No bright recovery for real estate and construction in Dubai, experts warn
Dubai’s economy is expected to perform positively during 2011 with the International Monetary Fund now predicting annual growth of 3.5% but recovery in the real estate and construction sectors is less strong, according to a new analysis report.
These sectors have been the principal drivers of the economy in recent years but will remain muted due to ongoing demand and supply imbalances and a slowdown in new development activity, it is claimed.
Despite the emergence of more attractive investment conditions, the number of transactions has actually fallen in comparison to the same period last year. However, the overall sales value was registered as higher, indicating that investors are now more focused on high end properties.
According to Reidin, the total number of sales transactions for villas and apartments during the second quarter of 2011 was 1,311, much lower than the 2,189 transactions in the same quarter of 2010, a 40% drop.
The total transaction value for the quarter increased from AED2.62 billion to AED2.71 during the same period, as the average transaction value jumped from AED1.03 million to AED2.07 million.
This growth is the result of rising activity from within established prime community locations, such as Dubai Marina, Burj Dubai, Palm Jumeirah and Emirates Living. 58% of total transactions were found to be registered in these developments, according to the latest analysis from CB Richard Ellis.
It says that the Federal Government decision to increase the visa validity granted to property investors from six months to three years should have a positive long term effect on the market.
However, at this stage the threat of significant new supply, cost of finance, and expectations of further pricing downside continue to inhibit property purchases. The decision to maintain an AED1million minimum value for eligibility will also reduce the overall impact of the change, the report says.
The residential market continues to outperform the office sector with lease rates recording a marginal fall of 1% during the quarter. However, increased supply within secondary locations and low levels of occupier demand, could still pose a threat of further downside as the year progresses.
Even as more stability is found, many landlords are still struggling to maintain adequate rental yields in the face of high service charges. Despite the significant decline in lease rates since 2008, service fees have remained largely constant, undermining yields on buy to let investments and also acting as a barrier to new investment.
Average lease rates have fallen 19% on a year on year basis but only 5% during the first 6 months of 2011, indicating that the market is starting to firm up a little. ‘However, this is not to say we will not see further price falls within secondary locations, particularly as large volumes of new units are completed,’ the report explains.
Villa assets within well established community developments, such as the Palm Jumeirah, remain very popular as regional investment capital flows towards prime products. However, apartment units are generally viewed with somewhat less enthusiasm, largely as a result of significant existing and available supply and a massive future pipeline of properties.
Average villa lease rates have fallen just 10% over the past year, with a quarterly decline of 2%. The biggest drop was identified in the two bedroom villa category which has slipped 23% year on year as new units have emerged in developments such as Jumeirah Village.
In conclusion the report says that greater stability has been found within some of the more established community locations, but new development areas will continue to suffer as excess supply enters the market. A substantial number of residential properties are set for completion up to 2013 and this will make further rental depreciation likely for residential units in Dubailand, Business Bay and Jumeirah Lake Towers.
‘The real estate market is likely to remain subdued during the third quarter of the year with the confluence of summer and the Holy Month of Ramadan. A strong quarter four is anticipated as Dubai and the region generally emerges from a difficult couple of years, although it remains to be seen whether this will be sufficient to turn around another challenging year in the local real estate sector,’ it says.
