (these include Nakheel's launch of Jebel Ali Estate at Cityscape and further stages being launched within Nshama's Town Square project)," noted Plumb.
"In addition, the lack of major new mega projects and the increased emphasis on housing for the middle-income segment of the population signifies the maturing of Dubai's residential market," he stated.
On the office sector, JLL said the third quarter saw the delivery of around 283,000 sq m of office GLA (gross leasable area), of which 53 per cent were strata-owned buildings located in Business Bay such as Bay Gate, Iris Bay, and The Binary A & B.
Elsewhere, Tecom Authority delivered The Makateb 1 & 2 in the International Media Production Zone (IMPZ).
"An additional 948,000 sq m of GLA is scheduled to be delivered by 2017; however we remain cautious on the delivery of these projects within this time frame. Already some towers have been delayed, while others like Symphony Tower and Platinum Tower in Business Bay (initially scheduled for delivery in 2016) have been converted to hotel apartments," said Plumb.
"In terms of performance, the DIFC (for example, The Gate) and surrounding buildings (such as Daman) continue to see increased demand and command higher rentals, while Grade B stock suffers from higher vacancy rates and a marginal decline in rents," he added.
According to Plumb, the commercial sector has been largely stable with demand focused on the higher quality offices of the central business districts (CBDs), most notably the DIFC, which continues to see increased demand and thus higher rents.
"Conversely, lower occupancy rates have resulted in a marginal softening in rents in secondary locations. One notable trend is tenants are now migrating between free zones as licensing requirements are relaxed. The limited supply of new office space in Tecom has resulted in many tenants moving to the nearby JLT free zone," he added.
On the hotel sector, JLL said the Dubai market continued to witness a slowdown in performance over the third quarter of the year, partly attributed to the seasonal nature of tourism in the emirate, but also to the slowdown in tourist arrivals.
While occupancy rates registered 77 per cent year to July, ADRs dropped seven per cent year-on-year (Y-o-Y) to reach $227 over the same period. In turn, RevPar’s declined nine per cent Y-o-Y to hit $175 in the YT July.
In terms of supply, the third quarter saw the addition of 450 room keys with the delivery of Intercontinental in Dubai Marina, Ibis Styles in Jumeirah and Hyatt Place in Baniyas Square, Deira. Despite strong demand, the delivery of an additional 32,400 room keys by 2018 is expected to exert further downward pressure on ADRs and RevPars, the report added.
On the retail sector, JLL said the activity remained subdued over the third quarter as annual rental growth rates across all mall types continued to slow down.
As the growth in retail sales figures remains sluggish, landlords now have to adopt more realistic and rational approaches to leasing in order to retain their tenants, noted Plumb.
"There are signs that landlords have recognised this softening and have adjusted rental levels to more realistic levels in order to differentiate their offerings in the face of strong competition. We expect rents to drop over the 12 months as the market moves through its cyclical peak," he added.
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