Increased demand expected to soak up realty over-supply

Dubai: Residential and commercial rents in Dubai and Abu Dhabi are likely to continue to slide in the short term, industry experts said.

"Residential rents in Dubai will continue to soften further, if not dramatically, over the next couple of years," said Cluttons Middle East partner Ronald Hinchey.

The reason may be because about 40,000 units were due to become available this year, Colliers International said.

And while rental values in sought-after established residential areas such as Arabian Ranches have held up since the sharp drop, anecdotal evidence appears to suggest prices dipped in April.

Rents fell by Dh5,000 to Dh10,000 for a number of townhouses and villas. Leasing agents said that if prices were higher the properties stayed empty for months.

"People's budgets are getting squeezed due to reduced salaries and tenants are now prepared to take on the time and cost involved to move to get a rent reduction," Hinchey said.

Last year rents took a decisive dip in spring and stabilised in June. Landlords unwilling to move on price pulled their properties off the market, counting on the traditional post-summer rebound — which didn't materialise.

Pundits are now wondering what landlords will do this summer.

"It will be interesting to see what happens end of June, whether and how many people will leave Dubai, no one knows," Hinchey said.

Recently released government population figures showed an increase in Dubai, thought to be partly due to residents moving to the city from Abu Dhabi.

"People will continue to live in Dubai and work in Abu Dhabi as long as the rents there remain 25 per cent plus to those in Dubai.

"The more the difference falls below 25 per cent the less incentive there will be to live in Dubai and people will choose to live in Abu Dhabi," Colliers International research and advisory manager Narmin Abugalala told the Dubai Property Society members.

Commercial

Rents were equally expected to fall on the office side as buildings come on-line, creating a potential oversupply, he said.

For example Colliers calculated that around 500 companies now in villas would need office space this year.

This demand may just absorb the over-supply coming online this year, Abugalala said.

"Corporations are still setting up representative offices with management in Abu Dhabi, but the main staff in Dubai where the rents are much cheaper," he said.

Colliers research showed office rents in Abu Dhabi averaged Dh117 per square foot, and Dh85 in Dubai.

Colliers International research and advisory director J.P. Grobbelaar said developers desperate to increase occupancy in the so-called "New Dubai" were offering offices for as low as Dh65 a square foot.

However Tecom appeared to buck the trend with rents remaining stubbornly high at Dh130 to Dh150 a square foot, according to the propertyfinder.ae website.

House prices

Dubai's house prices fared better this first quarter than last, if marginally.

The Colliers International house price index was up from 117 index points to 119 or two per cent.

This compared with a starting index of 100 basis points in 2007, which more than doubled to 216 points at the peak in the third quarter of 2008.

The slight gain could well be reversed taking into account the 41,000 residential units expected to become available by the end of this year.

Higher loan to value (LTV) ratios coming in at 75 to 90 per cent and slightly more favourable interest rates hovering between 6.5 to 8.5 per cent and more affordable prices may well have encouraged residents in Dubai to swap renting for owning, the figures indicate.

As such townhouses sold for five per cent more on average in the first quarter this year compared to last year.

Villas only increased by two per cent but apartments, even though there were more of them, increased by around six per cent.

The figures again point to buyers looking for affordability.

The blended average rate for residential property stood at Dh1,002 per square foot in the first quarter of 2010 up by four per cent from the last quarter in 2009 — a good start.