Landmark Advisory's Q3 Report: Owner behavior delaying the inevitable

In an oversupplied market like Dubai, price floors are consumer driven.

Jesse Downs, Landmark Advisory's Director of Research and Advisory Services, said:

"Landlords are opting out of the market because of lower rents creating a temporary respite in the price correction process. This short term decline in supply is a market distortion, which will end. Real prices will be determined by what Dubai residents are willing to pay."

The Landmark Advisory report also investigates new macroeconomic factors affecting Dubai's sales market. "With mortgage rates currently averaging 8.5%-9%, and construction financing rates at 7%-8%, there is a systematic imbalance. Residential demand is restricted by high borrowing costs and credit scarcity, while building is incentivized by lower capital costs on construction loans." Ms. Downs went on to say that "disjointed lending practices can widen the supply-demand gap in Dubai."

In terms of sale prices and rents, Dubai's average sale prices for villas and apartments declined 24% and 17% respectively during Q209. Sales demand was stronger for villas, which accounted for 73% of all residential sales.

During Q209, Dubai's leasing market saw average villa rents fall 19% to Dhs220,350, while average apartment rents declined 23% to Dhs129,900. Despite falling rents, transaction volumes increased significantly for both villas and apartments, by 25% and 20%, respectively. Commenting on this, Ms. Downs said: "relocations from Abu Dhabi, Sharjah, and within Dubai are the primary factors driving leasing demand."

Dubai apartment rental trends showed a significant spike in demand for International City. During Q109, International City accounted for only 2% of all apartment rentals, but in Q2, it registered as many leases as JLT, the second most popular area for apartment rentals after Dubai Marina. Ms. Downs explained that "increased demand was driven by existing tenants within International City upgrading to larger units there."

Turning to Abu Dhabi sales, average residential listing prices regained some stability in Q209. However, secondary market asked prices fell 11% for apartments and 8% for villas. Over the next quarter, sale prices will start stabilizing and are not likely to suffer significant decline.

"Furthermore, the delivery of first phases will likely encourage some price recovery for those units as they transition from the off-plan market to end-users," continued Ms. Downs.

Average asked villa and apartment rents in Abu Dhabi both fell by roughly 10% in Q209. Low quality apartments saw the heaviest rent declines, while rents for higher-end units were more resilient.

According to Ms. Downs, "as more supply enters the market, average rent levels in Abu Dhabi will likely decline significantly, especially for low quality units, larger apartments, and villas located outside Abu Dhabi Island."

The commercial property prices in both cities are struggling. Office space requirements for most companies already in the UAE are either static or shrinking. However, "Abu Dhabi's mid- to long-term prospects for commercial demand growth are stronger than Dubai's. Abu Dhabi's potential for population growth and job creation, combined with significant pent-up demand, bode well for the medium- to long-term performance of its office market," Ms. Downs concluded.