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House rents is a common thread that binds all expats' lives in the UAE, a pet peeve that dominates conversations at social gatherings and the biggest outlay for the common man.
While some of you may have had to cough up more rents during lease renewals, in all probability, this was because you are still paying below-market rates. You may have moved into your apartment when the market dipped circa 2009 and are still paying historic rents. Other tenants may have managed to secure rent reductions after negotiating with their landlords. This rings true for both Dubai and Abu Dhabi, although the latter always lags the former in terms of market performance.
Therefore, while the Dubai rental market is close to bottoming out, Abu Dhabi rents have more room to fall. Also bear in mind that Abu Dhabi reinstated the five per cent rental cap in December 2016.
However, different dynamics govern the two markets. While Dubai rents have been hit by regional economic stagnation, redundancies, weak job growth and modest supply growth, the Abu Dhabi housing market is feeling the pinch of weak public sector spend, low oil prices and new supply.
Luxury rents are affected in both the cities as companies are cutting housing budgets and other staff benefits. This is resulting in a lot of downsizing and demand for mid-income housing, a sector where rents have remained resilient.
"In recent months, tenants have been able to negotiate terms downwards on renewal and the number of landlords offering flexibility to pay annual rent through multiple cheques has increased. Employers are slowly replacing housing allowances with monthly salary components and hence tenants are likely to continue negotiating on both rent as well as multiple cheques," said Sofia Underabi, head of residential valuation at Cavendish Maxwell.
Dubai's residential rents dipped one per cent quarter on quarter during Q1 2017, driven by an increase in the number of available homes and more constrained demand, according to CBRE. Larger apartment units felt the price pressure more.
Meanwhile, Cluttons estimates that Dubai average rents dropped 9.9 per cent last year. "The rate of creation of senior level executive positions has fallen and this is reflected in the lower level of enquiries and budgets," said Faisal Durrani, head of research at Cluttons.
"Looking at the rental market, the total pool of tenants has decreased over the last two years due to macroeconomic employment deterrents while new occupier demand has not fully covered the gap. The market continues to bring new supply at an unchanged pace from the past few years, adding downward pressure on rents," says David Godchaux, CEO of Core Savills.
Most experts forecast a potential increase in rents in 2018 when the employment market picks up and brings new occupier demand in the run-up to Expo 2020.
Abu Dhabi market
A combination of reduced public spending, business contraction, a reduction in staff benefits and the continued delivery of new homes have placed downward pressure on rents in Abu Dhabi, according to real estate consultancy Asteco.
Asteco research identified a three per cent quarter-on-quarter decline in Abu Dhabi apartment rents in Q1 this year. Over the last 12 months, the market recorded a drop of eight per cent in rates.
"In part, this was a consequence of tenants negotiating favourable leasing conditions, as budgets were reined in, due to economic uncertainty and overall employment prospects," said John Stevens, managing director of Asteco.
Unlike Dubai, Abu Dhabi continues to experience a heavy shortage of affordable mid-market housing units. "With the enforced changes in corporate housing allowances and salary packages, most residents have become more concerned with budget constraints. The broadening effects of economic uncertainty pushed tenants to be more pragmatic in the selection of residential accommodation," said Arlene Jimenea, senior research analyst, CBRE Middle East.
Smaller units such as studios and one-bedroom units are in high demand, particularly in the central business district. Secondary and tertiary locations offer alternatives for tenants looking for larger residential types at more affordable rates.
"During this challenging market, maintaining tenant loyalty will become more of a challenge for landlords as tenants are more open to unit downsizing or housing relocation to balance preferences and budget considerations," added Jimenea.
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