While there has been much talk in the past several months about the market reaching the end of a down cycle, there now appears to be general agreement that prices are unlikely to fall further. Apartment and villa rents and sales prices barely changed during the first quarter, according to JLL, suggesting that the market is close to the bottom of its cycle.
“The key question concerns the timing of any recovery,” JLL states in its Market Overview for Dubai Q1 2017. “Given the continued slowdown in the Dubai economy and its dependence upon the global economy, where growth remains uncertain, any recovery in residential prices in Dubai is unlikely before late 2017 at the earliest.”
While real estate market is showing signs of marginally edging upwards this year, prime residential areas continue to lag in performance, according to a report by Core Savills. “While most market players are in consensus over the prices bottoming, a range of economic factors are resulting in contradictory indicators of recovery,” the firm states in its residential market update for Dubai.
Currency fluctuations remain one of the key reasons that has stalled property purchases by foreigners.
“Looking at real estate investment in Dubai last year, we witnessed a year-on-year contraction in the total number of investors, notably amplified by non-regional buyers,” says David Godchaux, CEO of Core Savills. “A strong US dollar continues to affect the traditional buyer nationalities such as Indians, British and Pakistanis as their currencies have devalued significantly over the last year.
We also saw receding regional demand as GCC investors, although the same in number, displayed a 21 per cent drop in total investment amount.”
However, analysts believe the maturity of the market will ultimately attract more foreign buyers.
“The residential market remains a favourite destination among Indian investors and according to recent data released by the Dubai Land Department, there has been Dh12 billion worth of property transactions from Indian investors,” says Craig Plumb, head of research, JLL Mena. “Although the residential market continues to slow down, this figure highlights the potential the sector has in terms of growth in the future.”
Supply
Estimates of residential deliveries in the first quarter vary from 2,500 to 3,100, but analysts say with developers phasing delivery, the question of oversupply is being addressed proactively.
Cavendish Maxwell says that approximately 2,500 units were handed over in Dubai during the first quarter. Of these, the report says nearly 88 per cent were apartments in areas such as Jumeirah Village Circle, Dubai Sports City, Dubai Silicon Oasis and Dubailand among others.
In its own research, JLL puts the number of completed units at about 2,600, of which 1,500 comprise apartments and town houses in Akoya. JLL states that apartments comprised more than 60 per cent of completions, followed by villas at 24 per cent and town houses at 15 per cent.
Core Savills’ Godchaux says around 3,100 units were handed over in the first quarter, representing just 15 per cent of the total stock announced to be delivered by developers this year. “We anticipate only 15,000 more units to be brought to market until the end of the year, which represents a 50 per cent shortfall from their announced number of 36,000,” says Godchaux. “This large discrepancy between the announced and delivered stock has been a historical trend in Dubai, which has helped developers address oversupply concerns by aligning demand and delivering products at realistic prices, aiding absorption, albeit in the mid and prime segments.”
Meanwhile, analysts are in consensus about phased delivery and materialisation rates in Dubai. The JLL report states that a further 28,000 units are currently under construction and scheduled for delivery by the end of the year. “Actual completions are likely to be far less, assuming a materialisation rate of 50 per cent, around 14,000 could be delivered, which is broadly in line with absorption levels over recent years,” according to the JLL report. “Key projects in the pipeline include two master-planned communities by Emaar — Dubai Hills Estate and Arabian Ranches 2 — and two apartment buildings, Burj Vista, in Downtown Dubai.”
Cavendish Maxwell, meanwhile, puts the number of units scheduled to be delivered for the rest of the year at 35,000. “Historically, there has been a considerable gap between the number of units announced for completion and actual handovers,” its report states.
“While some projects are delayed as a result of financing issues and extraneous factors impacting the residential market, the majority of delays over the last 12-18 months stem from a conscious staggered delivery schedule by developers.”
Rents
Tenants have been able to arrange better deals with landlords during the first quarter. “In recent months, tenants have been able to negotiate terms downwards on renewal and the number of landlords offering flexibility to pay rent through a number of cheques has increased,” states Cavendish Maxwell, also noting that employers are slowly replacing housing allowance with monthly salary components.
Cavendish Maxwell reports that the most pronounced declines have been among studios in Dubai International Financial Centre, International City clusters, Dubai Sports City and four-bedroom villas in Victory Heights.
Godchaux says, “Looking at the rental market, the total pool of tenants has decreased over the last two years due to macroeconomic employment deterrents, while new occupier demand has not fully covered the gap. Of this occupier demand, a segment of tenants who could afford to shift to ownership in the backdrop of relatively lower acquisition prices and higher yields, have done so, reducing the existing pool of renters even more.
“The market continues to bring new supply at an unchanged pace from the past few years, adding downward pressure on rentals.”
Core Savills’ report tags the highest rental drops in The Views and Discovery Gardens at 7 per cent, followed by The Greens at 5 per cent. On the Palm Jumeirah, villas have faced an amplified rental drop at 9 per cent, while apartments dropped at 4 per cent.
Sales
According to Chestertons, off-plan sales in Dubai increased by 45 per cent in the first quarter. There was also a 4 per cent average rise in the number of transactions for ready properties, a 25 per cent increase in transactional activity during that period.
“In the first quarter we witnessed positive movement on the residential transaction side for both transaction values and volumes,” says Ivana Gazivoda Vucinic, head of advisory and research at Chestertons Mena. “This is partly due to the increase in incentives and payment plans created by developers to make it more financially amenable for investors.”
The top locations for off-plan apartment sales were Downtown Dubai, Lagoons, Dubailand and Dubai South, according to Cavendish Maxwell. “For non-occupier investors, locations with high-net yields and low occupancy risk, such as International City and Dubai Marina, continue to remain attractive,” according to a Cavendish Maxwell report.
This is also borne out by data from Core Savills. “Dubai Marina saw the highest spike in year-on-year off-plan transaction volumes at 165 per cent,” according to the firm’s report. “This rise was underpinned by many project launches over the past few months, resulting in a sentimental boost for the overall district with average sales prices stabilising and starting to show early signs of recovery.
Off-plan’s impact
“However, Downtown Dubai displayed a negative contrary performance in sales prices due to a robust off-plan sales activity [a 91 per cent year-on-year rise] positioned at lower price points, in fact casting a shadow on the secondary sales market, [which suffered a nearly 4 per cent drop].”
Explaining the impact of off-plan sales on the secondary market, Godchaux says, “Off-plan sales are increasingly regaining a foothold, particularly products from reputed developers, although having a detrimental effect on secondary market sales, notably in prime apartment districts. While owners of existing properties try to sell their units, master developers offer products positioned at attractive entry points to a similar target pool, particularly investors.
“With a wider product base, developers can exercise a higher level of price control on the submarket and largely have an upper hand over individual landlords.”
For end users who rely on mortgages, there is more stability since banks prefer to provide loans against completed property. The Chestertons report says, “Areas where prices have stabilised are likely to remain attractive. Affordable options for self-use in completed buildings are available in areas such as Dubailand, Silicon Oasis, Sports City and IMPZ.”
Godchaux, meanwhile, notes a trend in both apartment and villa submarkets. “Although softening for almost two years, the prime segment continues to indicate further contraction in prices, while low to mid-segment submarkets are keeping up a steady upward creep, having reversed their course since Q1 2016.”
