Residential rents remain stable as sales continue to decline

Average rentals within the residential segment in Dubai remained stable during the *third quarter of 2015, although the market is highly fragmented with some affordable locations achieving growth, whilst other areas experienced more pronounced drops according to the latest Dubai market report by global real estate advisor, CBRE. 

There was further compression within the sales segment, with sales rates declining around -2 per cent from Q2 2015 and around -6 per cent year-on-year.

Mat Green, Head of Research & Consultancy UAE, CBRE Middle East said, “While global economics have reduced investor sentiment and partially impacted Dubai’s residential sales, the slowdown is largely attributed to a price correction resulting from market stabilisation. In light of lower activity, developers are incentivising sales by offering more flexible payment plans, some of which are back-loaded and provide post-handover payment options.“

Commenting on the outlook for the remainder of 2015, Green, said, “The residential sector is likely to continue to stabilise in the coming months. Nearly 20,000 new units could enter the market during the course of the year, much of which will be located in the secondary submarkets of Dubailand. The market will see a higher proportion of residential projects being launched at lower price points, inducing the drive to affordability in the sales market. This is a positive trend and will help prevent a bigger correction in the future.”

The office segment, on the other hand, has witnessed steady rental conditions amid limited supply growth and pending market maturity. Prime office rents remained unchanged for the sixth consecutive quarter, while secondary locations have witnessed marginal growth.

Single-held quality office assets continue to generate high demand from corporate occupiers, although the market is being held back by the lack of good quality supply being delivered.

This will start to change from 2016, with the delivery of One JLT and Dubai Trade Centre District Building C1, both of which have generated high levels of pre-leasing activity, which broadly reflects the maturing nature of the Dubai market. 

According to the report, hotels in Dubai are experiencing softer performance due to fluctuations in the global currency markets and geopolitical challenges. The currency devaluation in some of Dubai’s primary source markets has pressured demand, causing ADR to decline 7% year-to-date to USD 227. This corresponded to an 8% drop in hotel room revenues, which was further suppressed by lower occupancy levels (-0.9 pp year-to-date).

“Despite the decline, average occupancy levels across the hotel market during the first 7 months of 2015 remained relatively buoyant at 77%. However, Dubai’s robust pipeline of hotels could place additional pressure on average rates, impacting hotel performance in the short run” further commented Green.

The hospitality sector is likely to see subdued performance until the end of the year, largely due to weak global currency markets that have impacted tourism demand. Dubai is being challenged by a diversion of tourism to more affordable regional destinations, while the robust pipeline of rooms could place additional pressure on supply and demand dynamics in the coming years.

The retail sector has recorded steady performance during the first three quarters of the year, with major shopping malls demonstrating high occupancies along with stable lease rates, the report stated. Strong consumer demand from UAE residents and international tourists has functioned as a catalyst for the sector’s growth. Dubai is now home to 56% of the world’s retail brands, ranking second only after London in terms of global brand coverage. 

Development activity remains buoyant with 620,000 m2 of leasable area set to enter the market in the coming four years. Community malls and expansions of existing shopping centres comprised the majority of new openings in 2015, including the Golden Mile Galleria recently opened on Palm Jumeirah. 

“A growing resident population combined with high per capita income have contributed to robust growth within the retail sector. Dubai remains a top destination for retailers, functioning as a gateway city for brands seeking to establish a presence in the region. However, on the consumer side, reduced economic sentiment amid lower oil prices, coupled with lower tourism demand could constrain spending from residents and tourists alike,” added Green.