Residential rents across Dubai registered no
change during the first quarter of 2018, helping improve the annual rate of
change to 3.1%, from 7.7% at the end of
last year, according to leading international real estate consultancy,
Cluttons. This marks the first stable quarter for rents in the emirate in over
two years.
Cluttons’ Dubai Spring 2018 Property Market
Outlook reports that while the rental market has shown signs of stabilising,
the growing volume of off-plan investment stock, destined to be made available
for rent after the handover, is likely to
pose challenges in the future. The ability of the rental market to absorb a
high volume of new stock will likely be tested over the next three years, it
adds.
Murray Strang, Head of Cluttons Dubai said “We
expect newly completed rental properties to command the attention of tenants,
while older and more secondary property will register rent falls. This flight
to quality phenomenon will likely result in the creation of a very distinctive
two-tiered market. In the short-term, we expect rents to slip by up to 5-7%
over the remainder of 2018.”
In the sales market, the first three months of
2018 have shown a decline in average residential values across Dubai, falling
by 2.5%. However, more affordable areas such as International City, and
Discovery Gardens stood out as bastions of stability in the face of continuing
headwinds for the market.
Faisal Durrani, Head of Research at Cluttons,
said, “Affordability aside, one of the key factors that have likely contributed to the stability in values in Dubai’s more
affordable residential areas is the distinct lack of new supply in these
markets. We expect demand to remain firmly centred on new homes priced under
AED 800 sq ft as affordability takes
centre stage in the market”.
Of the 134,000 units,
we expect to hit the market by the end of 2020, just over a third are expected
to be priced under AED 800 sq ft,
underscoring the burgeoning affordability issues that the city is storing up
for the future. Even if you factor in some slippage in deliveries of circa 20%
to 30%, as has been the case historically, supply will still exceed the
projected demand resulting from the organic growth in population, which will
see 77,500 households created. While one may argue that supply and demand
appear to be well balanced, it’s worth remembering that not all new households
will purchase a home; many will opt to rent, in keeping with the transient
nature of the UAE’s residents. Developers appear to be ignoring this critical
issue at present; however, the new proposed law around the restriction of
off-plan sales until schemes are 50% complete may well be a blessing in
disguise.”
Cluttons expects the new proposed law to
curtail off-plan sales activity, which
has remained surprisingly resilient, despite a cooling in demand levels for
secondary market property over the last three years. “At the end of the day,
such rules are designed to protect buyers and preserve, and enhance the city’s
reputation as an investment hub, especially as new international markets are
increasingly being targeted by developers,” commented Strang.
Durrani added, “Developers, both large and
small will be forced into rethinking their growth strategies and development
pipelines are undoubtedly going to be reviewed. We may, at last, see an
abandonment of the ‘build it and they will come mentality’, with the city seeing
more measure, modest and appropriate homes brought to the market that actually
matches the underlying demand.”
The report highlights the law may move
developers to contain construction costs by cutting corners, which would
ultimately impact investors’ confidence in off-plan
developments. “While this may clearly be an issue, it does present the
government with an opportunity to introduce more substantive building
regulations around the quality of construction, with a view to raising the
warranty offered on newly completed homes, which currently stands at just one
year, compared to other international markets, where it is much higher,” added
Strang.
Overall, Cluttons expects values to slip by up
to 5% or 7% this year and adds that it is quite likely this trend will persist
well into 2019, catalysed by the buoyancy of the supply pipeline, before there
is the potential for stability in 2020, once the supply pipeline starts to
diminish.
Office market
Like the residential rental market, office
rents across the 24 submarkets tracked by Cluttons have remained largely
unchanged during Q1, with just eight submarkets registering falls in upper
limit rents of between AED 5 sq ft to AED
20 sq ft. On an annual basis, Bur Dubai
(-21%) registered the steepest correction in upper limit rents, leaving them at
AED 110 sq ft, or AED 30 sq ft lower than this time last year.
“We continue to record a range of activity
across the board, from companies expanding to some who are consolidating
operations - while there is a wide range
of new market entrants, some are attempting to regear existing leases. This
depth of activity is characteristic of a normal market where rents are neither
rising, nor falling rapidly and is indicative of a market that is healthy and
mature,” commented Paula Walshe, head of International Corporate Services at
Cluttons.
“Despite this apparent stability, the city’s
global nature means it is, more than ever before, influenced by geopolitical
events and tensions. Although we are 4,000 miles away from the UK, Brexit is
having quite a unique impact here, with some British occupiers looking to make
cost savings at lease renewals. On the
other hand, US firms, buoyed by positive economic news at ‘home’ are far more
positive in their outlook, with a stream of new entrants from the States being
complimented by expansionary activity among many US firms based in the city”,
Durrani explained.
According to Cluttons, the somewhat static
conditions mean that landlords are keen to demonstrate flexibility for the
right occupier, with contributions to fit-out
costs. The report finds that an increasing number of occupiers are being
motivated to relocate purely on the basis of cost, as well as the perception of
getting better value for money. Business bay, for instance, has been the
recipient of many occupiers departing from Deira and Bur Dubai over the last
18-24 months who have been drawn to this submarket by the attraction of letting
relatively more modern and recently completed space.
“However, in some parts of Business Bay, where
transportation and pedestrian infrastructure is still playing catch up, the
advantages of relocation may be negated by traffic issues as well as the lack
of gravitas associated with a more established central business district. The
latter of course comes with the added benefit of extensive street-level retail and food and beverage
outlets, which give rise to a vibrant and desirable place to work. This may
well change with the opening of Marassi Business Bay and once the area reaches
a certain level of office occupancy.
“The decision to relocate for cost savings is
both complex and challenging. Often, regearing existing leases, making more
efficient use of existing office space, with flexible break options, may be
more beneficial in the long run,” commented Walshe.
“Overall, flat conditions will likely linger
through 2018, with any rent falls likely to be contained between AED 5 sq ft to AED 20 sq
ft. Free zone areas will continue to buck the trend as their position as
the most desirable submarkets for most new occupiers remains unchanged and
unchallenged. That said, new supply in locations such as the Innovation Hub in
Dubai Internet City, Silicon Park in Dubai Silicon Oasis and Brookfield Place
in the DIFC will undoubtedly test rental stability in these locations.” Durrani
added.
Industrial market
The report shows Dubai industrial rents have
continued to drift, following on from a challenging 2017, which saw the market
being hampered by an excess amount of speculatively developed supply. This
overhang of warehouse stock still remains across all submarkets monitored by
Cluttons and is likely to put rents under more pressure as the year progresses.
As highlighted in the report, the market is
currently going through a period of normalisation, with occupiers being drawn to
more modern, newly completed stock. “Once we work our way through to the end of
this upgrade cycle, rents for the older
stock are likely to continue slipping, which will probably catalyse
redevelopment of historic warehousing. Until we get to that stage, rents are
likely to slip by up to 5% this year, with any declines contained between AED 3
sq ft and AED 5 sq ft,” commented James Lynch, Industrial Agency.
Hospitality market
As part of its expanded hospitality sector
services, Cluttons has, for the first time, including
an outlook on the emirate’s hospitality sector.
The report cites data from Dubai Statistics
Centre, highlighting that 10 new hotel properties were added to Dubai’s in
2017, taking the total number of rooms up by 4,854 to a total of 82,733 keys.
Overall occupancy levels have also improved, reaching an average of 78% last
year; up from 76% in 2016.
Cluttons points out that although the
hospitality sector remains a bright spot in the emirate’s property landscape,
the rising number of hotel and hotel apartment properties, combined with the
rise of Air BnB, is likely to sustain downward pressure on revenue per
available room (RevPAR), which has continued to decline in recent months.
“We do expect that occupancy levels will be
sustained as the city continues its aggressive drive to deliver enhanced
tourism infrastructure, which is materialising in the form of new theme parks, world-class hotel resorts and iconic
attractions, such as the recently announced QE2 hotel”, said Vikram Malhotra,
Head of Hospitality Advisory for Middle East
