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Tenants spoilt for choice

In a subdued rental market, we look at how tenants and landlords are faring

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Rents have dropped in recent months in various areas in Abu Dhabi, including Al Raha Beach
Property Weekly

Real estate pundits agree tenants are now in a much better position when negotiating contracts with their landlords. In the prevailing market environment, many landlords are compelled to offer incentives to entice new tenants or hold on to existing ones.

“Gone are the days when tenants feel pressured to take the first place that becomes available,” says Craig Plumb, head of research at JLL Middle East and North Africa (Mena). “There is a wide choice of units available at most price points, which increases the bargaining position of tenants.”

Some landlords have had to reduce rents or increase the number of instalments and others offer freebies or waive maintenance and other costs.

“Landlords are increasingly offering furnished units without increment, rentals inclusive of Dewa bills, or rent-free periods for up to two months,” adds John Stevens, CEO of Asteco. “Landlords are also relaxing on the number of rent cheques, with some reverting to a more Western-style of monthly payments.”

There are multiple factors that have contributed to the paradigm shift. Low oil prices and a sluggish economy have resulted in cuts in government expenditure and consequent layoffs at state-linked companies. Impacts of a softening global economy, redundancies in the oil and gas, finance and banking sectors have also stunted the demand for property.

Meanwhile, real estate development has posted a healthy growth rate. In Dubai particularly, new projects continue to be announced. Furthermore, many delayed projects are being resumed and locked-in properties are being released, further increasing supply in the market.

According to Asteco, the total residential supply in Dubai is anticipated to reach around 27,200 units this year. This compares to 13,750 handed over last year. Abu Dhabi will see an additional 3,100 units entering the market by year end.

“Even if not all of these units materialise due to construction delays and phasing, we expect that a large number of these dwellings will be offered to the market on ‘discounted’ rates to encourage take-up,” says Stevens.

Add-on benefits

As the sluggish rental market continues, Mario Volpi, chief sales officer of Kensington Luxury Real Estate Brokers, says tenants will continue to enjoy greater leverage. For landlords, it is prudent to try to retain existing tenants as additional floor space is being added to the market. Going through long void periods or losing quality tenants can be a big headache for any landlord, thus, many who are seriously affected by the present market conditions are more amiable to renegotiating the terms of lease.

Some villa tenants in Dubai, for example, are getting maintenance cost waived where such an expense would normally have been paid by the tenants. There are now rent-free periods wherein tenants get 13-14 months on a 12-month lease. “In Dubai, tenants are getting the landlords or developers absorb broker fees, which earlier was paid by the tenant,” adds Stevens.

This has resulted in a wide array of choices based on price, payment terms, location and other incentives such as rent-free periods, free maintenance costs and waived broker fees.

However, Volpi puts it in perspective: “Tenants are not necessarily driven to move by these sweeteners alone, but by their own time frames and individual motivations.”

As landlords try to avert void periods, new projects, especially larger ones, are being offered at a lower prices to ensure speedy take-up. This has pushed the rates further down in the traditionally preferred inner areas.

The growing bargaining power of the tenants is playing a major role in determining the prices of property. The situation is expected to persist as rents will likely continue to soften until 2020.

Abu Dhabi

“Rentals in Dubai have fallen further than those in Abu Dhabi as the market is more liquid and there is greater competition between developers,” says Plumb.

Given there are fewer players in Abu Dhabi, landlords have tried to maintain higher rents, although in recent months Plumb says Abu Dhabi has seen a greater fall in rents than Dubai “as the demand has softened significantly and vacancies have increased in even the more sought-after locations”.

Villa communities in both Dubai and Abu Dhabi have seen prices reduce the most, while apartments haven’t fared any better either.

Volpi points out that Abu Dhabi’s villas have seen a reduction of between 7 per cent in Al Raha Beach to 12 per cent in Al Raha Gardens during the second quarter compared with the same period last year. Apartment rents have dropped in the range of 8 per cent in areas such as Shams Abu Dhabi to 14 per cent in Corniche.

Stevens says that apartment and villa rents in one of the affordable developments in Abu Dhabi such as Al Reef are going down 10-11 per cent compared with last year. Rents for low-end units located in the inner city areas such as Hamdan Street, Khalidya and Murur and in the mainland such as Mohammed Bin Zayed City and Khalifa City are now around 12 per cent lower than last year.

Dubai villas also witnessed a reduction of between 12 per cent in areas such as Al Barsha to 16 per cent in Springs. Apartment rents have gone down by 9 per cent in Greens to 14 per cent in Business Bay.

As a result, tenants are able to secure rents that are 13-17 per cent lower than what they were a year back in established villa communities such as The Springs, Jumeirah and Arabian Ranches, according to Asteto figures.

Spoiled for choices, tenants are also driving a location shift to newer areas. “Tenants are weighing up the pros and cons of leaving what is considered a prime central area like Dubai Marina for newer developments a little further out like Mira,” says Russel Owen, head of agency in the UAE at Chestertons Mena.

He says rents for an average two-bedroom villa in Dubai Marina is now between Dh130,000 and Dh140,000 per year, whereas three-bedroom town houses with gardens in Mira and Mudon are leasing at around Dh140,000. “More clients, specifically those in the 30-40 age group, are moving away from Dubai Marina and starting homes in these more family-orientated communities,” says Owen.

Lease terms

The slump in prices has come as a much-needed relief for the tenants as landlords are now only too willing to accept payments in four to six cheques. This was unheard of earlier, but is the norm in a number of areas now.

“Market conditions have served to strengthen the negotiating position of many residential and commercial tenants,” says Stevens.

In a number of cases, existing tenants renegotiating for better terms upon expiry of their contracts. If landlords are unwilling to offer better terms, many tenants now are no longer averse to relocating in search of more attractive terms. Stevens expects this trend to continue for some time.

“We do not expect the market to recover until economic sentiment improves in line with increased government spending, further implementation of diversification strategies and the anticipated gradual rise in oil prices,” he says.

However, a Chestertons report notes that the market has started to level off and will remain flat in the coming months. “We are expecting to see upward growth in Q3 2018 as we head into 2020,” says Owen.

In the meantime, tenants should find ways to take advantage of the additional supply across apartments, villas and offices and look for better deals.

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