Dubai: With residential rental rates softening considerably and access to mortgage funding limited, any medium-term improvement in Dubai's freehold sales looks downright remote. And as an additional 8,000 to 12,000 apartments are added to the pipeline — that too in the freehold locations alone — over the next six months, rents are likely to come under further duress.
The perception that residential rentals are going to be soft for some time has gained ground with each passing quarter. For many households, this has seen the income set aside for rentals fall between 20 to 25 per cent.
In such a situation there's no incentive for them to take on the additional burden that comes from buying a home here. This is where the much-repeated argument of the recent past — that more end-users will start buying once property values drop to reasonable levels — fails.
Competition
Dubai will also have to compete for real estate-related investments with those existing in the UK, India and South Africa. The property markets in all three are on the mend and select developments eyeing overseas investors or expatriates have been doing the rounds here in recent months.
"Sale and rental rates have continued to fall across the UAE in Q3-2010, as new supply from new developments and relocation exerts downwards pressure on prices," said a new report issued by Cluttons. "Freehold transactions over the last quarter have been slow, with buyers adopting a ‘wait and see' attitude. Buyers and tenants are both now in a strong position to negotiate on prices."
Such pressure is already being exerted in ample measure, and will only continue to grow as more supply comes on-line. This chain only creates more prospective landlords or potential sellers entering the market.
On hold
But some are putting off decisions to get into the fray. "Our stock levels have decreased over June, July and August — this may be the result of owners being out of Dubai over the extended summer holiday period, or due to them holding on to their stock," said a spokesperson from Better Homes.
They may have been wise in doing so. Each new addition to the rental pool is only reinforcing the pressure on rates. Nowhere is it more evident than in Jumeirah Lakes Towers, where, according to latest data from Jones Lang LaSalle, lease rates dropped 40 per cent in the second quarter. That quite a few JLT high-rise developments were completed in the first half of the year cannot be dismissed as a coincidence. "The investment market remains weak, although there is some limited demand evident. Overall, however, transactional volumes remain low with the market still constrained by a lack of available capital," said Matthew Green, head of research and consultancy at CB Richard Ellis. "We are starting to see some institutional money come to the market, but at this stage many of the deals that come to the table fall through as the price gap between individual parties expectations vary so hugely."
Lease papers
With tenants shifting loyalties, the landlords are starting to fight back.
"The impact of reduced lease and occupancy rates, and increased tenant movement within the market, has influenced many landlords to seek greater security provision within their lease agreements," said a report issued by Jones Lang LaSalle.
"This trend has included the implementation of rental penalties for those contracts broken during the agreed lease period, to discourage tenants from moving mid-lease."
