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Gloomy outlook for property rents and prices in Dubai and Abu Dhabi

Dubai could see prices fall by another 10% by the end of 2010 and Abu Dhabi faces falls of 20% over the same period, says the report from Kuwait based Global Investment House.

It also says that prices have already fallen 56% in Dubai since the fourth quarter of 2008 and by 45% in neighbouring Abu Dhabi.

‘We estimate a current vacancy rate of 30% in Dubai and 3% in Abu Dhabi. The figure for the latter is subject to significant increase in the coming two and a half years given the influx of 65,000 units in the residential market,’ the report points out.

Global added that although it saw some positive signals in Dubai in the first quarter of this year, including increasing sales volume and a slowdown in the pace of drop in rental and selling prices, it believed this was created by an exceptional wave of tenant and capital movement of local and foreign investments from Egypt and Bahrain.

The report forecasts that the property recovery will take longer in Abu Dhabi than in Dubai due to the lag in the correction move downwards.

As far as the rental market is concerned, the report predicts that they will bottom out next year having fallen 59% since the peak of the market in the fourth quarter of 2008. But rents in Abu Dhabi, which are about 49% higher than Dubai, are expected to continue to decline.

‘We estimate the current blended average rent of one, two and three bedroom apartments in Dubai to stand at AED65,000 compared to AED97,000 in Abu Dhabi placing the capital at a 49% premium. We expect the gap to narrow down gradually over the next two years as Dubai rentals bottom out while those of Abu Dhabi continue declining on increasing vacancy rates,’ the report says.

‘The key risk we see to this assumption is the pace of re-mobilisation of Abu Dhabi ex-tenants who moved to Dubai, mostly during 2010, to benefit from lower rents,’ it adds.

The report also says that office prices in Dubai have fallen 58% since the peak in 2008. ‘We expect pressures on selling prices to persist over the short to medium term as vacancy rates remain high at 40% and new supply of 19 million square feet, equivalent to 33% of existing supply, enters the market by 2013,’ it explains. It predicts a further 10 to 12% decline in Dubai office prices from current levels.

In Abu Dhabi, vacancy rates hover at below 10% of the total existing 24 million square feet, which is expected to increase significantly as a new 13 million square feet enters the market between 2011 and 2013.
Office rents dropped 69% and 45% in Dubai and Abu Dhabi respectively from peaks. ‘A reversal of the declining trend remains out of sight for the next five years, in our view, given the present high vacancy rates, supply increase and economic conditions,’ the report adds.

‘We expect the decline in Abu Dhabi rents to speed up in the coming two years as the new grade A supply enters the market accelerating the vacancy rates of grades B and C and eventually pressuring grade A rents downwards.’