The quarterly rate of decline in prices for residential units is starting to signal early signs of rent stabilization in Dubai, said a report.

Villa rents increased slightly in the third quarter while the pace of decline in apartment rents has decelerated significantly compared to the 2009 – 2010 period, added the GCC Investment Strategy – 2012 report prepared by Global Investment House.

Average prices in 2011 for residential units dropped 12 per cent and 17 per cent on average in both Dubai and Abu Dhabi markets, respectively whereas apartment rents followed a similar pattern moving down 9 per cent and 12 per cent.

Office rents also followed suit down 10 per cent on average in Dubai and 20 per cent in Abu Dhabi reflecting the slowdown in business activity coupled with relentless new supply entering the two markets leaving them with an estimated vacancy of 45 per cent in Dubai and 20 per cent in Abu Dhabi up from 40 per cent in the former and 10 per cent in the latter at the end of 2010, the report said.

Digging into 2012, Dubai selling prices of residential units should bottom out by the first half of 2012 but is still off from a general price appreciation as the market will remain overflowed with excess supply and significant new inorganic demand is not expected in 2012, in our view.

The same is expected for the office market as new supply equivalent to 20 per cent of existing capacity is expected to enter the market during 2012 and 2013, the report said.

For the Dubai hospitality segment, we do not expect the improvements that took place during 2011 as a result of the Arab spring to be extended further in 2012 but see a more negative spell on leisure tourism and business travel from the overall negative global sentiment.

For the retail segment, further stability was seen, as the absence of new future supply, the firmness of rental rates and moderate vacancy rates during 2011 act as positive indicators in the near future.

Abu Dhabi will see a further 15 per cent drop in selling prices of residential units and 10 per cent drop in rents as new supply continues to enter the market, the report said.

Further deterioration in the office market is also expected as considerable new supply is currently in the pipeline pressuring both property prices and rental rates downwards, according to the report.

Our outlook on Abu Dhabi hospitality segment is also negative for 2012 given the new supply entering the market coupled with low demand for tourism and an already feeble performance in 2011.

The retail segment was able to maintain stable performance in terms of rental rates on the absence of new quality supply but is expected to see further downward pressures going forward as several deliveries are scheduled in 2012 and 2013.

In Riyadh, the residential market comfortably absorbed the new supply of c.25,000 units delivered throughout 2011. Selling prices in the residential market maintained their upward trend supported by the rise of input commodity prices like steel and cement along with increasing land prices.

Villa and apartment rents increased 9 per cent and 10 per cent YoY on average. Villa and apartment rents in Jeddah also reported a 12 per cent and 15 per cent annual increase as the market continued to suffer from a state of undersupply.

Vacancies in the office market increased in 2011 to around 15 per cent in Riyadh up from 10 per cent at the end of 2010 as the market fails to totally absorb the new 290,000 sq m of office space. Average rents have inched higher during the year despite the increasing vacancies as tenants became more willing to upgrade to higher quality premises at slightly higher rates passing the vacancies through to lower grade sites.

In Jeddah, current vacancy rates also stand at around 10-15 per cent but are expected to increase as new supply of 180,000sqm will enter the market in 2012 and 2013 whereas vacancies in the CBD are, already, much higher reaching up to 20 per cent.

Land prices in Kuwait maintained their long term upward move in 2011 after slowing down in the period between the first quarter of 2008 and the second quarter of 2010, increasing by an average of 20 per cent.

The majority of transactions remained in the private housing segment, which meant that land price inflation was passed through to prices of houses with transactions in some areas witnessing increases of 25-30 per cent over 2010 prices.

The office market, on the other hand, is highly oversupplied with some alarming vacancy rates in the CBD that reached as high as 30 per cent during 2011 with very low take up rate for new deliveries.

The retail segment, however, maintained its strong posture and footfall growth during the year for the already operating well positioned malls while new market entrants are still struggling to attract shoppers, which could be an early sign of saturation, in our view.

The residential market will see trading volumes and values for the private housing segment will keep on increasing so long as organic demand remains intact and attractive capital gains are attainable, according to the report.

The same trend should materialize in the investment housing segment as yields remain on the attractive realm of 7-8 per cent as opposed to sluggish stock market performance and very low returns on bank deposits, the report said. – TradeArabia News Service