Rising Supply: Pressure on property rentals and prices

By Sheena Amos

Average apartment and villa rents down by 13% and 11%

DUBAI 17 January 2018: This year is set to be another favourable year for tenants with rental rates predicted to incur a marked drop as a result of the sheer amount of supply projected for delivery this year, according to leading real estate consultancy Asteco.

Apartment rental rates softened steadily throughout the year with decreases ranging from 2 per cent to 4 per cent per quarter, on average. Drops in sales prices were slightly less prominent with variations of 0 per cent to 4 per cent. The villa market fared similarly with average quarterly declines in sales prices and rental rates of 2 per cent and 3 per cent, respectively.

“2017 recorded discernible contractions across all asset classes. However, this had and will continue to have a positive effect on tenants and investors with opportunities and value to be realised in 2018.” said John Stevens, Managing Director, Asteco.

There are 23,000 apartments and 8,500 villas scheduled for handover throughout Dubai in 2018 resulting in continual growth of supply and therefore more negotiating power in the hands of tenants/investors.

1BR Rentals

One bedroom apartments across the board have seen rental rates drop between Dh5,000 to Dh20,000 showcasing a further 13 per cent decrease on 2016. Units in Downtown Dubai are now available for Dh95,000, The Greens Dh75,000, Dubai Marina Dh70,000 and International City reports Dh40,000, on average.

Rental rates for one to three bedroom apartments have shown an average decrease of 13 per cent compared with Q4 2016 and 18 per cent since the last market peak in 2014, which has led to owners/landlords offering a number of incentives including rent-free periods and increased payments (up to 12 cheques) to retain tenants and/or improve occupancy.

“These conditions have put the bargaining power firmly in the hands of tenants who enjoyed a wider choice of properties, discounted rates and increased incentives. New properties and areas of the city are also becoming more accessible to a wider tenant pool.” Stevens added.
Average villa rents fell by 11 per cent with four bedroom units in Arabian Ranches for example priced at Dh190,000 versus Dh235,000 in 2016.

Sale Prices

Sales prices were affected the least with an average decrease of 6 per cent, although it is important to note that demand for villas with high ticket prices remained subdued in 2017.

Stevens said, “Investors will continue to be more sensitive to the price point of properties in 2018 as opposed to the price per square foot, meaning units that were previously advertised below the Dh1,000 per sqft. mark will be marketed for instance at below Dh500,000 for studios or Dh1 million for one bedroom apartments to entice take-up.”

Demand for offices, on the other hand, was limited and resulted in subdued transaction activity in the market.

“Despite recording only marginal quarterly drops in sales prices and rental rates, the office sector has arguably proven the most challenging asset class in 2017 underpinned by a bearish market sentiment, low oil prices and limited business growth. However, Asteco expects healthy appetite for quality Grade A commercial properties moving into 2018.” he added.

Following the 5 per cent VAT introduction, which is applicable to the commercial sector, there has been concern amongst the market on how this will affect both tenants and investors. Despite the fact that it is expected to dampen market sentiment in the short-term, Asteco believes that in the long-term it will ultimately boost the economy.

In regards to the residential market, which is generally exempt, the tax is anticipated to have a minimal fallout as it is only applicable indirectly to items such as maintenance, utility and agency fees, with some or all of these charges expected to be initially absorbed by owners/landlords.

“Whilst VAT affects all of us, the impact for tenants will be negligible. The commercial market will adjust accordingly as we see the system successfully implemented nationwide,” said Stevens.