Dubai prime home rents may fall further

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Dubai prime home rents may fall further
Gross yields continue to be upwards of eight per cent for apartments across most mainstream sub-markets in Dubai.

dubai - Demand decreases from ultra high net worth individual and C-suite occupiers

By Staff Report

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Published: Tue 12 Dec 2017, 12:51 PM

Last updated: Tue 12 Dec 2017, 1:26 PM

Rents in the Dubai prime residential rental market have some more room to contract as demand for prime residential decreases from ultra high net worth individual and C-suite occupiers, says Core Savills, a real estate consultancy.

New stock in the upper and mid-prime residential segment are also diluting demand. However, with capital values also softening considerably, some products in this segment still hold stable yield values.

With relatively slower falls in rents in mainstream locations over the last few quarters, the prime segment is expected to be sluggish in moving towards the bottom.

Gross yields continue to be upwards of eight per cent for apartments across most mainstream sub-markets in Dubai, however, some degree of yield compression is expected through further rental decrease.

"As the next cycles of lease renewals inspire relocations, particularly among tenants whose rents are yet to reflect the softening market, we expect rents to continue softening. Although widespread, the magnitude of these drops is expected to remain limited," says David Godchaux, CEO of Core Savills.

Meanwhile, Dubai's residential market has completed an entire cycle in the last 10 years and is currently in the midst of its second cycle. After seeing a quick recovery over 2011-2014, rents in Dubai declined again between 2015 to 2017.

According to a report issued by Core Savills, Dubai was able to see a swift recovery in rents due to significant fiscal stimulus from the government which kickstarted growth and fuelled job creation, thus driving up demand for rental property. After reaching a peak in 2014, rents declined again, mirroring the decrease in oil prices.

"Given that Dubai continues to be a fast-growing economy, largely reliant on expatriate tenant demand, that has historically been responsive to Dubai's economic fluctuations, the speed with which the city traversed its rental cycle is not surprising. As the UAE sees further economic diversification and private sector-led growth, Dubai's rental cycle is likely to decelerate and lengthen," observes Godchaux.

Office rents
Dubai's prime office market has been outperforming the overall real estate landscape over the last few years due to limited grade A supply and unmet demand from large international occupiers wanting to set up or expand their regional operations. However, the pace of upward movement in prime rents is expected to moderate as the upcoming stock gradually self-adjusts, with new prime stock anticipated to exceed new grade B supply for the first time in the last 10 years.

This is expected to create a healthy balance between supply and demand as more options become available for large corporates to choose from - many have been resorting to purpose-built premises due to limited options available in recent times.

The secondary office market continues to lag due to strong headwinds faced from the large amount of existing and upcoming stock, despite marginal improvements in demand.

"As macro-economic indicators start improving and demand for grade B and C office space starts increasing again, we still expect a significant lag in absorption for the existing vacant stock. We are very cautious about any chance of a recovery in secondary market rents in the next 12 to 18 months," Godchaux adds.


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