Residential rents across Dubai registered no change during the first quarter of 2018, helping improve the annual rate of change to -3.1 per cent, from -7.7 per cent at the end of last year. This marks the first stable quarter for rents in the emirate in over two years.
While the rental market had shown signs of stabilizing, the growing volume of off-plan investment stock, destined to be made available for rent after handover, was likely to pose challenges in the future. The ability of the rental market to absorb a high volume of new stock would likely be tested over the next three years. Newly completed rental properties are expected to command the attention of tenants, while older and more secondary property will register rent falls. This flight to quality phenomenon will likely result in the creation of a very distinctive two-tiered market. In the short-term, rents are expected to slip by up to 5-7 per cent over the remainder of 2018.
However, more affordable areas such as International City, and Discovery Gardens stood out as bastions of stability in the face of continuing headwinds for the market. Affordability aside, one of the key factors that has likely contributed to the stability in values in Dubai’s more affordable residential areas is the distinct lack of new supply in these markets.
Demand to remain firmly centred on new homes is expected to be priced under Dh800 per sq ft as affordability takes centre stage in the market.
Of the 134,000 units that are expected to hit the market by the end of 2020, just over a third are expected to be priced under Dh800 per sq ft, underscoring the burgeoning affordability issues that the city is storing up for the future. Even if one factors in some slippage in deliveries of circa 20 to 30 per cent, as has been the case historically, supply will still exceed the projected demand resulting from the organic growth in population, which will see 77,500 households created.
While one may argue that supply and demand appear to be well balanced, it’s worth remembering that not all new households will purchase a home; many will opt to rent, in keeping with the transient nature of the UAE’s residents. Developers appear to be ignoring this critical issue at present; however, the new proposed law around the restriction of off-plan sales until schemes are 50 per cent complete may well be a blessing in disguise.
The new proposed law is likely to curtail off-plan sales activity, which has remained surprisingly resilient, despite a cooling in demand levels for secondary market property over the last three years. At the end of the day, such rules are designed to protect buyers and preserve, and enhance the city’s reputation as an investment hub, especially as new international markets are increasingly being targeted by developers.
The law may move developers to contain construction costs by cutting corners, which would ultimately impact investors’ confidence in off-plan developments. While this may clearly be an issue, it does present the government with an opportunity to introduce more substantive building regulations around the quality of construction, with a view to raising the warranty offered on newly completed homes, which currently stands at just one year, compared to other international markets, where it is much higher.
Developers, both large and small will be forced into rethinking their growth strategies and development pipelines are undoubtedly going to be reviewed. We may at last see an abandonment of the ‘build it and they will come mentality’, with the city seeing more measure, modest and appropriate homes brought to the market that actually matches the underlying demand.
(With inputs from Cluttons Report Dubai and TradeArabia News Service)