The office, residential and retail sectors in Dubai real estate market are all becoming more favourable for tenants thanks to a significant demand-supply mismatch along with falling rentals and increased vacancies, according to a new study.

This trend is likely to continue into 2010 with increased vacancies and a continued decline in average prices and rentals across the market, said Jones Lang LaSalle, leading real estate investment and advisory firm, in its latest ‘Dubai Real Estate Market Overview – January 2010.’

While demand levels are increasing, as both existing and new tenants seek to consolidate and take advantage of better quality space becoming available on more competitive terms, there is not likely to be enough demand to meet the high level of new supply entering the market in 2010, it said.

Average vacancies across the city are therefore likely to increase from their current level of around 33 per cent during 2010; much of this space is contained in strata-titled buildings in non-core locations.

Many international and regional tenants will not consider such space and an increasingly two tier market is therefore likely to emerge, the report stated.

Vacancies in single ownership buildings in the most sought after Central Business District locations are currently less than 10 per cent, resulting in selective shortages in meeting certain tenant requirements.  Vacancies in this sector are likely to remain limited and this is in many ways a more telling statistic given the polarisation of demand.

“The tenant is becoming the ultimate winner as the office market is going through a significant adjustment with more vacancies and cheaper rents on offer.  This scenario is encouraging for businesses as it offers multiple options for expansion and relocation as Dubai becomes more competitive office location both locally and regionally,' said Blair Hagkull, managing director of JLL Mena.

'Attractive deals can be found throughout the city’s prime and peripheral areas as rental rates and capital values are hovering at pre-2007 levels. This is an opportune time for tenants as average annual Grade A rentals have fallen to around Dh220 ($59.8) per sq ft,' he pointed out.

According to Hagkull, average prices and rentals in the Dubai residential sector are expected to show more stability in 2010 as the rate of decline has slowed in the past few months.

'While conditions may stabilise in some locations and sectors, the overall market is likely to see a continued decline in average prices and rentals in 2010. The performance of different locations will be more driven by local demand and supply issues,' he added.

“Prices seem to have stabilised over recent months, despite the existing over-supply situation. Stabilisation of transactional volumes is another positive indicator of investor confidence but the lack of housing finance remains a major challenge in Dubai, the report said.

An improved lending scenario is one of the key factors for a sustainable recovery as the value of mortgages as a percentage of total sales value has dropped significantly during 2009, it added.

'With an additional 24,000 units expected to be completed in 2010 and 25,000 units in 2011, there may be an emerging opportunity for both investors and financers in the Dubai residential market as it has already seen a significant level of pricing adjustment in 2009,' Hagkull remarked.

Rental adjustments, Hagkull said, were comparatively less in the Dubai retail market than the office or residential sectors but the market was still moving in favour of tenants in 2010.

'Average rentals have declined by around 29 per cent from fourth quarter of 2008 to 2009 and by 13 per cent from third quarter of 2009 to fourth quarter of 2009 on the back of a 15 to 20 per cent decline in retail sales in 2009.

Several planned projects have experienced delays, which in turn has affected the future supply pipeline.  This lower level of future supply relative to planned completions in the office and residential sectors, is providing the retail market with something of a breathing space, he pointed out. 

'This is an interesting time as the dynamics of the Dubai retail market continues to swing in favour of tenants due to falling rents and increased vacancies in some centres. In spite of the cut back in future supply levels, we expect to see an increase in shorter leases, break clauses and rent free periods as we go through this tectonic shift in the market,' Hagkull noted.

'There will be more and more incentives for tenants due to the shift in power from landlords to tenants,' he said.

'We are also seeing the emergence of a two-tier retail market as occupancy rates in super regional and regional malls remain above 90 per cent as opposed to older shopping centres,' Hagkull added.

According to the JLL report, 2010 was likely to be characterised as a year of selective stability. While average vacancies were expected to increase and average prices to fall, this would not be experienced uniformly across all projects or locations, with a flight to quality resulting in an increasingly two-tier market emerging during 2010 in which better quality projects and locations will benefit from selective stability.

With supply levels having adjusted, the major driver of performance in the real estate market in 2010 is likely to be the strength of ongoing demand, the report said.-TradeArabia News Service