Major infrastructure projects to support rebound of Dubai real estate
Rushika Bhatia
Industry Watch

Major infrastructure projects to support rebound of Dubai real estate

A recent Dubai Chamber of Commerce and Industry study reveals that prices in Dubai’s real estate market have declined for the last two years due to oversupply in residential units.

This is also seen as the main factor behind further declines in rents and prices of properties according to experts in the local real estate market. Nonetheless a robust rebound is expected at a slow pace as it may still take 2011 and the first quarter of 2012 for the sector prices to bottom out, states the study.

Based on the price index and supply of units of Dubai’s residential real estate sub-sector in 2010 and its outlook in the short term, published by Colliers International and Jones Lang LaSalle and others, the study reveals that completion of world class infrastructure and a business friendly environment over the last two years will be among the main factors behind the creation of more demand for Dubai real estate.

The study further reveals that remarkable transport infrastructure investments such as Dubai Metro Green Line and the major extensions of Dubai International Airport will increase the attractiveness of the Emirate and the eventual rebound of its real estate market.

Overall residential real estate price index

A blended index for Dubai quarterly house price index for the period Q1-2007 and Q4-2010 is depicted in Figure 1. A blended index is defined as an index that encompasses sale prices and rents of villas, apartments and town houses.

Dubai’s house price index registered a 1% increase in Q4 -2010 compared to  Q3-2010. On an annual basis, the index witnessed an overall decline of about 6% in value when compared against Q4-2009. The blended average house price for Q4-2010 was approximately AED 961 per square feet) compared to AED 1,022/ft2 in Q4-2009.

Dubai residential market supply demand trends

The total supply percentage share of villas and apartments in Dubai’s residential market is composed of about 79% apartments and 21% villas. Figure 2 indicates that in 2010, the supply pipeline in Dubai had past its peak.  According to Jones Lang LaSalle, in 2010 approximately 36,000 residential units were completed, bringing the total residential stock to around 309,301 units by the end of the year.

In 2011, it is expected that about 25,545 units will be completed, implying that the new supply of residential properties in Dubai is expected to slow down by about 30% compared to 2010. According to the same source, major residential projects have already started and expected to be completed in H1-2012.

From the demand side, the year-on-year Dubai residential numbers have decreased by 53% and their corresponding transactions value has decreased by 65% for the period between Q3-2009 to Q4-2010.

Dubai apartments and villas price trends

Investigating the individual price movements of residential apartments and villas separately, Figure 3 shows that in Q4-2010, the overall apartment index remained unchanged compared to Q3-2010, following a negative percentage change for the last quarters in a row. Transactions of apartments increased by 16% for the same period under investigation. On an annual basis, the overall apartment index declined by 5% in Q4-2010 compared to Q4-2009. The biggest drop in apartment lease rates was once again recorded for smaller unit types – studios and one bedroom units.

The villa market has closely mirrored the pattern of the apartments market during Q4-2010 with rates decreased by 3.3%. On an annual basis, the drop was just 2%, with the smaller villa sizes of two and three bedroom units witnessing the biggest reductions. Diminishing lease and occupancy rates have resulted in some landlords being willing to absorb service charges on behalf of the tenants, whilst others are offering rent-free periods as an incentive. Other landlords are offering rates of 10% to 12% below prevailing market levels in order to secure tenants willing to pay their rent a full year in advance.

The study concludes by stating that Dubai’s real estate sector will gradually recover with a lag to the recovery in the domestic and global economy, even though it is unlikely to return to pre-crisis sales or rental growth rates in the foreseeable future. The real estate sector will remain under stress due to the onset of massive new supply. Despite current challenges, Dubai, as the region’s financial and business hub will continue to provide attractive investment opportunities regionally.