Dubai's real estate sector continues to struggle in 2010 as the latest set of figures released by Dubai-based real estate consultancy, the Landmark Advisory, reveal sale prices and rents for villas, apartments and offices will continue to decline.
Because of the supply glut, through Q1 2010, apartment prices are expected to fall by as much as 20% over the next 18 months. And despite increasing in Q3 last year, villa prices in Dubai have stagnated, with a marginal increase of 0.2% in the fourth quarter. In the fourth quarter 2009, apartment prices fell 4.3%, which was similar to the 3% decline in Q3 2009.
'While villas prices remain unchanged on average, there is a variance of pricing emerging based on location,' said Jesse Downs, director of research & advisory services, Landmark Advisory. 'Sale prices for villa communities along Sheikh Zayed Road – which we refer to broadly as coastal communities – have increased while inland communities have decreased.'
Sale and leasing transactions for commercial property remained low in Q42009 with average sale prices down 5.1%, while office rents dropped 8.4%. According to Landmark Advisory, this trend will continue to decline as an estimated 48 million square feet of office space enters the market over a four-year period.
Landmark Advisory also estimates that average rents are likely to decline as more residential supply is delivered at a time of weak demand fundamentals.
Its latest quarterly report also focused on the ratings of the top developers in Dubai. The quantitative evaluation revealed a deficit of Grade A developers, with the top 52 developers in Dubai achieving an average rating of C. Seventy-one per cent of developers were graded C+ or lower.
The consultancy said this low ranking will contribute to the ongoing divergence within the asset classes.
Downs added: 'To date, much of the supply already delivered was built by master developers, which rank higher. However, these developers constitute the minority of the total pipeline of units within the next several years.
The single-asset developers currently building the bulk of the forthcoming supply have a significantly lower rank and may suffer further credit downgrades as their product is forecasted to overpromise and under deliver. This phenomenon will create a bifurcation between integrated, high-quality units and those poor quality units within fragmented communities where many builders have postponed their developments indefinitely."
Location is key
The findings echo those of the consultants Jones Lang LaSalle, whose latest report outlined a number of key real estate trends in the UAE. Most pertinent was the finding that the UAE market will experience greater differentiation in 2010 as some locations will perform better than others, resulting in a polarising effect on the market.
Craig Plumb, head of research at Jones Lang LaSalle MENA said: 'The need to rebuild confidence and greater transparency is no longer optional but a necessity in the region's fast evolving real estate markets. The rate of decline may be comparatively less in 2010 than in 2009 but the timing of recovery will depend on additional demand from both investors and tenants. As the markets mature, investors need to take a longer term view as the levels of returns are expected to become more stable and sustainable."
Dubai's collapsing real estate market – which was estimated to contribute 50% to the emirate's GDP - has had a number of knock-on effects. The emirate has announced a 6% cut in state spending for 2010 as it feels the strain of its debts as a consequence of the real estate collapse. Spending is projected to be $9.64bn in 2010, compared with $10.3bn in 2009.
Unable to fall back on hydrocarbon-backed wealth, Dubai's cut in spending come in sharp contrast to its neighbours. For example, Saudi Arabia has unveiled its largest-ever budget of $144bn for 2010, a 14% increase in expenditure compared to 2009 budget of $126bn.