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Big advantages for Dubai tenants as rental market softens

With a softening rental market in Dubai, tenants are set to experience a lot more flexibility from landlords

According to Mat Green, Head of Research and Consulting, CBRE Middle East, Dubai’s rental market has continued to soften over the past 12 months, driven by rising new supply levels.

This is helping to form a tenant-driven market, whereby occupiers are able to negotiate more attractive terms with landlords, particularly for new leases, with lower rental rates and a higher number of cheques negotiable across many locations.

However, tenants on existing leases are generally not finding the same level of flexibility from their landlords, although rental increases on lease renewals are at least are becoming less prevalent.

Soft spots

The overall softness of the residential sector is reflected in the three per cent decline in rentals over the last year, driven by a three per cent drop in apartments and a two per cent for villas.

In terms of location specific performance, the decline in apartments has been driven by deflationary trends in locations such as Palm Jumeirah, Dubai Marina and Sheikh Zayed Road.

However, some of the more affordable residential locations, including Jumeirah Village Circle and Discovery Gardens, have actually seen more stable conditions prevail.

Fragmented market

There is a high degree of fragmentation in the residential market, with many residents continuing to orientate towards affordable locations, resulting in declining rentals and rising vacancy rates in some of the more established high end residential communities.

This has been driven by the rising cost of living in the Emirate, which, combined with economic uncertainty, has driven occupiers to make more defensive decisions in regards to their housing.

The rising supply of comparatively affordable villa and townhouse properties situated along the Al Qudra Road, including Reem, Mudon, and Arabian Ranches 2, is encouraging existing apartment tenants to migrate away from the central areas, to benefit from larger unit typologies and outdoor areas, at rates lower than or similar to high end apartments in Dubai Marina, Downtown and Palm Jumeirah.

Downward rates to continue

We expect to see further widespread deflation of rental rates in H2 2017 and into 2018, as new supply is delivered into the market and available options for tenants increase.

With a significant number of new houses being handed over, offering relative value for apartments, further deflation of rentals for high-end condos can be expected.

There may also be further downside risk for some of the older townhouse and villa communities.

Gaining negotiation power

The main trends at the moment relate to the evolution of a tenant’s market, with negotiable rents, a higher number of cheques and even-rent free in some cases.

There is also a continued shift towards affordability, with tenants typically becoming more cautious with housing requirements and/or looking for value in secondary locations, such as Jumeriah Village Circle or Reem.

From a development perspective, there is a general shift towards smaller unit sizes, particularly for apartments, which is being driven by investors’ desires for lower ticket sizes and developers’ desires to sell a higher number of units in a quicker timeframe.

Emerging locations include Mohammed Bin Rashid City, Meydan and a number of new communities in Dubailand, which are now starting to see critical mass being created, which will ultimately heighten their appeal in the longer term as they become established.