Dubai Report Q3 2010

Dubai Q3 Report 2010

Property Market Summary

Highlights

Residential rental rates across the board and particularly in the apartment sector recorded a decline despite increased activity over the summer months and Ramadan.

Apartment rental rates declined by an average of 6% whilst villa rents dropped by 4%.

Office transaction activity was low and predominantly driven by relocations as companies take advantage of rental decreases of up to 11%.

Despite a number of handovers in Abu Dhabi, rental correction was not sufficient to encourage a significant movement of tenants from Dubai to Abu Dhabi.

Sales prices for apartments, villas and offices decreased by 6, 7 and 3% respectively, mainly due to the large amount of units available for sale.

Real Estate Monitor

The line graph below demonstrates the average percentage sales and rental trend on a quarterly basis.

"There has been a change in focus in the real estate sector as maximising rental yields and long-term capital appreciation takes precedence over short-term sales profits, with pro-active property management being a key factor."

Elaine Jones
CEO, Asteco Property Management

Apartment Rental Rates

In Q3 2010, results from a selection of properties showed the average decline of apartment rental rates to be 6% from the previous quarter.

Transaction activity, which is generally at its lowest during the summer and Ramadan, has been surprisingly buoyant with a number of people taking advantage of the quiet months to look for value-for-money accommodation. Therefore, the drop in rents has proved to be less significant than in Q2.

The largest change was recorded for Palm Jumeirah, Jumeirah Beach Residence and Sheikh Zayed Road with average decreases of 11, 9 and 9% respectively. These developments have previously been more successful at maintaining their rental rates due to their primary location. However, continuous rental drops in other developments have caused the above-mentioned areas to adjust in order to compete for the shrinking tenant pool whilst the demand-supply gap widens. Superior developments such as Tiara and Oceana Residences as well as Sama and Rolex Tower command above average rental rates due to the quality of the apartments and advanced facilities.

The lack of improvement in infrastructure and maintenance in International City has caused rental rates to decline by a further 9%.

Other affordable developments such as Discovery Gardens and Jumeirah Lakes Towers , however, have only seen a minimal correction of 3 and 2% respectively. Although further declines across the board cannot be ruled out, the drop in these areas is expected to be less significant due to the already lower rents.

Apartment Sales Prices

Asteco has recorded an average drop of 6% for the selection of locations below. This is mainly attributed to the increasing supply of apartments. However, we have also seen increased sales activity, predominantly due to buyers taking advantage of attractive deals often coming from owners who are expected to take handover of their unit but are unable to make the final payment, which often constitutes a large percentage of the overall sales price.

Transaction activity from new investors is low due to the large drop in rental rates, high service charges and the lack of attractive mortgage finance.

Developments such as Palm Jumeirah, which have historically been able to maintain their approximate value, have now had to adjust as a result of decreasing sales prices in nearby communities such as Dubai Marina and Jumeirah Beach Residence which also offer community living. Quality developments such as Tiara and Oceana Residencef, however, have fared better as opposed to Golden Mile or Shoreline Apartments.

Although further declines are expected, sales prices for affordable developments such as Discovery Gardens and JLT have been relatively static over the last three months.

 Villa Rental Rates

Villa rental rates have experienced an average decrease of 4% since Q2 2010 for the same reasons mentioned in last quarter's report – namely the increase in supply in various developments such as Layan and The Villa in Dubailand and Cedre Villas in Dubai Silicon Oasis, as well as Shorooq Villas in Mirdif. Take-up is relatively slow due to the sheer volume of pent-up villa stock and the continuous handover of new villas.

The Springs has seen a drop of 7% due to the significant number of units available and the ongoing infrastructure construction in the area. Existing tenants are relocating to newer and more affordable units on the outskirts of Dubai despite the location disadvantage.

With increased activity over the summer, we expect this momentum to continue in Q4 with demand predominantly coming from tenants looking to move from apartments to villas as rental levels continue to adjust.

Villa rental rates seem to be more robust compared with apartments, which in part has to do with the fact that the current and future supply of villas is marginal compared to apartments.

Villa Sales Prices

 Villa sales prices have experienced a drop of 7% on average after having remained relatively stable in Q2 2010. The Meadows and The Springs continue their downward trend from the previous quarter with further decreases of 11 and 10% respectively. This is largely due to the number of units available for sale and the resulting competition to find a buyer. Lower sales prices have in turn spurned transaction activity; in fact, these developments, as well as Arabian Ranches, account for the majority of all villa transactions that have taken place over the last three months. Palm Jumeirah saw the biggest dip after managing to hold value over the last year. This is due to sheer buying power of potential investors, which consequently forces sellers to adjust the pricing levels in order to complete a transaction. It should, however, be noted that investors who bought in the early stages are still selling at a profit despite decreasing sales prices. Demand for townhouses and smaller villas is higher than that for larger sized units due to the lower price point. This trend is expected to continue in the short- to medium-term.

 Office Rental Rates

 Office rental rates have experienced a minimal decline of 4% on average over the last three months, due to subdued transaction activity over the summer period and Ramadan. The majority of companies are expecting rental rates to decrease further and are therefore deferring any major decisions until Q4 2010 or early 2011. Leasing rates in Tecom have seen the greatest decrease due to the handover of Cayan Business Centre and the general oversupply in surrounding developments such as JLT, Dubai Internet City, Dubai Media City and Tecom itself. On the back of financial difficulties Dubai Internet City and Media City have seen an outflow of predominantly small companies, which has resulted in rental rates to ease by 4%. Overall, transaction activity is expected to pick up whilst rental rates are likely to continue the downward trend. Long-term anchor tenants are expected to renegotiate lower rental rates whilst minimal relocation demand will continue as new supply enters the market and companies take advantage of better locations and facilities.

Office Sales Prices

Dubai's office market suffers from weak end-user and investor demand which is predominantly rooted in the cautiousness of potential tenants and the sheer amount of supply. The majority of companies are still opting to lease whilst only a small number are intending to acquire office space for long-term purposes. Companies practise due diligence before making any major decision and are usually in a position to hold out for the right offer. In addition, the softening of office rental rates in primary areas has resulted in companies taking out long-term leases as opposed to buying. In order to entice companies to acquire office space in non-CBD locations such as Dubai Silicon Oasis and JLT, sales prices have been adjusted to reflect the decreasing prices in more prominent areas. Fitted office space is preferred over shell and core units. Office sales prices are likely to continue dropping in the short- to medium-term.

Project Focus  

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Law Update

Circular No. 1 of 2010 regarding service charges for jointly owned property was issued by the Real Estate Regulatory Authority (RERA) on the 5th September 2010. The circular provides, inter alia, that all developers should, prior to collection of service charge fees, adhere to the following:

Register the project and all the units contained therein with the Land Department registry; Arrange a general assembly meeting of all owners to elect the board and document the meeting in accordance with the directions; and Register the owners association with RERA.

The circular also deals with a number of other issues related to payment of service charges, such as annual service charges have to be approved by RERA; all unit owners must pay the RERA-approved service charge and the developer must pay service charges in relation to any unsold units; no unit owner may avoid using the common areas in order to avoid payment of his share of the service charges, etc. The above legal information is supplied courtesy of Al Tamimi & Company. (For more information go to www.tamimi.com.)

UAE Residential Comparison

The graphs below show the current average rental rates (in AED‘000) for apartments and the percentage change in rental rates over the last three months for the different units across the Emirates.

The average is calculated using average rates from 16 locations across Dubai.

 Mortgage Market Update

We are starting to see a more mature mortgage market emerging in the UAE. Lenders are notably becoming more competitive, which is having a positive effect on the consumer. John Charcol Middle East are now working with a number of lenders who have recently introduced fixed rate products onto the market from 5.99% for the first year. This is a significant step forward and provides clients with the peace of mind that their monthly repayments will not increase within this timeframe. Another step forward includes selected lenders providing finance for any completed property with a title deed. This is making finance more accessible than before as clients were unable to finance their property due to the developer not being approved. All in all, the outlook is gradually looking positive as there has been a noticable increase in the amount of mortgage related enquiries and the consumers' confidence is gaining some momentum.

Note:

1. (*) The above lenders reserve the right to change their product policy, fees and charges, interest rates and other credit-scoring criteria at any time without prior notice. 2. Banks will generally only finance properties from developers on their approved lists. John Charcol Middle East is an independent mortgage broker based in Dubai. For queries or assistance in relation to mortgages, contact John Charcol Middle East's sales team Toll Free on 800 JCME (5263) or +971 (4) 341 7466 if dialling from outside the UAE, or by email to mortgages@johncharcol.ae

Asteco Property Management LLC

With over 25 years' experience in the Middle East, Asteco's Professional Services team brings together a group of the Gulf's leading real estate experts. Asteco's network of offices in Abu Dhabi, Al Ain, Dubai, Northern Emirates, Qatar, Bahrain and Jordan not only provides a deep understanding of local markets but also enables us to undertake large instructions where we can quickly apply resources to meet the client's requirements. Our breadth of experience across all the main property sectors is underpinned by our sales, leasing and investment teams transacting in the market, and a wealth of research that supports our decision making.

Research

Asteco's Research Department provides investors and developers with essential real estate knowledge to ensure clients understand their competitors, target markets and their long-term strategies.

Consultancy

Asteco's Consultancy Department provides comprehensive advice on market trends and solid solutions, from project concept to completion. Asteco's consultancy reports stimulate initial investment to financial institutions and other private equity providers.

Valuations

 The team is fully independent in its approach and adheres to the Royal Institution of Chartered Surveyors' (RICS) valuation standards.

Investment Agency

Asteco has a dedicated Investment Agency team, which acts for both local and international investors in investment and development transactions covering the GCC and global markets. Internationally, Asteco has developed a strategic alliance with Savills (PLC), an internationally renowned property consultancy group, with operations throughout the UK, Europe, Asia and Australia.

Sales and Leasing

Asteco is the leading sales and leasing agent in the UAE and is the sole agent for a number of key developments in the region.

Property Management

Asteco manages some 45,000 leases or approximately 3,500 buildings throughout the UAE, which include corporate portfolios and local and international funds.

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DISCLAIMER:

This report contains information available to the public and has been relied upon by Asteco Property Management on the basis that it is accurate and complete. Asteco Property Management accepts no responsibility if this should prove not to be the case. No warranty or representation, expressed or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by our principals. Asteco will not be held responsible for third-party contributions. Figures contained in this report are derived from a basket of locations highlighted in this report and therefore represent a snapshot of the Dubai market. For a full in-depth study of the market, please contact Asteco's research team.

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