Dubai real estate prices fall by an average of 4% as fears of too much supply impact on market

House prices fell 4% in the second quarter of the year, the first quarter on quarter decline for 12 months, the latest Dubai House Price Index from Colliers International shows.
 
The index slipped 5 basis points from 119 in the first quarter of 2010 to 114 in the second quarter. It puts the average price of a house at Dhs1,014 per square foot, down from Dhs1,061 per square foot in the first quarter.
 
The index still shows a 7% increase in overall house price values year on year but Colliers International cautions that forthcoming housing supply and declining rental incomes are likely to put downward pressure on house prices moving forward.
 
Apartment prices fell by 5% while villa prices were down 3% and townhouse prices were down 8%. The index also shows that transactions increased by 15% in the second quarter of the year compared with the first three months. Villas made up the largest proportion of sales at 49%, apartments accounted for 34% of transactions and townhouses were at 17%.
 
But the consultants expect demand to remain sluggish. Demand is coming from end users who want property in established residential projects with completed infrastructure and facilities.
 
Ian Albert, regional director at Colliers International described the decline as ‘modest’ when compared with the 50% falls last year but added that a recovery is some time away. ‘We anticipate a further slowdown and we have an ongoing concern of the new supply entering the market, which will further impede recovery,’ he said.
 
The global real estate consultancy expects around 33,000 units to be released onto the market by the end of 2010, down from its earlier estimate of 41,000 following project delays or rescheduling. However, given Dubai’s history so far, a large number of these units may not be delivered on time and may cross over into 2011.
 
‘There are already more than 340,000 residential properties in Dubai with an average occupancy rate of 87%, with further declines anticipated. The market simply cannot absorb the additional supply unless the population grows and/or the release of stock is slowed down,’ explained Albert.
 
The situation is compounded by dwindling rents in the emirate with Dubai’s overbuilt residential market contributing to more than a 50% decline in average rental rates since 2008, discouraging ownership and further dampening demand.
 
‘Although this is good news for tenants, a reduction in the income generation potential of a property impacts negatively on its market value, making it less attractive to investors. This will be another factor to monitor over coming quarters,’ said Albert.
    
Albert said banks are still cautious about lending and mortgages are mainly offered on completed projects and to borrowers who pass the banks’ rigid approval processes.