The emirate appears to have avoided falling into another round of real estate boom and bust, although prices are set to dip this year due to tighter regulations and lower oil prices
Over the past year, residential rental prices have first stalled and then begun to fall in Dubai, according to real estate agents in the city.
UK consultancy Knight Frank says rental prices in the UAE emirate declined in the final two quarters of 2014 and it expects further price drops this year, with rents to decrease by an estimated 5 per cent and sales prices by 5-10 per cent. US consultancy JLL also says it expects a subdued year, not least because 25,000 additional housing units are due to be brought onto the market the biggest increase for many years.
The changing nature of demand and supply can be clearly seen in data from the Dubai Land Department, which shows falls in both the number and value of transactions in the emirate last year. In all, the department recorded 53,871 transactions in 2014 worth a total value of more than AED218bn ($59.3bn). That compares with 63,652 transactions worth a total of AED236bn a year earlier declines of 15 and 8 per cent in the respective metrics.
Read more from
The fall in activity may be, at least in part, a reflection of the tighter rules governing house purchases. In October 2013, the Central Bank of the UAE announced it was placing more stringent rules on how much an individual could borrow when buying a property. The Dubai Land Department doubled the transaction fee on real estate purchases to 4 per cent in the same month.
Sales prices for villas have stabilised or even fallen slightly in many parts of the city since then, according to UK property consultancy Cluttons. It also notes there has been a fall in rental values after many years of sharp rises. The speed at which rental values were rising began to slow in the third quarter of 2013 and subsequently started to retreat slightly, with prices dropping by 0.3 per cent in the third quarter of last year, according to Cluttons. That was the first fall since the start of 2011.
About 25,000 additional housing units are due to be brought onto the Dubai market this year
The softening of the market conditions has calmed some nerves. Greg Lewis, a senior negotiator at Knight Frank, says the mortgage market is the most important element behind the slowdown in the Dubai market, and he says fears of another property bubble have been dispelled for now.
The main factor is the mortgage rates, he says. With such limited borrowing and larger deposits needed, buyers are struggling to find the money or are not willing to be exposed to that level in this market.
Adding to the downward pressure last year was the slump in oil prices, which began in the summer and continued for the rest of the year. Although Dubai is not an oil-driven economy, much of its economic activity is based around providing services to other countries in the region that do depend directly on hydrocarbons revenues. As a result, confidence levels have taken a dip.
Dubai experienced a general slowdown in real estate performance during the second half of 2014, with a decline in residential transactions, flat rental growth for residential properties and prime offices, and only marginal growth in residential sales prices, says Matthew Green, head of research and consultancy for the UAE at US real estate agency CBRE.
One of the key factors in this whole situation is the negative impact on sentiment. With uncertainty surrounding the length of any oil price slump, investors have rightly become more cautious. While there has yet to be any noticeable slowdown in the office sector, occupiers from the oil and gas and the finance sectors are likely to be more restrained. Uncertainty is also likely to lead some consumers to be more prudent in their spending.
There are some similar trends noticeable in other parts of the market. According to JLL, the growth in rents for retail space began to slow down towards the end of 2014, and it now appears to be reaching a similar point in the cycle to the residential market.
In this area too there is plentiful new supply coming to the market. Over the course of this year, some 267,000 square metres of additional retail space is expected to become available, with 118,000 sq m due for completion in the first quarter alone, according to JLL. Among the schemes are the second phase of Dragon Mart, with a total built-up area of 175,000 sq m. Several smaller, neighbourhood centres are also due to be completed, such as The Box Park by Meraas Holding in Jumeirah.
The increase in shop space comes after several years of little or no growth, with total supply at 2.9 million sq m at the end of 2014, according to JLL. That has contributed to a drop in vacancy rates, with the proportion of empty shop units across Dubai falling to just 8 per cent at the end of 2014, down from 12 per cent a year earlier.
Dubai remains the clear destination of choice for the majority of brands looking to enter the region for the first time, says Green. Currently, the main challenge for brands looking at Dubai is finding available retail space at one of the major malls.
The mismatch between demand and supply mean rental rates have risen very fast over the past year. At the end of 2013 the cost for a sq m in a secondary location was AED1,720 while in a primary location it was AED3,965. By the end of last year, these figures had risen by close to 30 per cent, reaching AED2,220 in the case of secondary sites and AED5,060 for primary locations. However, JLL says that, while there is sufficient demand in the market to fill the additional space expected this year, it expects rental rates to be flat over the coming 12 months.
While the residential and retail segments appear to be at or near the top of the cycle, the picture is slightly different in the commercial office market and there appears to be room for further increases in prices. The continued healthy growth in Dubais private sector economy has helped to maintain momentum in the commercial property sector. And while low oil prices may be dampening confidence levels to some extent, the emirate can still rely on its reputation as a safe haven in the region. That factor should help to keep demand for office space buoyant this year, according to Knight Frank.
There are some significant office developments coming to the market, including Dubai Design District, Dubai Trade Centre District and other schemes in Business Bay and Dubai Internet City. According to JLL, up to 1.2 million sq m of new office space is expected to come to the market over the course of 2015, although it says some projects may yet be delayed. Even so, this marks a significant change from recent years. In 2013, the amount of new office space added to the market was 300,000 sq m, while in 2014 it was 200,000 sq m.
The small amount of additional space last year contributed to a fall in vacancy rates, which dropped from 29 per cent at the end of 2013 to 24 per cent by December 2014, according to JLL. At the same time, average rents for prime office space climbed slightly, from AED1,850 a sq m in 2013 to AED1,870 a sq m by the end of 2014. The agency suggests that rental rates and vacancy levels should remain stable in the short term. However, all the additional space means average rents could face downward pressure and vacancy rates are expected to rise in the main business districts by the end of the year.
In the longer term, there may be some bigger changes coming to the citys real estate market. In late 2013, Dubai was selected to host the World Expo 2020, which prompted an unsustainable boost to the emirates real estate prices. That has since died away, but the need to prepare for the event is a factor in the continued investment in the citys infrastructure.
The expo will be held close to the new Al-Maktoum International airport and this part of the city is likely to become increasing important in the years ahead, according to Julia Knibbs, research and consultancy manager at local property consultancy Asteco.
The [Al-Maktoum] airport will employ large numbers of people and attract businesses serving the airport to the area, she says. As a result, we expect that over time, there will be a shift and expansion of the city towards the new airport, away from the existing, more congested areas of Dubai.
You might also like...
A MEED Subscription...
Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.