Dubai rents could fall in ’08

Dubai’s residential rents, which have been on a relentless rally over the past five years, will start declining next year for the first time in a decade as more than 60,000 new housing units come into the market, analysts said.

The rate of increase of rents has already begun to slow. According to EFG-Hermes, Egypt’s largest investment bank, the decline in the pace of rental rate growth observed in the first eight months of this year will sustain into early 2008.

Residential rents across Dubai increased on an average by 16 per cent in the first eight months of this year compared to 30 per cent for the whole of 2006. This trend of slowing rental rate increases, according to analysts, is mainly due to a relief from Dubai’s seven per cent rent cap.
Predicting that the rent cap for 2008 will most likely be reduced to five per cent, an analyst at EFG-Hermes said the decline in the pace of rental rate growth observed in the first eight months of this year, therefore, expected to continue into early 2008, with rents starting to decline in 2008 as new housing comes onto the market.

Revising the bank’s housing unit supply forecast for the next three to four years, the analyst, Sana Kapadia, said due to a far slower pace of project handovers, only 11,000 units or 20 per cent of the expected 57,000 units are coming onstream in 2007 — meaning that supply continues to lag behind demand.

But in 2008, the supply will surge to 64,000 units, and 68,000 in 2009. “Based on the assumption that the population of Dubai will rise to almost 1.9 million by 2010, up from 1.4 million currently, demand now calls for 45,000 to 50,000 new units per annum.”
This means, by end- 2008, supply will outpace the demand.
EFG-Hermes also predicted that a fall in residential property prices, expected to happen in 2008, will now be delayed until 2009. “Supply in the residential property market is and will continue to be constrained in 2007. We predict that the peak year for supply will now be 2009. The market is unlikely to see a price decline before this occurs,” the analyst said.
According to market analysts, rents for luxury housing will fall at a faster pace as end-user demand for mid-income housing is higher than that for luxury housing, which has dominated delivered supply to date.

On the other hand, in the commercial property segment, rents and prices will continue to rise due to capacity limitations. “As Dubai continues to attract businesses from across the globe, we have seen continued pressure in terms of both rents and selling prices of commercial property over the past eight months. “Vacancy rates of around one per cent, in addition to pent-up demand from existing businesses and new tenants wishing to upgrade office premises has allowed rents to rise 40 per cent year to date on average. Prices for freehold office space have risen 17 per cent year to date.“This trend of a sustained increase both in terms of rents and selling prices stems from a prolonged lag in the completion of new commercial supply.”The analyst said with most of the commercial space additions expected to hit the market in 2008 and 2009, she expects to see a marked decline in rents. “As a result, we expect to see Dubai commercial property yields sliding back gradually toward the international average.”

Source: KhaleejTimes