The remainder of the year promises to be a good time to look for one’s favourite home at reasonable rental prices and conditions. While real estate analysts are somewhat divided over how much further rents could decline, they all agree the downward trend would continue in the second half of the year and possibly longer.
“We do not believe the market will bottom out anytime soon, and pending the considerable amount of supply expected in 2018 and beyond, we expect further pressure on rental rates,” says John Stevens, managing director of Asteco Property Management.
The movement of the market has somehow surprised some analysts. In its year-end review, JLL had to adjust its assessment of the Dubai market to “bottoming out”. In the previous year, it had indicated that the bottom had already been reached.
“The market has moved anti-clockwise over the past year and we did not see the expected improvement in rentals that we expected in 2017,” says remarks Craig Plumb, head of research at JLL Middle East and North Africa (Mena). “In fact 2017 saw a marginal 6 per cent decline in average rents.”
Plumb cites a number of reasons for this, including stunted sales since Q1 2017 and too much supply in the market.
“This has prevented any pressure on pricing, and the launch of off-plan sales has drawn many renters out of the market, creating a shift from renting to owning,” Plumb explains.
“The level of economic and employment growth was anaemic at best in 2017, below expectations at the beginning of the year,” he adds.
John Stevens
While sales price would remain flat, JLL believes that rents would decline further by a not-too-significant rate of 2-5 per cent.
“This is good news for tenants,” says Plumb. “They should be able to negotiate lower rents to remain in existing units and not have to move to achieve reduced rents as in previous years. Lower rents is also good news for inflation. It should reduce inflationary pressures that are making Dubai less and less competitive.”
Asteco also forecasts rents to record further decreases, but expects the rate of decline to slow down. “Existing and upcoming supply are definitely the main drivers for these corrections,” says Stevens.
Bearing in mind the additional stock to be delivered in the coming years, coupled with other internal and external economic factors, Ivana Gazivoda Vucinic, head of advisory and research at Chestertons Mena, says it is hard to estimate when the rents will stabilise. “As of now, unless some major economic driver happens, we can’t see the rents going up in the foreseeable future,” says Vucinic.
Craig Plumb
Niraj Masand, director of Banke International Properties, believes the drop in rent could be even more pronounced. “There could be as much as a 15 per cent pressure on rents over the next 12-18 months,” says Masand. “What will start making a difference is the quality of the apartments.”
According Reidin, residential rents decreased by 0.43 per cent in January and 7.65 per cent year-on-year. Reidin’s Dubai Residential Property Rental Price Index recorded a 0.29 per cent month-on-month drop in apartment rents in January and 7.43 per cent year-on-year, while villa rents decreased 1.22 per cent month-on-month and 8.85 per cent year-on-year.
The report, though, noted that rents in some affordable areas, such as Discovery Gardens, Jumeirah Village Circle (JVC) and Dubai Silicon Oasis, showed minor uptick changes.
As prices decline, Masand says good-quality units and those close to Metro stations will come out winners. “Areas that have good infrastructure by reputable developers will hold up, but the ones that are being manufactured in bunches will see pressure, such as some in JVC Dubailand, Dubai Sports City, Dubai Silicon Oasis and so on,” he explains. “Dubai Motor City, Mira, Nshama [Town Square] and Arabian Ranches are the kind of products that will hold their value, as they have all the services.”
Niraj Masand
Masand says the biggest pressure will be on older areas, from Jumeirah to Garhoud, as residents are moving to the newer freehold communities.
“The impact on some projects will be less pronounced as they benefit from unique demand drivers, such as favourable location, advanced facilities, quality finishes, excellent property management, above-norm incentives etc.,” Stevens concurs.
Bargaining chips
Although there is no firm data available, Plumb says it appears there are more vacant units now based on anecdotal evidence, which benefits tenants as it increases their range of choices and bargaining position. But Plumb also notes that “many landlords are not responding and are resisting the need to lower rentals to match the market”.
However, those with a more realistic mindset are offering rent-free periods of usually 13 months for the price of 12, as well as more flexible payment terms. “Four cheques is now the norm, and other incentives such as repainting and new appliances,” says Plumb, adding that Dubai’s rental calculator is less useful during times of rental decline.
Maturing market equals less price fluctuations
Asteco has discovered an interesting trend in its investigation of real estate cycles, where rents would increase or decline by about half as much as in the previous cycle.
“As any immature property market evolves, fluctuations become less extreme, cycles more predictable and rates more stable, but to what extent is difficult to say,” Stevens explains. “It is, however, important to note that given the country’s virtually unlimited land bank, the real estate sector is a lot more exposed in terms of the possibility of additional supply than mature property markets, such as London or Hong Kong, meaning it is more volatile to changes.”
Ivana Gazivoda Vucinic
According to Reidin, gross rental yields for Dubai in January remained the same when compared with the previous month at 6.9 per cent. More specifically for villas and apartments, the gross rental yield stayed stable at 5.2 per cent and 7.3 percent respectively. “You have an average of 3-3.5 per cent yield worldwide, but here it’s 6-8 per cent, which kind of doesn’t add up, so you will see yields with the pressure on rents come more into the 5-5.5 per cent range, and that’s when things will start to look up,” opines Masand.
Stevens points out an important fact regarding the generalisation of yields: “The yield of a property is highly dependent on when and for how much the unit was initially bought. Also, institutional investors may be more flexible than individual owners, as they require a certain rental income to cover mortgage costs.”
In any circumstance, Stevens says a majority of landlords understand that retaining tenants and increasing occupancy rates in the medium to long term are more important than short-term gains, particularly given the current market conditions and amount of existing and future inventory.
“High rents can often only be achieved through long waiting periods, and that in turn affects overall income,” says Stevens. “It is a tenant-driven market, and as such it is prudent for landlords to be flexible to avoid high or prolonged vacancies.”
The next peak
As to when and by how much the market will pick-up again depends on a variety of internal and external factors, including oil price recovery, government spending, employment and business growth, says Stevens.
From an international perspective, Taimur Khan, research analyst at Knight Frank, says the global economic backdrop bodes well for the future. “Global growth is forecast at 3.6 per cent in 2017 and 3.7 per cent in 2018. Investor sentiment is becoming more positive and we expect this to feed through to property market investment,” says Khan. “For investors, this stabilisation and an attractive residential yield of 6-8 per cent lead to a very favourable investment case for Dubai.”
Change of strategy
A large proportion of off-plan investors have been driven by capital appreciation, however, some of these projects may not deliver the expected numbers once delivered. In such cases, Vucinic says the only way to achieve some return is by renting out the property.
“This means that the tenants will have more choices for the available budget, which will cause further downward adjustments of the rental levels,” Vucinic adds.
Compounding this situation is the growing number of tenants who are buying their own homes. While the mortgage caps and the doubling of the transaction fee introduced in October 2013 made property ownership difficult for more people, Stevens says developers have stepped in with incentives to attract new buyers.
Taimur Khan
“Developers recognised this gap in the market and began offering low down payments, increasingly flexible post-completion payment plans, incentives such as absorbing agent commission etc.,” he says. Hence, as tenants move into their own homes, new vacancies are created in the rental market.
While this opens an opportunity for both homebuyers and tenants, Stevens points out that it has its limit. “Given the growing young population, where over 60 per cent are aged 25-44, and the fact that early home ownership has gained popularity, it is important to consider loan-to-value ratios, as the majority of those people would not be able to afford the almost 30 per cent down payment, including the 4 per cent DLD fee, required to obtain a mortgage,” says Stevens.
Meanwhile, as market reports point to more vacancies in the rental pool, some analysts are seeing the silver lining. According to Khan, population is set to increase by up to 30 per cent over the next 10 years, which indicates future tenants are on their way.
