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UAE Property Insight - Universal drop in occupancy and lease

Global Arab Network - - George Haddad

Monday, 03 August 2009 09:37

Largely as a result of “ripple effect” radiating from Dubai, the Northern Emirates enjoyed a boom period in recent years as cost-conscious occupiers sought alternative accommodation solutions.
However the real estate market in the Northern Emirates is now experiencing a universal drop in both occupancy and lease rates.

Residential buildings still some way from completion have been most affected in the downturn, with investor confidence in off-plan units at a low.
Many residents relocating back to Dubai; or looking to upscale in their current locations as rents cool across all areas.

Ajman
•    Overall residential lease rates have fallen by nearly 20% with some units seeing decline 35%+

•    Majority of projects launched in last 2 years been located along the Emirates Road. Given this location offers easy road access to Dubai & prices were significantly lower than Dubai these units have proved extremely popular with investors and end-users alike.

•    Initially, projects focused on provision of residential units in independent towers. However, with the maturing freehold market the focus turned towards freehold properties as part of mixed-use master-planned communities.

•    Freehold market in Ajman first emerged in 2004 with the launch of Al Naemiyah Towers. Apartments offered at phase 1 rate: AED1,680m²; and phase 2 at AED1,940m².
•    Followed by Rashidiya Towers, offered at rate: AED2,368m².

•    The evolution of launch sale prices in Ajman is illustrated in figure 1 and highlights the rapid rise in rates, especially from period 2007 to 2008.

Ras al Khaimah
•    Property significantly cheaper than in Dubai and Abu Dhabi. RAK has naturally occurring characteristics in the form of mountains and sea that provide some potential for tourism and leisure based projects in the future. RAK also benefited largely from its position as both an overflow market for Dubai and its attractiveness as second home location for local and international investors

•    Availability of lower price units helped RAK attract value conscious purchasers seeking opportunities outside main markets of Dubai and AD.

•    Average launch sale prices for residential units during period 2005 - 2008 have risen from AED6,100m² to AED14,800m², a rise of 143% as illustrated in figure 2

Residential Lease Market

·    Over the last decade, much of the mid to low-income accommodation needs of the Dubai workforce has been satisfied by apartment developments in Sharjah and the Northern Emirates. “Ripple effect” emanating from Dubai reached as far north as Ajman and Umm Al Quwain. This became starkly apparent during late 2007 and early 2008 when supply became tight and rents rose in Sharjah.

·    Residential rental rates have fallen across all types and market sectors in the Northern Emirates in the first half of 2009 (figures below)

·    However, considerable new supply will enter the market in the Northern Emirates during the remainder of 2009 and the increased options for residents, coupled with low demand, is likely to cause further declines in lease rates.

·    Year-on-year, rents in the Northern Emirates have dropped by an average 20%, now showing close resemblance to rents that prevailed in H1 2007

Outlook

·    Residential lease rates are to likely to experience further downward pressure as significant new supply enters the market in the short term. With supply already outstripping demand, tenants are likely to benefit from an increase in options while also being offered more favourable terms from landlords. Increasingly attractive incentives have become more common as landlords try to retain high occupancy rates in the face of deteriorating conditions.

·    Declining lease rates in Dubai will result in further relocation of tenants from the Northern Emirates, predominantly from Sharjah and Ajman.

·    In the Freehold market, the impact of the new visa regulations on the property markets in Ajman and Ras Al Khaimah has not yet become clear.   In Ajman, the value of most residential properties is below the minimum criteria of AED1,000,000 laid down by the Federal Government and it is feared that already declining market conditions for developers will worsen, at least in the short term. Could result in additional delays, cancellations or Government intervention

·    Given the current direction of the market and lack of investor appetite more issues of this nature are likely to arise.

Global Arab Network

This article is an extract from report by Matt Green, Associate Director – Research & Consultancy, CB Richard Ellis Middle East

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