property

The real estate waiting game

Homebuyers will find more choices even as prices are poised for a gradual recovery over the next two years

Heba Hesham
00:00 May 2, 2018
Dubai Water Canal

Homebuyers and tenants can expect to find more choices as rents and sales prices are likely to remain under pressure over the next two years, according to analysts. With more than half a million units scheduled to enter the market by 2020, industry pundits say it could take some time before prices stabilise, even with developers phasing deliveries.

“Dubai’s residential property prices and rents declined by 5-10 per cent in 2017. We believe this correction will continue at least for two years, before prices stabilise in 2020 at the earliest,” Sapna Jagtiani, associate at S&P Global Ratings, tells PW.

According to a JLL report, a total of 570,000 new properties could enter the market by 2020, representing an average annual increase of 8 per cent.

Around 60,140 apartments, 9,822 villas, and 3,456 townhouses are scheduled to be completed this year alone, data from Propertymonitor shows. However, it is unlikely that all these units will be delivered on time.

“We’ve seen a trend in Dubai where only 40 per cent of what’s expected materialises in reality, at least over the last few years,” notes Jagtiani, citing JLL’s predictions.

Changing dynamics

Tenants have been among the biggest beneficiaries of the falling property prices. They now have the option to negotiate better terms with landlords or shop around in outer areas for significantly lower headline rents.

“It has been a tenant-friendly market over the last few quarters as widespread rental softening has been witnessed across all districts we track,” David Godchaux, CEO of real estate consultancy firm Core Savills, tells PW.

He advises end-user buyers to consider upcoming districts that offer high-quality units, in addition to established communities. “Some upcoming non-core areas that presently do not offer strong surrounding infrastructure or are not in proximity to amenities may make end-user buyers hesitant to purchase. However, a few of these districts are being expanded to improve accessibility and connectivity and are likely to offer good value in the longer term.”

For investor-buyers, particularly those choosing to buy in the affordable sector, understanding the direction of long-term yield and price trends will be crucial.

Discovery Gardens has the best gross rental yield in Dubai at 9.4 per cent

Data from Reidin shows that Discovery Gardens and International City currently offer the best gross rental yields in Dubai, with annual return rates of 9.4 and 9.16 per cent respectively, followed by other affordable locations such as IMPZ, Jumeirah Village Circle (JVC) and Dubai Sports City. Yet, these areas are expected to see large additions of supply over the year, suggesting that current rental rates may decline.

“Given that the affordable sector has typically offered high yields, buyers may expect such levels to be sustained. But due to a significant increase in supply in this segment, rental rates are likely to decline further, resulting in yield compression,” cautions Godchaux.

Moreover, if upcoming supply in the affordable sector exceeds the growth of tenant demand, yield compression is likely to be exacerbated further, potentially leading to a drop in prices.

Ivana Gazivoda Vucinic, head of consulting and valuations and advisory operations at real estate consultancy Chestertons Mena, shares a similar view, noting that affordable areas are witnessing maturity of stock and increasing competition, and in turn yields are slightly compressing.

Nevertheless, some experts believe that Dubai’s affordable segment will continue to offer the highest rental income. “Even though there are expectations for real estate yields to continue to soften in the near term due to a decrease in rental prices, affordable areas are likely to continue to offer the best yields until 2020 and beyond,” Ozan Demir, director of operations and research at Reidin, tells PW.

To wait or not to wait?

The analysts agreed that buyers could benefit from waiting a little longer. “Buyers within the affordable segment, particularly renters transitioning to ownership, could consider waiting out for handovers of new developments before entering the market to mitigate the risk of delay in delivery, while gauging the final product for build quality and finishes,” Godchaux says.

Similarly, Gazivoda believes that investors could buy at cheaper prices in one or two years, although this could mean losing out on the rental revenue coming in over those two years, which might offset their capital appreciation. “It depends on the way you calculate it,” she notes.

The fact remains that residential property prices are currently 15-20 per cent less than their peak in mid-2014. Therefore, 2018 can be considered a good time to invest in real estate, suggests Demir.

For sellers, time is of the essence. “If you have decent yield from your property or a lease agreement in place for a year, you might want to wait until it expires,” Gazivoda suggests. “But I can’t see prices picking up before 2020, so if you’re selling, the best time is now.”

According to Godchaux, sellers across both the prime and affordable segments are mostly looking at selling below-acquisition prices. “Unless distressed, owners in core areas may look at holding their properties as yields are still decent given the relatively lower risk profile in the mid to long term.”

Speculative surge

For the time being, the World Expo 2020 seems to offer the biggest hope for the real estate market. “In 2020, the sector could well start to benefit from the potential increase in economic activity and positive business sentiment attached to the Expo; the expected 25 million or more visitors and floods of new residents to Dubai should support the market,” says Jagtiani.

This anticipated speculative surge is mainly driven by sentiment and is devoid of any demand and supply mismatch, she notes.

Other positive indicators come from the Ministry of Economy, which said in January that the UAE’s GDP is projected to grow at a faster pace of 3.9 per cent this year thanks to government investment in infrastructure projects and growth in foreign trade.

And while there are some political and economic challenges, their impact on Dubai’s real estate market will most likely be minimal.

For instance, the blockade on Qatar by some Arab states is not expected to directly affect the market as Qataris don’t feature in the top 10 property investors in Dubai, Jagtiani noted. Falling oil prices should also have a limited impact considering that the sector now accounts for less than 1 per cent of Dubai’s GDP.

Affordability a key theme

In terms of trends, the availability of lower price inventory is expected to continue as developers create more products targeted to the mid-income category, with salaries ranging from Dh15,000 to Dh30,000 per month, Manika Dhama, senior consultant at Cavendish Maxwell, tells PW.

Indeed, many developers are shrinking the size of their plots and apartments to make them more affordable, while moving their projects further away from the city to places like Dubai South and around the Expo site.

The Chinese pavilion in Global City. Property buyers from China accounted for about 3 per cent of all sales in Dubai last year

Additionally, to bring down land costs and improve margins, developers are increasingly forming joint ventures (JV) as evident from projects such as Dubai Hills, a partnership between Meraas and Emaar, and Dubai Creek Harbour, a JV between Dubai Holding and Emaar.

Further confidence stems from the return of Chinese investors to the market. Last year Chinese property buyers accounted for about 3 per cent of all sales in Dubai. And in September, the Dubai Land Department appointed Chinese promotion trustee UC Forward with an aim to attract Dh1 billion in foreign direct investment to the emirate’s real estate sector.

“Given the evolution of the market and the various mitigating measures market participants have taken, we do not expect the massive price drops that we saw in 2009,” says Jagtiani. “The current slowdown has been more gradual, and the eventual recovery in prices and rents will likely happen at a similar pace.”