A steady trickle of aggressively priced inventory in the affordable category has brought in fears of oversupply in Dubai’s lower-end residential segment, reports say. Lower-priced inventory continues to enter in locations such as Dubailand for villas and Dubai South, Jumeirah Village Circle and Al Furjan for apartments, according to a third-quarter report by property consultancy Cavendish Maxwell, impacting price dynamics for existing developments.
There is a concentration of activity in the affordable segment with the Dubai Land Department (DLD) reporting that the value of mortgage transactions in property increased to Dh60 million in the first six months from Dh48 million over the same period last year.
“Movement in the secondary sales market is largely driven by end users, while investors account for most off-plan sales, particularly below the Dh1-million price point,” said David Godchaux, CEO of Core Savills.
Off-plan
Core Savills’ Q3 Dubai Residential Market Report says that off-plan sales lead the way in transaction numbers with developers increasingly competing on price points.
Developers are also now launching more efficient unit sizes to keep ticket prices attractive and offering incentives such as aggressive payment plans, according to the Cavendish Maxwell report. Such payment plans allow developers to offer lower rates without discounting prices. “The majority of the new plans on offer are structured with post-handover payments, where the bulk of the payment, 60 per cent and 75 per cent in some examples, is due after construction,” according to the report.
While sales transactions for ready units increased modestly at 7 per cent, they were overshadowed by the 62 per cent rise in off-plan sales when comparing year-to-date figures to the same period last year, according to Core Savills.
Despite this spike in off-plan transactions, the average unit value is 11 per cent lower than last year, further illustrating the strategy shift: developers are bringing lower-priced products.
“Instead of adjusting supply to demand, some developers are taking the risky route of adjusting prices — by occasionally offsetting quality or shrinking their margins,” said Godchaux. “This brings a significant amount of lower-quality stock to the market, which may find short-term investor take-up on the back of lucrative payment plans, sometimes aided by the high level of marketing spends. If sales and tenant demand for such products has been overestimated, this may not be sustainable in the long term.”
This trend of burgeoning off-plan activity also affects the ready sales market. “Individual landlords try to keep pace with the overhang of off-plan projects by reducing sales prices, as a result bringing the area average down while dampening recovery,” Godchaux said.
Cavendish Maxwell says that prices in established communities with limited upcoming supply have held stronger than emerging locations, even as marginal price declines of 1.2 per cent for apartments and 1.4 per cent for villas continued in the third quarter.
“This downward trend over the last 12 months has created a wider gap in the price performance of quality stock in established areas with limited upcoming supply, against that of newer developments in emerging locations,” the Cavendish Maxwell report stated. “Factors such as proximity to the central business district, social infrastructures like schools, supermarkets as well as build quality and developer track record will continue to play a larger role in maintaining price levels in the Dubai residential market.”
Rental market
The rent declines for residential property in Dubai have been more pronounced than price declines over the last 12 months, according to Cavendish Maxwell. Citing the Property Monitor Index, it notes that over the last 12 months rents in Dubai have declined by 2.8 per cent for apartments and 3.5 per cent for villas and town houses. The decline has been attributed to new project handovers, especially lower-priced inventory, as well as the readjustment of salaries and job losses in some key sectors.
Core Savills reports a similar trend in the 19 districts it monitors. “As sales prices have not dropped at the same rate, yield compression has been witnessed across most area and is expected to continue in 2018,” said Godchaux, noting that the magnitude of these drops will likely remain limited.
Supply
Cavendish Maxwell reported approximately 11,800 residential units handed over so far in Dubai this year. “As of September, approximately 32,000 units are scheduled for handover for the remainder of the year, though actual completions may vary significantly,” the report said. “Some developers have begun responding to this market reality by phasing the delivery of projects.”
Core Savills reported over 5,950 units delivered in the third quarter and forecasts 17,800 units for the whole year.
“Anecdotal evidence suggests a mismatch between affordable stock and the requirements of prospective home owners; while studio and two-bedroom units appeal to investors, end-user demand is for smaller two-bedroom units at similar entry prices,” said Godchaux.
