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Although anecdotal evidence suggests that a significant number of expatriates have left the UAE in the first half of 2009, some of this decline has been mitigated by a stream of relocations from Sharjah and Abu Dhabi, resulting in a smaller net population effect than originally feared, a latest report on the Dubai property market has concluded. 

According to Landmark Advisory, a division of Landmark Properties, this has also been bolstered by individuals opting out of shared accommodation, choosing instead to lease their own units on account of lower rents. Analysts expect that the Dubai Municipality’s intention to resume enforcement of the one-family, one-villa law to also support rent levels.

“This will increase the aggregate number of households, while decreasing average household size. The net effect will be additional demand for apartments and smaller townhouses, and villas. Due to the shrinking household size, however, larger villas may experience rent declines, due to this policy,” the report said.

According to the report, former Abu Dhabi residents that moved to Dubai, but commute to work in the capital, are primarily motivated by location when choosing a new home. High-income commuters tend to prefer Dubai Marina/Jumeirah Beach Residences, Palm Jumeirah, Emirates Living villas, and Green Community villas. Middle income commuters from Abu Dhabi tend to relocate to Jumeirah Lake Towers and Discovery Gardens. Relocation demand from Sharjah is primarily price-driven and centers on more affordable areas like Mirdiff, International City, and Al Qusais.

Landmark Advisory reports that there is an unexpected, albeit marginal, upsurge in rents across Dubai. At the same time, leasing inventories and listing volumes have fallen noticeably. Landlords are de-listing or forgoing listing their properties, either due to dissatisfaction with current rent levels, or because they are on vacation during the summer. Either way, the result is a marginal average increase in rents at a time when fundamentals should be dictating the opposite trend.

Assuming that landlords are exiting the market due to lower rents, this behavior will prevent Dubai’s leasing market from reaching a rent floor, the report points out. In an oversupplied market like Dubai, rent floors are consumer driven. The momentary respite in the rent correction process, caused by a supply distortion, is only temporary and will reverse as soon as those properties come back onto the market. Real rents will be determined by what Dubai residents are willing to pay.

According to the Dubai Property Price Index (DPPI), during Q209, average sale prices for villas declined 24 per cent, while apartment prices fell 17 per cent. However, demand was considerably stronger for villas, which accounted for 73 per cent of all residential sales in Q209. Sale volumes in Jumeirah Village were particularly strong, with an average transactional price of Dh577 per square foot, which is considered excellent value.

While bid-ask spreads ranged up to18 per cent, nearly three quarters of all sales verified by Landmark Advisory had a 0 per cent bid-ask spread in Q209, with an aggregate average spread of 2 per cent. These spreads, however, cannot necessarily be extrapolated to the wider market listings, because of different pricing strategies, the report pointed out.

Year-on-year, villa and apartment prices are down 37 per cent and 25 per cent, respectively. Since peaking in Q408, however, villa and apartment prices have declined by 44 per cent and 36 per cent, respectively.

During Q209, average apartment rents in Dubai declined 23 per cent to Dh129,900, while average villa rents fell 19 per cent to Dh220,350. Although apartment rents declined more than villa rents in Q209, the opposite trend prevailed in the last quarter. Year-on-year, rents for villa and apartment rents have declined by 19 per cent and 12 per cent, respectively.

Since peaking in Q308, villa rents, according to Landmark, have fallen 31 per cent, while apartment rents are down 29 per cent since their peak in Q408. Relocations from Abu Dhabi, Sharjah, the Northern Emirates, and within Dubai are the primary factors driving leasing demand.

Overall demand for villas increased, as illustrated by a 25 per cent growth in leasing transactions. Two - and 5-bedroom villas experienced the heaviest rent declines, at 28 per cent and 27 per cent, respectively, with 3- and 4-bedroom villas, seeing rents fall by 18 per cent and 11 per cent, respectively.

According to the report, quantitative data and qualitative commentary indicate that demand was strongest for 3- and 4-bedroom villas, an observation supported by higher volumes and relative resilience of rents for those unit categories. The upgrading trend identified in Q109 continues, with 3- and 4-bedroom villas faring best in terms of demand. Location preferences remained unchanged from Q109, with the following areas earning highest leasing volumes: Emirates Living (40%), Mirdiff (20%) and Jumeirah/Umm Sequim (20%)

Overall demand for short-term villa rentals remained stable in Q209, compared to Q109. However, where demand for short-term villa rentals was relatively well distributed accounting for 83 per cent of transactions. 

Apartments

Overall demand for apartment rentals increased in Q209, as demonstrated by a 20 per cent growth in leasing volumes. Transaction patterns show strong demand for 1- and 2-bedroom apartments, and weaker demand for 3- and 4-bedroom apartments. Average rents for 2-bedroom apartments declined 44% in Q209, more than any other unit-type. This was caused by strong demand for 2-bedroom apartments in more affordable developments, like International City.

The report cites transactional data to say that 3-bedroom apartment rents fell the least, with a quarterly decline of 24 per cent, due mainly to demand for larger units concentrated in higher quality buildings. Approximately 60 per cent of all leasing transactions for 3-bedroom apartments were in the Dubai Marina/Jumeirah Beach Residences (JBR) area, while 80 per cent of the total were in premium locations, like Dubai Marina/JBR, Downtown Burj Dubai and Palm Jumeirah.

Overall, the most popular areas for apartment rentals in Q209 were Dubai Marina (26%), Jumeirah Lake Towers (19%), and International City (19%). A major difference over last quarter is the spike in leases for International City apartments. During Q109, International City accounted for only 2 per cent of all apartment rentals, but in Q2, it registered as many transactions as Jumeirah Lake Towers (JLT). Demand in International City was primarily driven by upgrades to larger apartments by tenants within the development itself; approximately 75 per cent of International City leases were for 2 bedroom apartments.

The decline in Dubai Marina’s share of total apartment leases is not symptomatic of falling demand; the absolute number of leases in Dubai Marina remained relatively stable. Instead, it indicates a relative increase in demand for other areas.

Demand for short term apartment rentals remained stable in Q209 compared to last quarter. The top areas for short term apartment rentals are Dubai Marina (41%) and Emirates Living (36%). Landmark Advisory expects a total of 22,700 residential units to be delivered by end-2009. This projection is slightly lower than estimates made last quarter, as developers continue to re-phase projects and delay construction. While the current estimate for new unit deliveries in 2010 is 40,400 units, analysts expect this to fall to 25,000-30,000 units over the next 12 months.

The report points out that for end-users in need of financing, interest rates and LTV ratios are the key factors shaping residential sales demand. Mortgage rates are between 7.75 per cent and 10.5 per cent, but currently average around 8.5-9 per cent. In contrast, construction financing rates, which shape supply side decisions, are currently 7-8 per cent. As such, a systematic imbalance persists, where residential demand is restricted by high borrowing costs and credit scarcity, while building is incentivized by lower capital costs on construction loans.

According to Landmark, disjointed lending practices continue widening the supply-demand gap. In some areas, like Jumeirah and Satwa, supply is decreasing, as older buildings are demolished. While the overall effect is currently negligible, a coordinated urban regeneration plan would control aggregate supply and therefore help stabilize the market. Such a strategy would be especially beneficial in light of improved building standards, it says.

According to the report, despite immigration from other emirates, Dubai’s total population may still decline. Analysts expect more out-of-work expatriates to leave the UAE by summer’s end, but many are currently staying in a final attempt to find new employment. As such, the reported future school enrollment figures can be misleading, they say. Many parents may have chosen to keep their children officially enrolled, just in case they are able to find a new position. In reality, using school enrollment as an indicator will not provide meaningful results until September/October 2009, they point out.

They say that looking to 2010, actual rent levels will depend on multiple factors, including the real volume of unit deliveries and net demand growth. While relocation trends are currently propping up the leasing market, its long-run performance will be defined by Dubai’s ability to achieve net job creation. This will depend on macroeconomic performance and government policies, both of which are impossible to predict.

Signs continue to indicate probable sale price stabilization in Q409, which, could be the beginning of a price floor. However, this is highly dependent on macroeconomic, financial, and real estate industry policies and trends. Based on historical trends, sale volumes are likely to dip during August and September, but then pick up again in the fourth quarter.

Landmark feels that the strong demand for villas is likely to continue from investors and end-users. Based on current supply projections, villas will constitute less than 20 per cent of total residential unit deliveries in 2009, and even less in 2010-2011. Given these supply and demand characteristics, villas are likely to reach a price floor first.

Apartments, on the other hand, will be subject to additional sale price volatility due to the large volume of new supply likely over the next 2 years. However, price floors for apartments are expected to start forming in the short term within specific areas. Such areas will be defined by stable or limited supply, plus strong and continuous demand fundamentals. The proverbial ‘location factor’ and master development quality will be key, they say. Of course, other factors like amenities/facilities, views, parking and maintenance fees are also important for residential demand.

According to Landmark, due to the continuing influx of new rental units, average villa and apartment rents will continue to decline into Q409. The intensity and longevity of these declines will depend largely on owner decisions, like when to list the property and how much rent to charge.

However, as leasing rates decline, additional demand from relocation is likely to support rent levels, keeping them from falling too sharply. While it is difficult to call a bottom, there is some evidence to suggest that rents in specific areas may stabilize in Q409. Ultimately this will depend on the supply-demand dynamics prevailing in each location, the report says.

Referring to Dubai’s commercial office market, the report says the market is entering a period of massive over-supply amid a pattern of demand destruction, which will likely last for quite some time. During Q209, office sale prices declined 12 per cent, but since peaking in Q308, Dubai office sale prices fell 42 per cent. Office rents fell on average 10-15 per cent in Q209. Corporate restructuring, layoffs, frozen recruitment, and delayed expansion have changed short-term office demand characteristics, making them difficult to model accurately into the medium- to long-term The vast majority of companies have frozen all recruitment and expansion plans for the short- to medium-term. Redundancies, corporate restructuring, and cost-cutting measures have caused average office space consumption to decrease significantly.

The report says that of the little demand that currently exists, most focuses on smaller units. Recently delivered office buildings in Dubai are finding it increasingly difficult to rent out entire floors or larger units. Smaller offices are absorbing faster. In general, vacancy rates in newer buildings will remain higher for longer periods, as absorption rates continue to fall.

While inquiries into new commercial space do continue, most companies are waiting until early 2010 before making any decisions on acquiring new office space. Furthermore, pre-fitted out units are increasingly attractive to potential new tenants, due to lower setup costs. Fitted out units in new buildings retain a considerable premium over shell & core.

In the short-term, corporate restructuring, recruitment plans, and finances will remain an important factor affecting office space consumption. Several prominent international surveys show that most chief operating executives of large multi-nationals intend to continue reducing headcounts throughout 2009. At the same time, a number of regional, industry-specific surveys indicate likely resumption of recruitment among banking, investment, and oil & gas professionals, specifically in the UAE.

Shell & core units are becoming less popular, as tenants look for ways to cut capital expenses. However, this trend is not binary; certain tenant profiles continue to prefer shell & core delivery, although this segment is now smaller than ever before. To maximize absorption, landlords will have to be increasingly creative regarding leasing terms and incentives, including free parking, contribution to tenant moving costs, and even no-payment periods. Dubai’s commercial property glut will continue to worsen over the next three years, the report says

According to Landmark calculations, during 2009, 10.5 million square feet (977,000 square meters) of new office space will be delivered to a market already reeling from economic shocks. While supply figures for 2010 and 2011 may be revised downward in the future, actual delivery will exacerbate existing oversupply and push office prices and rents down. To absorb the supply delivered only in 2009, Dubai’s economy must generate 85,000-90,000 new office jobs. Based on the office-consuming share of total employment and the rate of expatriate economic activity, this rate of office sector job creation will require a full 20-30 per cent population increase. Even under normal circumstances, this growth rate would be virtually impossible, it says.

Poor planning has created a supply glut that will take many years to resolve. The economic downturn is only part of the problem. When Dubai had a shortage of office space, and saw ever-escalating rents and prices, developers churned out commercial development plans without considering aggregate trends.

Dubai office prices are likely to decline further, as additional supply enters the market. Given the prevailing market uncertainty and continuing credit scarcity, demand is currently minimal and likely to remain low. The main source of sales demand will come from companies with long-term commitments to the region.

The commercial component of the current real estate cycle is likely to be more protracted than for the residential segment. Changes in lending policies will be a significant factor defining the length of the cycle. However, given the uncertainty in the local office market, banks are unlikely to improve lending policies significantly in the short term. Low LTVs and the high cost of borrowing are likely to continue restricting demand.

For those companies with a long-term perspective and available financing, the next 12-18 months will provide excellent opportunities to acquire inexpensive office space. Of course, this will depend on the financial situation of individual companies.

Leasing rates are likely to keep falling. As vacancy rates increase and absorption rates decline, landlords will be forced to implement competitive pricing strategies. Owners should be offering creative incentives, like compensation for moving costs. The short- to medium-term will be an excellent time for companies to consider upgrading office space. Currently, Grade A offices in prime locations are available for Dh2,368 – 2,690 per square meter in some cases already fitted-out with luxurious finishings.

Referring to the Abu Dhabi market, the report says that while there are few transactions taking place in Abu Dhabi, the rate of real price declines appears to be slowing, for the time being. Average aggregate listing prices regained some stability in Q209, after declining sharply between Q308 and Q109. The slowing rate of price correction is mainly a consequence of significant adjustments having already played out during Q408 and Q109, as well as growing resistance by sellers to lowering their prices.

The Q209 average price declines affecting Abu Dhabi’s main freehold master developments have been relatively homogenous at approximately 10-12 per cent. The one exception is Hydra Village, whose prices fell only 7 per cent, on average. Generally, these declines are due to the withdrawal of high-priced properties from the market by sellers unwilling to lower prices. The departure of many high-priced units brought down the overall listing price average.

The report notes that the better than average Q209 price performance for Hydra Village is a result of the exceptional 35 per cent decrease already seen in Q109, which left less room for depreciation in Q209. As such, Hydra Village is approaching a natural price floor, because further price-cuts would result in secondary market losses for the seller.

Generally, this floor price is a function of payment plans and will vary between and within developments, depending on the pricing and collection strategies set by each developer. Even after such large discounts, Hydra Village is still failing to attract secondary market buyers, mainly due to construction delays and consequent failure to meet delivery dates.

According to the analysts, end-users remain the predominant buyers of freehold property in Abu Dhabi, focused almost exclusively on nearly completed properties. Investors, however, continue to wait for signs that the market has bottomed-out. In so doing, investors are avoiding the risk associated with uncertainty over future rental yields and sale prices of units in upcoming developments.

Sale transactions have been increasing, as has the number of serious buyers in the market. As mentioned above, transactions are centered on nearly completed developments, like Al Reef Villas and Marina Square, but only where prices are close to the primary market prices.

Other nearly completed developments, like Sun and Sky Towers (expected delivery: Q2/Q310), still maintain secondary market premiums over primary market prices, but register only minimal transactions. Average prices for Sun, Sky, and Tala Towers now have a 20-40per cent premium over primary market prices; even the low end of listings keep premiums between 15 per cent and 30 per cent. In the case of Al Reem Island, buyers prefer Marina Square for its lower prices.

Developments on Al Raha Beach have generally received less attention from serious buyers, mainly due to higher prices. One exception is the Al Bandar district, whose close completion date (Q1/Q2 2010) has made it the focal point of buyer interest on Al Raha beach. However, Al Bandar’s high prices relative to other options in Abu Dhabi’s leasehold market have deterred high sales volumes. Average secondary market listing prices for Al Raha Beach are still 10-20 per cent above primary market prices. However, isolating the bottom end of price listings (distressed/motivated sales), shows that Raha Beach developments can reach up to 5-10 per cent below primary market prices, the report points out.

After the price declines seen during Q408 and Q109, the few transactions actually taking place are now very close to distress price levels. Price spreads between the lowest listing prices and transactions are now only 5-10 per cent. According to Landmark, In Abu Dhabi, there appears to be an average price ceiling of Dh1,300 per square foot for off-plan properties. Only a few transactions on select projects, like Sun and Sky Towers or Al Bandar, have sold above that ceiling. As first observed in Q109, many active sellers continue to resist additional discounts after recent corrections brought many properties close to their primary market prices.

Although prices may still decrease marginally, there are clear signs that a price floor is emerging and that transaction volumes now depend on the ability to acquire financing. General market confidence is also a key factor.