Accelerated rent declines are helping to make Dubai and Abu Dhabi more attractive to live and work, said a report.

Landmark Advisory, a leading real estate firm, forecasts that declines in residential and office rents will improve affordability in both the emirates in its Q3 2010 Dubai and Abu Dhabi Real Estate Report.

“New commercial properties coming online will infuse the market with higher quality office supply and drive down office rents, making both cities more attractive centers for business,” said Jesse Downs, director of research and advisory services at Landmark Advisory.

“The market now needs stimulus initiatives to leverage the improved affordability and to encourage the growth of industries that will diversify the local economies and fill the expanding vacancies projected over the next 3-4 years.”

Dubai

Residential oversupply in Dubai is also set to peak in 2012 with vacancies projected at 25-28 per cent. Meanwhile the commercial oversupply will continue to grow, with up to 45.9 million square feet of empty office space by 2014. Vacancies are expected to reach 53 per cent in 2011 and peak at 58 per cent in 2013/2014, the report said.

“The coastal-inland bifurcation abated marginally in Q2-10 with steeper sale price and rent declines in coastal villa communities compared to inland communities. Nevertheless, coastal communities still maintain rent premiums up to 61 per cent, depending on the unit type,” said Downs.

“As prices are falling faster than rents, this is pushing up yields,” explained Downs.

“This is positive for the market as higher yields are required to attract investors wary of the weak market fundamentals and perceived downside risk. At the moment, financing remains limited, which means investors continue to dictate market trends.”

The report found that sale volumes slowed in Q2-10 compared to Q1-10; sale price declines accelerated to 5.0 per cent for villas and 5.8 per cent for apartments in Q2-10, a result of limited mortgage-backed transactions, particularly for apartments, which, based on Landmark’s transactions, were almost wholly cash transactions.

In terms of leasing, villa rents fell 4.4 per cent, while apartment rents fell 5.8 per cent during Q2-10.

“Amid a strong sale price decline, the ongoing yield compression trend that has been witnessed since early 2009 reversed in Q2-10,” said Downs. “Net villa yields increased from 4.9 per cent to 5.7 per cent, while apartment yields increased from 5.4 per cent to 7.4 per cent based on actual sales and rental transactions.”

Abu Dhabi

Quality issues in Abu Dhabi may lead to rapid reshuffling of the market as the new higher quality supply is delivered, according to Landmark Advisory’s latest report.

“Only 20 per cent of pipeline properties advertised as high-end will actually meet that standard, and short-term price/rent performance of medium quality deliveries will behave as though they were higher-end. However, we predict that this trend will be temporary, with performance weakening and not recovering once the truly high-end developments are delivered,” said Ms. Downs.

Sales demand for Abu Dhabi’s investment zones has remained weak due to further project delays and the lack of appropriate regulatory framework, which in turn has caused concern among potential owner occupiers and investors.

Rental decline sharply increased in Q2-10 with an 11 per cent decline compared to the marginal 3 per cent decline observed in Q1-10.

“Stagnant sale prices are attributed to virtually non-existent transaction volumes and sticky asking prices,” Downs said.

“In the leasing market, office rents will continue to decline on the back of rapidly expanding office supply; in 2010 alone there will be a 32 per cent increase in supply,” she concluded. – TradeArabia News Service