Residential rents unlikely to stabilise for another two years

DUBAI — Although the residential property market in Dubai is maturing, property prices and rents are not expected to stabilise this year, according to a report by the Kuwaiti Global Investment House (GIH). This will not happen for another two or three years, once developments currently under construction are completed.

By Lucia Dore (Senior correspondent)

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Published: Sun 2 Jul 2006, 11:00 AM

Last updated: Sat 4 Apr 2015, 2:55 PM

Delays in the delivery of new projects continue to fuel demand for existing property, which is leading to a steady appreciation in rents and prices. But GIH does not expect rents to appreciate at the rate of earlier years, largely because of the 15 per cent rental cap imposed by the government last October.

The report also states that rental yields in Dubai remain respectable, ranging from seven to 10 per cent, with residential yields at the lower end and commercial yields at the higher. Demand for office space is greater than for residential.

Margins for developers will depend on whether the land was obtained as a grant, it added. And the report also states: "With the risk of an oversupply situation in the medium term, developers have to concentrate on cost control and providing differentiated service levels in order to encourage people to buy off-plan and secure their terms."

Dubai's focus on tourism has also led to the construction of large-scale shopping malls, but there is a risk of oversupply. According to GIH: "Though the emergence of sprawling malls adds to the allure of Dubai, the numbers point towards a looming overcrowded situation." The per capita retail space in Dubai is estimated to be four times that of the US, which latent demand is not expected to mop up. Instead, the expected increase in tourist arrivals and the improving image of Dubai as a shopping destination are expected to strengthen the fortunes of large-scale retailers, states the report.

Abu Dhabi, with its current supply deficit, has a more secure story for developers, according to GIH. There are huge opportunities because an enormous supply of new property is required to satiate demand. "This implies a more secure story for developers as demand is latent rather than external as is the case, to a certain extent, in Dubai," states the report.

Retail activity there is also picking up. "Going forward, we expect more action in the Abu Dhabi retail segment, though mostly as a part of the mixed-use developments that are coming up," states GIH. And if the project is successful, "we believe that the existing players would be met with adequate indigenous demand to generate good returns."

Tourism in Abu Dhabi is also expected to grow once developments in the investment zones are completed. Tourist numbers are expected to increase from one million currently to three million by 2010.

Real estate activity in the Northern Emirates, especially Sharjah and Ras Al Khaimah, is also expected to flourish — but not on the scale of Dubai and Abu Dhabi. Burgeoning economies, a constant inflow of expatriates, proactive government policies, high liquidity and a change in the property law in Abu Dhabi, Ras Al Kaimah and Dubai that permits foreign ownership in designated areas, are boosting investor's confidence in the property market.

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