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Dubai real estate market 'back in limelight'

Dubai, January 9, 2011

Better times are ahead for Dubai real estate sector as investors regain confidence with the re-emergence of key lenders onto the marketplace, while Abu Dhabi faces a downward pressure on commercial and residential rental prices, said a recent study.

Real estate specialist Cluttons in its recent market report for Q4 2010, pointed out that investors were upbeat on prospects in specific locations and developments in Dubai as Tamweel, one of the largest Islamic mortgage lenders, has entered the scene offering attractive rates to credit-worthy clients wishing to purchase quality stock.

According to Cluttons, another major factor has been the slow migration of global giants such as Swiss pharmaceutical group Merck Serono into the emirate.

This is an encouraging sign, as Dubai’s affordability starts to make an impact. The key to medium term success is focusing on quality property maintenance and fostering the tenant-client relationship through a flexible approach to leasing, the realty specialist said.

The fall in office rents will continue unabated as long as new supply continues to be introduced, it added.

Meanwhile, Abu Dhabi continued to experience a downward pressure on commercial and residential rental prices throughout the summer months, the report said.

This is in contrast to the sales market, where values have remained relatively constant for most stock, with relatively small falls in the primary areas, it added.

According to Cluttons, the commercial rents in the UAE capital plunged about 45 per cent from the Q3 2008 peak to a low of Dh2,500 ($680) per sq m. However, the industrial rents have stabilised throughout the fourth quarter and affordability has entered the market, the expert added.

In Dubai, the average rental rates fell by 3.3 per cent for apartments and 3.2 per cent for villas in the emirate, while the sale prices  witnessed a 2.4 per cent drop for apartments and 5.1 per cent for villas, the report said.

However, DIFC and Tecom are the only two areas that still remain unaffected by the price reductions, Cluttons pointed out in the report.

Mortgage lenders are now offering attractive rates to credit-worthy clients wishing to purchase quality stock. Tamweel, in particular, has introduced competitive rates after a two-year freeze on lending.

'As supply continues to increase, drops in values will be unavoidable. Accordingly we are continuing to see the “flight to quality” in both the sales and rental markets as the more desirable locations become increasingly affordable,' it said.

Lifestyle projects such as The Old Town, Dubai Marina, Palm Jumeirah, The Meadows and The Greens are continuing to prove more resilient in both the sales and leasing market.

The report pointed out that the market downturn had its positives, including increased affordability and better quality listings which has introduced market maturity into Dubai’s real estate sector.

As to quality and affordability, buyers now have the option to upgrade to a better quality
unit in a more desirable location. 'Those who initially looked to buy a property in
The Springs, for example, can now afford a property in The Lakes,' it added.

In terms of the leasing market, residential lettings witnessed an increase of activity in September, as new families located to Dubai and existing families either renewed or upgraded to better residential facilities before the start of the new school term.

Between October and December, the leasing market moves into a period of calm, and asking rents tend to serve as just “place holders” until transactions resume.

We may see some activity again at the end of the year when some employment contracts expire, and this will serve to clarify where the rental market is heading, the report said.

In Abu Dhabi rental rates witnessed an average drop of 16 per cent in the lower sector of the market, in areas such as Mohammed Bin Zayed City. Now a one-bedroom flat is available from around Dh50,000 ($13,612) per annum.

'The higher end of the rental market towards the northern areas of Abu Dhabi Island has also seen drops of 8 per cent from Q3. Typical one bedroom flats are currently priced around Dh110,000 per annum.'

In Dubai, office rents have continued to fall across the board due to increased supply. Transactions have been fuelled by existing companies looking to relocate and take advantage of cheaper rents in areas which once may have been out of their budget.

The on-going construction and completion of commercial projects within JLT, Tecom C, Business Bay and Silicon Oasis throughout 2010 has placed downward pressure on rents within most areas of the city.

However, a two tiered market has emerged comprised of strata owned buildings versus the institutional, single-landlord owned buildings.

While some companies are attracted to the new business districts by their low rents, the issues surrounding strata owned buildings has diverted demand for office premises within these new areas to the traditionally, single-landlord owned buildings.

As a result, occupancy in established office districts such as the CBD, Deira, Bur Dubai and Sheikh Zayed Road have been able to maintain healthier levels.

The recent announcement by pharma giant, Merck Serono, to relocate its intercontinental offices from Geneva to Dubai firmly demonstrates that large multinational firms are looking positively at Dubai’s economy and taking advantage of increasing affordability.

"In an increasingly tenant-friendly market, we are finally seeing landlords offer lease terms that can attract occupiers. As well as reduced rents and regular payment terms, we are seeing higher levels of rent-free periods besides longer term leases of three to five years."

"Whilst it has been customary in Dubai for the tenant to cover the agency commission, we are now seeing landlords willing to incentivise agents by paying agency fees," it said.

These are positive changes in the marketplace which are demonstrating to potential tenants that landlords understand the need to be proactive and flexible in structuring lease terms, mainly when the drive for tenants to relocate premises is based on cost savings.

Landlords who have been slow to react to falling rents by offering incentives and focusing on good property management have seen vacancy rates rise, the expert said.

In Abu Dhabi, the office development completions continue to rise and is likely to result in a further softening in rental values throughout 2011, with use of incentive packages increasing.

'As rents continue to decline for secondary grade space, good quality Grade A space will see a smaller reduction as premium properties will continue to attract the highest rents.'

'Buildings such as Sowwah Square, Etihad Towers and International Tower represent the best stock in town with completion due in early 2011,' Cluttons observed.

The medium to long-term outlook for the Abu Dhabi’s office market remains stable however, driven by the weight of sovereign and private wealth and government development initiatives, the report added.

On Abu Dhabi industrial and logistics market, Cluttons said the picture is a slightly brighter as the steady deterioration of rental prices which was seen over the previous 12 months, has begun to stabilise as affordable open land and completed warehouse accommodation returns to Abu Dhabi.-TradeArabia News Service

Tags: Cluttons | Dubai real estate |

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