Dubai: With Dubai property prices having already softened by approximately 20 per cent, the question in everyone’s mind was when rents would follow.

After a lag of six months, rents have started to soften on a citywide basis, as incremental supply starts to come on stream. With a high correlation between prices and rents (+0.8) and a continued supply stream across villas and apartments this year, it is evident that rents will soften further across all sections, particularly at the higher end, as mortgage payments and higher vacancy rates push rental rates lower.

Analysis of the income distribution in Dubai reveals a staggering 84 per cent of the expatriate population are not eligible for purchasing and can only be tenants. In London the figure is 48.8 per cent, and in Hong Kong it is 53.2 per cent.

While this obviously ignores the overseas “investor effect”, it is evident that for the resident population, there is a considerable skewing of supply towards the top end. In recent months, there have been announcements by developers starting to offer mid-income projects.

Where the pricing has been appropriate, it has met with considerable demand. But as it stands, less than 15 per cent of the freehold market is classified as mid-income housing, providing yet another compelling insight into why the Dubai market remains top heavy at the moment.

As speculative activity has receded in the ready and off-plan segments, end-users are steadily becoming a larger percentage of the housing market. But it is equally evident that income distribution levels will also need to be elevated if there is to be housing “base effect” that permeates through to the majority of the expatriate community.

This would counterbalance the currently overwhelming investor phenomena. For this to materialise, the job market needs to be scrutinised critically, and statistics from Dubai Statistics Center paint a somewhat optimistic picture.

Given that per capita incomes in Dubai remained flat for a few years after the 2008 boom-bust cycle, there is evidence that this is starting to rise. However, there is evidence that job creation (outside of the labour force) is being created at all levels at higher per capita levels buy a significant margin (in excess of 20 per cent).

While it is too early to gauge the impact of oil prices in the economy as yet, anecdotal evidence suggests that the pace of infrastructure and real estate projects have remained unscathed, and that job creation remains robust in these and related sectors.

It is this job creation cycle that is the strongest indicator that Dubai is less vulnerable this time around to the events that transpired in 2008. And given the scale of projects and the profile of developers’ balance-sheets in this cycle, along with their flexibility in adapting to changing demand, protracted and painful price corrections à la 2008 appear highly unlikely.

What does this imply for tenants in the current to medium term? As the supply cycle has become more visible, it is clear rents will continue to soften gradually and moderately in the residential space in the medium term. (This is not true in commercial as occupancy rates have risen steadily there.)

The relationship between rents and prices imply that there will be some softness in prices, particularly at the higher end.

Rents and prices of mid-income housing have outperformed those at the higher end by over 22 per cent in the last 12 months, clearly illustrating the paradigm shift that is underway in the real estate market. To buttress this, on the demand end, it is equally evident the rental cycle will shift towards a two-tiered market; one based on quality and location, and the other based on price.

Statistics continue to reveal that it is in the latter segment that supply continues to lag significantly behind demand, and it is in this area that rents (and prices) will likely make a recovery quicker and faster than the market is discounting thus far.

The writer is Managing Director of Global Capital Partners.