While the Dubai rental market is close to bottoming out, Abu Dhabi rents have more room to fall
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.
Pressure on Dubai rents set to continue
House rents in Dubai decreased only marginally in the first quarter of 2017, but analysts expect rates to see growth towards the year end.
According to Chestertons, house rents dropped marginally in Q1. While average apartment rents dropped by one per cent across Dubai, properties in DIFC bucked the trend with a four per cent increase compared to Q4 2016. In Dubailand, rents fell by almost four per cent, with similar drops experienced in Jumeirah Lakes Towers and Remraam.
Villa rents also fell by one per cent, with villas in Victory Heights (eight per cent) and The Springs (six per cent) experiencing the greatest drops. The Lakes saw rents increase by almost six per cent.
In terms of supply, Core Savills estimated 3,100 units were delivered in Q1 2017 while Cavendish Maxwell said 2,500 residential units have been handed over. Nearly 88 per cent of the units handed over in Q1 were apartments in areas such as Jumeirah Village Circle, Sports City, Silicon Oasis, Dubailand, among others.
A further 28,000 units are currently under construction in Dubai and scheduled for delivery by the end of 2017. Actual completions are likely to be far less. Assuming a materialisation rate of 50 per cent, around 14,000 homes could be delivered.
There is expected to be a downward pressure on Dubai rents for the near future.
Citing reasons, Mario Volpi, chief sales officer, Kensington Exclusive Properties, said: "There are many properties scheduled for handover this year that will give many options for tenants. Mira in Arabian Ranches 2, for example, is handing over now and offering 3-bedroom + study for Dh115,000.
Many people have lost their jobs, so there has been some migration to smaller properties and/or leaving Dubai altogether."
Sanjay Chimnani, managing director of Raine & Horne Dubai, said Dubai rents in the category of Dh170,000+ have been seeing the biggest drops in the past 18 months while the market below Dh80,000 has not seen much movement. "We believe there may be some more correction till the last quarter of 2017. From the fourth quarter of this year, we will see rents stabilise. The soon-to-be-implemented modification to the rental disputes law may have a positive impact on rents for quality properties as this segregates different assets in the same area," Chimnani added.
"Dubai rents are approaching what tenants perceive to be good value and this will continue for a little longer. Depending upon project handovers, rents will vary. If the handovers are on time, then demand and supply will be affected. There will be more units available for rent, as compared to the number of tenants seeking homes. However, if the handovers are not on time, there might be an increase in demand for homes, which may lead to increase in rent or continue along the same line," said Imrann Nawab, head of sales at SPF Realty.
Quick facts
Luxury vs mid-income
Luxury rents are affected in both Dubai and Abu Dhabi 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. Smaller units such as studios and one-bedroom units are in high demand, particularly in the central business district in Abu Dhabi.
Dubai vs Abu Dhabi
Different dynamics govern the two markets of Dubai and Abu Dhbai. While Dubai rents have been hit by regional economic stagnation, redundancies, weak job growth and a modest supply growth, the Abu Dhabi housing market is feeling the pinch of weak public sector spend, low oil prices and new supply. Rents are also set to fall in both emirates.
What happens next?
There may be some more correction in rental amounts till the last quarter of 2017. From the fourth quarter of this year, rents will be seen stabilising. The soon-to-be-implemented modification to the rental disputes law in the country may have a positive impact on rents for quality properties as this segregates different assets in the same area.
Good time to buy and rent
Dubai rents are approaching what tenants perceive to be good value and this will continue for a little longer. Depending upon project handovers, rents will vary. If the handovers are on time, then the demand and supply will be affected. There will be more units available for rent, as compared to the number of tenants seeking homes in the emirate.
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