By the end of 2012, there will be an oversupply of residential property in Dubai of between approximately 110,000 and 115,000 units, a report from Investment Boutique reveals. These figures would suggest that close to 500,000 people, excluding unskilled expatriate workers, will need to immigrate to Dubai in order to fill the forecast supply.
Last year was undoubtedly one of low expectations and a great deal of uncertainty, and the highlights of 2009 were few and far between for the real estate sector.
"There were minimal transactions throughout most of the year and the numbers paled in comparison to the boom time era. There was constant downward pressure on both sales prices and lease rates that had landlords and owners competing for tenants and buyers for the first time in Dubai's recent history. Units demanded decreased in 2009 due to a falling expatriate population," the Dubai State of the Market Report 2010 by investment Boutique states.
The firm expects the real estate sector in Dubai to remain fragile for the remainder of 2010, although it is believed that sales prices and lease rates are fast approaching their lowest point. "Affordability will be paramount going forward as speculators have left the market and demand is being created by end users. Downward pressure on prices is expected to continue until affordability matches income levels. The majority of demand is likely to remain for rentals as opposed to sales," the report predicts.
More Dubai real estate project cancellations expected
More project cancellations and delays are expected this year, as developers look to finish projects which are already close to completion, in order to receive bullet payments from purchasers on handover.
The sector will continue its flight to quality, as developments with fundamental flaws will suffer the worst vacancy levels. The biggest threat to the market in 2010 however, remains the looming threat of major oversupply.
Next year is set to provide the residential market with some much needed stability, as prices are expected to bottom out in the latter part of 2010. A lack of new projects on the market and a rising population is expected to contribute to this. "It is expected that barely any new construction projects will be launched until the outlook is a bit clearer for developers and the supply and demand equation reaches a point closer to equilibrium. Banks will slowly loosen lending criteria as they can fully understand the effects of the downturn and forecasting future results will become easier."
Residential market confidence to return in 2012
It is in 2012 that confidence is expected to return to the Dubai residential market. Banks are expected to loosen lending criteria, although with a better understanding of risk management.
"No new projects are expected to be announced and launched during 2012 unless they are niche products with very unique selling points and a very specific target market. Oversupply issues in the residential sector will exacerbate and vacancy levels will vary from area to area. Investment Boutique estimates population to grow in 2012 due to job creation in the Emirate," reveals the report.
Commercial sector to suffer
The commercial side of Dubai's real estate sector is set to experience the same major problem as the residential side – oversupply. "The commercial real estate sector in Dubai is expected to remain over supplied in the coming years as new projects get handed over, whereas the number of office workers shows slow and steady growth. However, the planned office space is based on extremely optimistic growth forecasts, which are unlikely to be achieved and therefore the pipeline of supply after 2012 is expected to be delayed indefinitely until demand catches up with supply," the report explains.
Rents and occupancies in the commercial sector are set to come under more pressure from new supply in the market in 2010, coupled with a minimal and limited demand. Relocations are expected to increase, as companies take advantage of cheaper prices in better locations in Dubai. From 2011, Investment Boutique predicts that new demand will start to grow at a slow pace, while rental prices will fall at a slower pace than this year, although vacancies in secondary locations will continue to increase.
In 2012 the firm expects supply to hit its peak and stabilise, although no equilibrium will be reached: "The equilibrium between demand and supply will not be achieved on an overall basis but superior locations will see normal occupancies and stable rentals whereas inferior locations will suffer from high vacancies and lower rental values as they are unlikely to attract tenants," the report concludes.