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'Landlords undercut rents on glut fears'

Issac John / 4 November 2010

Landlords in Dubai are slashing rents by up to 20-30 per cent below market rates in anticipation of a new supply glut in the market, real estate firm Landmark Advisory said.

Jesse Downs, Director of Research & Advisory, Landmark Advisory, predicted that the most significant challenge would be the impending supply pipeline .

Rents continue to slide in some of Dubai’s most popular residential areas as new supply squeezes prices. Landlords in new units are severely undercutting market rates to achieve occupancy, a strategy that has led to rent declines of up to 38 per cent in some of the emirate’s developments, the report said.

“Going forward, lease rates will continue to decline, especially in areas which suffer from maintenance and infrastructure issues,” Landmark Advisory said in a report.   “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 infrastructure issues,” Downs said.

“We estimate that average vacancy rates in Dubai are currently 15-18 per cent but will increase to 19-24 per cent by 2012. Even considering the Abu Dhabi commuter demand, it is clear that average rents in Dubai will continue on a downward trajectory,” said Downs.

Increasing supply 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, the report said.

“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,” Downs said. 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 per cent since June, whereas a comparable unit in Downtown has only declined by six per cent in the same period.

“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 per cent. In comparison, the building with high rates and a rigid pricing strategy only has 40 per cent occupancy,” said 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 per cent since June 2010 (from Dh22,000 to Dh16,000 per annum).

Villas in areas with long-standing maintenance or infrastructure problems witnessed greater price falls than those areas that are comparatively unaffected. An example of this is Jumeirah Islands, which witnessed an average drop in lower limits of 16 per cent across all unit types, compared to a drop in the Meadows of only 9 per cent.

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 per cent, meaning that office space is now readily available for as low as Dh25 per square foot.

During the same period, Business Bay has experienced more manageable declines of  seven per cent, the report said.

Email: issacjohn@khaleejtimes.com

 

 

 
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