Dubai rents continue to fall

Tuesday May 17 2011

A new report by Landmark Advisory has found that rents in residential and commercial units in Dubai continue to fall irrespective of quality and location. Declines are primarily attributed to increasing supply, a trend that will continue with 100,000 new units anticipated for delivery over the next two years.

Although units in lower quality buildings and less prestigious locations are seeing the steepest rent declines, the more significant trend is the resumption in rent declines for high quality units in prestigious locations, Landmark said.

The biggest problem facing the market is the impending supply pipeline, according to Jesse Downs, Landmark`s Director of Research & Advisory Services. Tenants are increasingly seeking more value for their rental dirham and are able to leverage alternative options to negotiate very attractive deals. This is pushing up bid-ask spreads and illustrates that landlords are conceding in negotiations with ever more discerning and value-seeking tenants.

More significantly, this is a trend now observed in high quality units in prestigious locations, which is a segment that has experienced relatively minimal volatility in late 2009 and the first quarter of 2010 due to relocation trends, Downs said. Dubai prices fall

Landmark`s report on the Dubai market for June found that lower limits for a one bedroom apartment on the Palm Jumeirah were down 6% since the advisory`s previous report in April. One bedroom properties in Jumeirah Lakes Towers have dropped by 10% while in lower quality areas such as International City, upper limits for both studios and one-bed apartments decreased on average by 22%.

Well established areas with a limited supply pipeline are also experiencing additional rent declines. Downtown Dubai has seen further rent drops due to continued supply entering the market in neighbouring areas like Business Bay and Sheikh Zayed Road, the report noted.

While these areas are not of comparable quality to Downtown Dubai, the impact on this increased supply is evident, lower limits for two beds in Downtown Dubai are falling five percent, at the same time that lower limits in Business Bay and Sheikh Zayed Road have fallen by 12% and 6% respectively since the beginning of May, Downs said.

As the competition to attract tenants has grown landlords have begun offering more concessions, including six-cheque contracts and incentives like rent free periods to assist tenants with days lost during the moving process.

Unlike the trends in April 2010, where the rental declines were primarily restricted to lower and medium quality buildings, high quality buildings in good locations are also seeing rental drops, Downs said. While the falls are still marginal when compared to the drops in lower quality buildings, this is still a significant trend. Villa rents see more stability

Villa lease ranges have been much more stable than apartment rates, the report found, with lower limit declines seen at Arabian Ranches, Victory Heights, Jumeirah Islands, The Springs, Dubai Silicon Oasis, sections of the Lakes and parts of Palm Jumeirah.

While some villa rents did fall, they did not fall in every area and rents for certain high quality villas have remained stable. Since this segment is particularly sensitive to demand fluctuations, rents for specific high end villa developments may experience short term fluctuations.

For example, the lower limit rent for a five bedroom villa on Palm Jumeirah is currently at Dhs400,000 per annum. Given the limited pool of individuals and families able to afford such a luxury villa, the rents may fluctuate based on longer void periods, Downs said. Commercial rents expected to fall further

In terms of commercial units, the report said rents have declined since April and are expected to fall further. “The commercial market is witnessing a prolonged period of oversupply, and with new developments in Business Bay, and JLT expected for completion in 2010 and beyond, lease rates are expected to decline further across Dubai,” Downs noted.

In terms of specific areas, DIFC lease rates lower limit has decreased by 17%, commercial units in Business Bay have decreased 6% and Dubai Silicon Oasis has decreased 20%, the study revealed.

Landlords are attracting new tenants by offering lower lease rates, longer term leases, and increased incentives such as rent-free periods, fit-out allowances, and increased cheque options.