Idle Dubai homes make an active comeback

dubai - Owners are renting out unoccupied units for the short term

Dubai has had its share of homes that remain vacant for most part of the year. Referred to as 'shadow inventory', such homes have existed in Dubai since the early years of freehold ownership. According to a recent Propertyfinder report, shadow inventory is being added back to the rental market in Dubai as capital appreciation ebbs.

The owners of shadow inventory fall into two categories - those who bought for investment purpose and are waiting for the right time to exit and those that bought the unit as a holiday home and don't want to deal with a tenant.

"There has been an increasing number of shadow inventory that has come to the market. However, the units still only make up a small percentage of the overall new instructions we see. I don't think it's a new trend. If you go back five to six years, there were a lot more empty apartments and villas than than there is now. These are not units that have just been handed over. They are at least a couple of years old and never lived in," says Lewis Allsopp, CEO of Allsopp & Allsopp.

"Shadow inventory could include homes that are not yet sold or rented for a long time. These residential units may be undergoing foreclosure or are already owned by a bank or government agency to be auctioned at a later stage. However, other scenarios include landlords waiting for the right time to sell or rent their unit, second [winter-sun] homes or homes that will be converted into short-term holiday lets," observes Haider Tuaima, head of real estate research, ValuStrat.

These properties are typically based in prime areas such as Downtown Dubai, DIFC, Dubai Marina, Jumeirah Beach Residence and the Palm Jumeirah. These are areas that were first launched in Dubai and where a lot of the initial investment came into.

Shadow inventory is mostly found in the form of apartments in Dubai. "We used to see shadow inventory in villa areas and while there are still some, they have mostly been either let or sold now," adds Allsopp.

Capital declines
These high-end locations suffered the most capital declines during the three-year market correction. According to ValuStrat, capital values declined 14.4 per cent on average since their peak during the first half of 2014.

So, it comes as no surprise that shadow inventory is being released to the market.

"Those who bought homes for investment and are waiting for the right time to exit are coming to terms with the fact that they may have to hang on for longer than they thought. In terms of the global economic situation, there is quite a bit of uncertainty. This is playing on the minds, and maybe even pockets, of some owners and is another reason why the owner of an empty property will decide to sell or rent. On the whole, there is more of a lean towards renting the properties than selling them," informs Allsopp.

An increasingly popular trend is for shadow inventory to be put into the market as a short-term let or holiday let. Here, the owner will get increased returns and more flexibility with the availability of the property.

For owners opting to sell, the right price is the primary motivation. "As with any maturing market, sellers here are getting flexible and less speculative. Most sellers have strong confidence that the property market will be a different game in the run-up to Expo 2020," says Parvees Gafur, CEO of Trustworthy Real Estate.

Who is buying?
End-users are mostly buying shadow inventory with a mortgage and looking to live in it. The days of quick profits are largely gone. So, for the most part, investors are not buying these units.

Owners of vacant homes not only face a loss of rent, but they also incur annual service and maintenance charges.

"Quite a bit of money will have to be pumped into each property on a yearly basis. There is only so long it can go on before an owner will decide that either selling the property or renting it out is going to be a better option," adds Allsopp.

For instance, real estate agents Allsopp & Allsopp has listed an upgraded penthouse in Dubai Marina. "The owners were going to use it as a second home but their plans changed and they left it empty for a number of years. They have brought it to the market only now," the CEO adds.

However, shadow inventory is only a small contributor to the rent decline witnessed in Dubai now. A big reason for the rent drop is an increased supply, but this is mostly coming from recently handed over developments.

"Rents generally follow the sales market, although, with one-year delay or perhaps more. Additionally, rents have been negatively affected due to the volume of fresh residential supply in the market," concludes ValuStrat's Tuaima.

- deepthi@khaleejtimes.com