Overview
Dubai real estate market is witnessing a major correctional phase with sale and lease rates witnessing a significant drop for the first time since the property market was opened for foreign investment.
Over the last 5 months lease rates, sale prices and demand of all the real estate components has dropped considerably.
Rental Cap
The new decree on the rental cap, released in January 2009 means rental contracts for both residential and non-residential properties signed in 2008 cannot be increased in 2009, so long as the rent in 2008 is equal to or up to 25 per cent lower than the average market rate.
Office Market
Prime office rents dropped by around 18% in Q1 2009 as compared with previous quarter with rates falling from AED 550 psf to 450 psf.
The following figure illustrates Dubai office rental growth from 2005-2009:
Year on year prime rents show signs of change, however, compared to the previous quarter the rental rates in Q1 2009 dropped by 18%.
Secondary locations with Grade A office buildings, mainly in the Freehold locations of Jumeirah Lakes Towers and TECOM, are experiencing a sharp decline in lease and occupancy rates.
Lease rates for these and other secondary locations are illustrated below:
Grade A office lease rates at the summer peak in these areas were AED 2,370-3,230 per m². Currently landlords are quoting a reduced rate of AED 1,400-2,690 per m² along with additional landlord incentives that include more relaxed payment terms on a quarterly and bi-monthly basis.
Residential Market
Since Nov 2008, there have been redundancies in different sectors of the economy, with the most affected being the real estate and construction sector.
Meanwhile the worldwide economic downturn has resulted in a decline in global tourism as well.
Considerable new supply along with the above factors has seen a weakened demand for residential units.
Average % drop compared to year on year is marginal (9%); but when compared to Q4 2008 there is a substantial drop in the lease rates by 23% in the locations listed in the figure below:
The highest drop was noticed in Discovery Gardens development.
During Q3 2008 the rents in the area were in the range of AED 90,000-110,000 for one bedroom. The current rents for similar size unit range between AED 60,000-75,000 registering a drop of circa 33%.
Transaction Market
Economic downturn has had a severe affect on the transactional market.
Both the off-plan and ready properties have witnessed a sharp drop in sale prices. The data sourced from Dubai Land Department indicates a drop in the number of sale transactions from1,486 Q1 2008 to 595 Q1 2009, a drop of circa 60%.
Ready to occupy properties - Interest from real investors is on the rise, but they are generally choosing to play 'wait & watch' strategies, waiting for the prices to bottom before entering the market. In some of the developments prices have already bottomed out, providing excellent investment opportunities for investors.
Off-plan properties - Developers of these properties have revised their payment plans and in few cases revised the prices from the original prices in order to retain the customer base and to maintain a steady flow of funds for their developments.
Outlook
The drop in demand for commercial and rental space, following the decline in an expatriate workforce, will have a significant impact on the lease and occupancy rates in all areas of Dubai throughout 2009.
Many projects currently penned for completion during the course of the year are likely to be further delayed and pushed back into next year.
The exit of speculators from the market would see further interest from real time investors/end users and investment funds entering the market during the rest of the year - with the focus on properties which are ready to occupy or expected to enter the market over the next 12 months.
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