Despite high profile launches in 2010 of the Armani hotel at the Burj Khalifa and the Al-Malktoum International Airport, the latest round of real estate reports reveal prices continue to decline on the back of oversupply in the market.
According to the Q3 2010 report by Dubai-based management company, Asteco, Dubai apartment prices declined a further 6% in the third quarter of 2010, while villa rents dropped 4%.
Sales prices and rental rates remained stable in more affordable locations such as Discovery Gardens and Jumeirah Lake Towers, which recorded a minimal correction of 3% and 2% respectively. Any further contractions are not expected to be significant due to the already lower rents.
Renters search for value for money
'The number of transactions, which are generally at their lowest during the summer and Ramadan, has been surprisingly active with a number of people taking advantage of the quiet months to look for value for money accommodation. Therefore the drop in rents has proved to be less significant than in Q2,' said the report.
Villa activity also fared better than expected, as tenants increasingly opted to move from apartments to villa developments, as prices remain competitive. This trend is expected to continue into Q4 and drive demand. 'Villa rental rates seem to be more robust compared with apartments, which in part has to do with the fact that the current and future supply of villas is marginal compared to apartments,' the report added.
According to the report, villa rental rates have experienced an average decrease of 4% since Q2 2010, due to oversupply. In particular, the Springs has seen a drop of 7% due to the significant number of units available and the ongoing infrastructure construction in the area.
New supply drives downward price pressure
The largest change was reserved for Palm Jumeirah, Jumeirah Beach Residence and Sheikh Zayed Road with average rental decreases of 11%, 9% and 9% respectively. Whereas previously, these properties had been successful at maintaining their rental rates due to their primary location. However, continuous rental drops in developments have caused the areas to adjust in order to compete for the shrinking tenant pool while the demand-supply gap widens.
New supply applying pressure on prices is the main driver for rental declines in the emirate. However, capacity is set to increase further in 2010. In May, the Bank of America Merrill Lynch reported that Dubai would have 44,000 vacant units by the end of 2010. As rents decline, both investor and owner occupiers are discouraged from entering the market.
As a result of market forces, the rental market has changed complexion. Matthew Green, head of research and consultancy with CB Richard Ellis Middle East, tells AMEinfo.com, the situation for landlords is dire, as tenant loyalty is not there. With so much supply, landlords are having to adapt to keep apartments occupied in such a competitive market. Bargaining has become commonplace, up to 12 cheques are being accepted and in some case, landlords are offering one month free.
'There is so much supply that tenants loyalty is not there. For landlords the situation is dire. But the decline in rental rates will slow. Yes it's still declining, but Dubai has got through the worst. It will not be as severe as the last couple of years. Hence, landlords are keen to keep tenants and offer incentives to keep them,' Green said.
Green adds however, there are some benefits to Dubai's real estate market. 'The market is at least competitive and more affordable than in 2007, 2008. When the economy does pick up, companies will find it far easier to expand. And for ex-pats, the cost of living has reduced.'
In its Q2 2010 market view, research by CB Richard Ellis, revealed that year on year lease rates had declined by 33%.
A Q4 report by Dubai-based Landmark Advisory also revealed apartment sale prices and rents continued to erode on the back of increasing supply with average quarterly declines of 6.3% and 5.8% respectively.
'Various factors continue to push Dubai residential sale prices and volumes down like increasing supply and the existing limitations on the residency visas for property owners. Equally important, limited mortgage activity means investors continue driving demand,' said Jesse Downs, director of research and advisory services at Landmark Advisory.
'The widespread expectation of additional price erosion keeps many investors on the sidelines waiting for opportunistic investments,' continued Downs. 'In some cases this is a fallacy. Although we expect the average residential sales price to continue to decline in 2012, high quality, well position properties in well designed communities with limited supply pipeline are expected to remain relatively stable.'
Going into the final quarter of the year, a considerable number of new residential units are still expected to be handed over, prompting lease rates to fall further. 'There isn't expected to be a huge amount of activity in Q4. But where areas are experiencing new supply such as in Business Bay, they will be under pressure to secure tenants, placing more emphasis on rental rates,' Green added.