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Dubais residential property market acts like an oligopoly

The residential real estate market in Dubai behaves much like an oligopoly, according to property consultancy, Colliers International.

In its fourth quarter real estate overview of Dubai, it says that a "disproportionately small number of landlords control the majority of the real estate market".

This is demonstrated by the "tendency of landlords to tolerate low occupancy rates in preference to dropping rents," it says. Such behaviour may "cushion" the size of any housing market correction that should occur as more residential units come on stream. The region's excess liquidity also has a "distorting effect" on market behaviour, say Colliers. These factors will make it difficult to determine what will happen to the market once the 7 per cent rent cap is removed.

The research looks at the implications of the overwhelming focus on the high end of the residential market. An oversupply of units could "give rise to a market-wide relaxation of lease terms that are currently heavily weighted in favour of landlords," say Colliers. Moreover, it expects annual in-advance rental payments to be widely replaced by quarterly (or possibly monthly) in-advance payments within the next 18 months, "as landlords become increasingly competitive". But this will only happen if the regulations pertaining to real estate brokerage firms are firm enough to ensure landlord income security.

The approach adopted by developers is commented upon. The report states: " Many developers have overlooked one of the most salient aspects of real estate: maximising development returns is not purely a function of building as much as possible."

Colliers has also undertaken a Residential Occupancy Rate Survey (Q2 2007) of Emaar's completed ready-for occupation master-planned developments. Comparing The Greens (upper middle-income occupier profile) and the Dubai Marina (high-income occupier profile) it found The Greens enjoy high average annual occupancy levels of about 94 per cent;

Dubai Marina has occupancy levels of 70 per cent; and that the ownership profile is split almost evenly between owner-occupiers and tenants in both The Greens and Dubai Marina occupier segments.

Like the residential sector, the office sector has also seen an undersupply of units. This has been reflected in occupancy rates of between 97 per cent and 99 per cent in most available office buildings and "tremendous increases in office rental rates", say Colliers. The impact of undersupply is also reflected in the level of finishing at which office space is let. It is now possible to let offices in "shell and core condition" which is "creating a new, increased benchmark in the city for average occupational costs", says the real estate consultancy.

It is more bearish on prospects for Dubai's office sector than for the residential sector, mainly because of the forecast tripling of office product between now and the fourth quarter of 2009. According to Colliers "office product will increase total supply from a current 1.6 million sq m to 5.6 million sq m by year-end 2009."

A greater number of corporate leases for renewable three, five or 10 year terms is also being observed, notes the consultant, and are expected to become more common. By the third quarter of 2008 capital values are predicted to fall and "capitalisation rates will likely decompress in response to an increase in vacancy rates".

Abu Dhabi

Colliers' Abu Dhabi Real Estate Overview for the fourth quarter of 2007 states: "A population surge, a series of legislative reforms in 2005 governing property ownership and the phenomenal growth witnessed within neighbouring Dubai, have constituted the main drivers for real estate investment in the emirate."

Demand for residential property continues to outstrip supply. One and two-bedroom apartments enjoy the highest demand and buildings with a reputation for effective property management and a good selection of amenities have waiting lists, according to the report. Some developers also claim that projects are 100 per cent pre-let well in advance of construction completion, say Colliers.

Despite the 7 per cent rent cap announced in late 2006, "new leases are commonly contracted at premiums of up to 25 per cent over the average passing rents of incumbent neighbours," according to the report. It also notes that the largest gap in the market is the middle-income segment.

Based on Colliers' calculations, there are 14,000 villas and 18,000 apartments under construction. And the supply of residential accommodation units in the city is forecast to increase by about 205,000 by 2015, according to figures from developers.

Regarding office space, Colliers anticipates that by 2011 existing office space supply will increase by a further 85 per cent to 850,000m2 of gross floor area (GFA). It also says that, currently, there are few purpose-built primary grade office buildings in the city, and the bulk of them are owned by government or semi-government entities; occupancy rates in purpose-built buildings are typically around 98 per cent; the quality of the city's remaining stock is low with the majority of office buildings of secondary or tertiary grade; and virtually all buildings suffer from a lack of dedicated parking facilities.

Colliers' research also shows that there is approximately 515,000 sq m of office space GFA under construction in Abu Dhabi. In the meantime, however, "unsatisfied demand has resulted in average rental increases of over 30 per cent in all office accommodation under study between 2005 and 2006", it says. And between 2006 and 2007 rents increased by around 10 per cent, as a result of the rent cap. Office rents are forecast to rise still further, "until substantial supply enters the market from the end of 2009 onwards".

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