Special Features
Increasing Supply Continues To Impinge On Rental Rates, According To Landmark Advisory’s November 2010 Dubai Leasing Guide
Landmark Advisory today released its November 2010 lease guide for Dubai. The latest report shows that lease rates have significantly declined across the market since the last leasing guide was published in June 2010.Jesse Downs, Director of Research & Advisory, Landmark Advisory, forecasts that the most significant challenge will be the impending supply pipeline: “Tenants realise it is currently a renters’ market and want more value for their rental dirhams and, so, are able to leverage alternative options to negotiate very attractive deals. Some developers and landlords are finally realising the implications of this supply pipeline and are slashing rents by up to 20-30% below market rates in order to achieve higher occupancy in newly handed-over buildings.”
Going forward, Landmark Advisory predicts that lease rates will continue to decline, especially in areas which suffer from maintenance and infrastructural issues: “Rents are often an illustration of the quality of the community, including building maintenance and infrastructure. The most significant recent rent declines are in areas with maintenance and infrastructural issues,” added Ms. Downs.
According to Ms. Downs, increasing supply has and will continue to put a strain on rental rates and landlords need to be acutely aware of the market when considering how to price their units: “Landlords of newly handed-over units are willing to severely undercut market rates to achieve occupancy. While some may claim this is an anomaly, these properties are setting the new market rates. While rents will continue to fall across Dubai, these new pricing strategies have particularly significant implications for the areas with the most substantial supply pipelines. “
When considering the aggregated supply and demand dynamics across Dubai and Abu Dhabi, Landmark rents will decline in spite of the Abu Dhabi commuter demand: “We estimate that average vacancy rates in Dubai are currently 15-18% but will increase to 19-24% by 2012. Even considering the Abu Dhabi commuter demand, it is clear that average rents in Dubai will continue on a downward trajectory,” said Ms. Downs.
Residential - Apartments
The latest guide found that apartment rents have declined across Dubai with very few exceptions. The biggest declines occurred in areas such as Dubai Marina, JLT and The Views, primarily caused by the handover of new buildings. The lower limit for a high quality 2-bed in Dubai Marina has declined by 27% since June, whereas a comparable unit in Downtown has only declined by 6% in the same period.
Landmark Advisory monitored the outcomes of divergent rental strategies comparing the pragmatic and rigid approaches of owners. “We tracked occupancy levels of three new buildings in Dubai Marina, all with similar handover dates and of comparable quality. Within three months of handover, the building priced to attract tenants has already achieved occupancy of 90%. In comparison, the building with high rates and a rigid pricing strategy only has 40% occupancy,” explained Ms. Downs.
Apartment rents in lower quality properties continue to deteriorate – in this context, quality refers to the current state of the building, quality of maintenance, and condition of the community. For example, the lower limit for studios in International City has fallen 38% since June 2010 (from AED 22,000 to AED 16,000 per annum). “Of course, these declines are caused by increasing supply in the area and overall rental trends in Dubai. However, the severity of the lower limit decline is also attributed to ongoing concerns about maintenance and the community,” added Ms. Downs.
Residential - Villas
In accordance with the report, villas in areas with long-standing maintenance or infrastructural problems witnessed greater price falls than those areas which are comparatively unaffected. An example of this is Jumeirah Islands, which witnessed an average drop in lower limits of 16% across all unit types, compared to a drop in the Meadows of only 9%.
Recently handed-over villa communities in Dubai have suffered severe price drops as many landlords have struggled to attract tenants to areas lacking basic amenities and infrastructure or within/near construction zones.
Commercial - Office Rents
In terms of commercial units, rents have continued to decline since June and, as predicted, the freehold market has borne the brunt of the decline. Over the past six months, JLT has experienced the most significant fluctuations with the lower limits of rents falling as much as 50%, meaning that office space is now readily available for as low as AED 25 per square foot. During the same period, Business Bay has experienced more manageable declines of 7%.
“These trends are a direct result of the supply pipeline dynamics in each community,” explained Ms. Downs. “In JLT, the majority of supply pipeline has now been handed over, causing the steep declines. However, in Business Bay, the majority of the supply pipeline is still under development. We, therefore, expect rents in Business Bay to continue their downward trajectory with significant declines anticipated in the coming years. Naturally, there are also other factors that will impact rents in each area such as location, infrastructure, and licensing costs and procedures,” concluded Ms. Downs.
Landmark Advisory’s latest lease map for Dubai is available for download at http://www.landmark-advisory.com.
