Dubai witnesses strong rental growth in emerging masterplan locations as cost sensitivity focuses occupier demand

• Accelerated rental growth in CBD area with average rates increasing around 7% quarter-on-quarter –
• Apartment sector witnesses highest increase with a 4.5% growth quarter-on-quarter  -
• Villa sector has seen rental rates rise by around 19% year-on-year -

Dubai, 7th October 2013 — The emergence of strong demand has accelerated rental growth in the CBD area with the average rates now AED1,615/m²/annum, representing an increase of around 7% quarter-on-.quarter, according to the latest Dubai MarketView by CBRE, the leading international real estate consultancy.

The third quarter witnessed strong leasing activity, despite being a traditionally quiet period for the real estate market. Rental growth was recorded across all key sub-markets as corporate occupiers continued to seek out high quality offerings in established office locations.

 “As new supply has been delivered, demand for offices in many ageing properties has waned, driven by the widespread migration of tenants towards better quality assets. This trend has also resulting in a growing divergence in performance between the top and bottom of the market,” said Mat Green, Head of Research & Consultancy UAE, CBRE Middle East

“Despite the high headline vacancy rate across the market as a whole, the availability of good quality office accommodation over contiguous floors is somewhat limited. This is likely to lead to further rises in rental values over the next 12 months as landlords seek to achieve premiums on remaining space spaces as occupancy levels near capacity. For now this trend will remain largely building specific, with premium products in the more attractive office locations garnering the majority of occupier interest,” added Green.

According to the CBRE MarketView, as availability shrinks further, there is likely to be spill over of demand in secondary locations. Secondary office property locations are experiencing a marginal strengthening of performance with rising rental and occupancy rates despite the entry of new office stock.  Secondary office rents (excluding Tecom A & B) are currently averaging AED955/m²/annum, representing an increase of 3% quarter-on-quarter.

The residential market remains firmly set on an upward track, with sustained growth being achieved across both rentals and sales segments. Sales activity remains robust, with a total of 5,175 residential properties transacted during the quarter with a total value of AED11.15 billion.  This figure is marginally lower than the previous quarter, but is significantly higher in both numeric and value terms over the same period last year.

“As with the transactional market, the leasing market continues to show positive momentum with rising activity across all Dubai locations.  The average quarterly rise in residential rents (covering both villas and apartments) has been 3.5%, similar to the second quarter. The highest increase has been noted in the apartment sector with a 4.5% growth quarter-on-quarter and 28% year-on-year.  Smaller sized units covering studios and one bed rooms have seen the biggest jump during the quarter as demand for more affordable properties continues to influence relocation decisions,” commented Green.

According to the MarketView, a number of regulations have now been implemented to try and discourage speculator activities, and whilst they may dampen demand, it is thought unlikely that these steps alone will be sufficient to fully curb such activities in the short term. This is highlighted by the continued interest in off-plan properties, with the majority of recent launches achieving high absorption of units.  As has been the trend over the last 24 months, most new projects have been launched by developers with a proven track record in the local market, highlighting a slight deviation from the previous cycle where there was greater involvement from smaller scale private developers

“This trend has been the result of the enforcement of RERA regulations requiring developers to have 100% ownership of their land and an unconditional performance guarantee for 20% of the construction costs should they wish to sell off plan before 20% of the construction is completed. This requirement has been implemented by authorities to help safeguard the interests of investors by ensuring the appropriate financial standing of developers,” further added Green.

Significant improvements made to road connectivity and the opening up of new retail and other complimentary facilities has resulted in developments such as Business Bay, Jumeirah Village and Dubai Silicon Oasis being able to command higher rental rates as well as solidifying occupancy rates.  With limited residential stock and proximity to the Downtown and CBD area, the Business Bay development has seen rents increase by close to 9% quarter-on-quarter and by 36% year-on-year.

“The villa sector which had been leading growth in the residential sector has now started to slow slightly, witnessing an increase of just under 3% quarter-on-quarter, with two, three and four bedroom units recording the highest level of increase.  Overall the villa sector has seen rental rates rise by around 19% year-on-year,” concluded Mat Green.