Rental growth in residential market reaches 22% year on year raising fears over affordability

-    Apartments sector witnessed increase of 29% whilst villa rentals have grown by 15% year on year    

-    Over the next four years roughly 65,000 new residential units penned for completion

-    Office rentals in Dubai continue to rise, with average prime CBD rentals up 3% quarter-on-quarter and 21% year-on-year

Dubai, 16th April 2014 — Dubai’s residential sector has seen rents surge by an average of 22% year-on-year, with apartments registering an increase of 29%, whilst villa rentals have grown by 15%, according to the latest Dubai MarketView by global property advisor CBRE.

Mat Green, Head of Research & Consultancy UAE, CBRE Middle East, said, “The rising cost of living in the emirate is now starting to become a very real concern for many residents, with rentals having risen by an average of 45% during the past two years.”

According to the CBRE report, quarter-on-quarter, rental growth has been more marginal at around 2.8%, with apartments rising by 3.0% and villas by 2.6%. The strongest sub-markets for apartments were Sports City, Downtown Dubai, JBR, International City and Dubai Silicon Oasis. For villas the best performing markets were Al Warqa and Springs.

“Dubai’s residential sector continues to experience growing demand from both occupation and transactional sources. Despite recent regulatory changes, both rentals and sales prices continue to rise, albeit at a marginally slower rate than was recorded during the previous quarter,” added Green.

The residential development pipeline is again starting to swell, with an ever increasing number of new projects being launched. Whilst this pipeline is still far smaller than witnessed during the last cycle, it is nonetheless something to monitor carefully in the coming years, with a danger that further down the line supply could again start to exceed demand fundamentals, noted the report.

“During 2014, close to 17,000 new units are expected to be completed with the majority of these set to be delivered in secondary locations such as Dubailand, Jumeirah Village Circle and Silicon Oasis. Over the next four years roughly 65,000 new units are penned for completion, with 83% of these apartments, and villas and townhouses comprising the balance,” commented Green.

“With sustained demand for both occupational and investment properties, we anticipate that residential rental and sales growth will continue throughout 2014. However, we expect growth levels to be lower than 2013 performance as affordability becomes a more influential driver of property moves. We expect to see an increase in the flight to affordability, with occupiers starting to consider Sharjah and the Northern Emirates as a cost sensitive alternative to Dubai,” further added Green.

According to the report, office rentals in Dubai continue to rise, with average prime CBD rentals up 3% quarter-on-quarter and 21% year-on-year. The average prime rental rate now measures AED1,830/m2/annum and this figure is expected to experience further upward movement over the course of the year as the emirate’s business environment continues to improve.

With demand levels increasing, the CBD market is facing diminishing availability of good quality office accommodation. Specifically offices that are capable of accommodating large corporate space occupiers over contiguous floors. 

Occupancy rates within prime CBD offices have been rising steadily over the past 12 months, with only small pockets of space now available in popular buildings including Emaar Square and Standard Chartered Tower.

The secondary office market is also experiencing inflationary pressures, with 3% growth quarter-on-quarter and 29% growth year-on-year. Secondary office rentals now average AED1,090/m2/annum. With limited availability of good quality office accommodation in prime areas, we can expect to see demand spillover into some secondary locations, particularly for single owned properties in close proximity to transport links.

“Office stock in Dubai continues to see significant growth with over 1.8 million m2 set to be delivered by the end of 2017. However, whilst there is a large pipeline of new supply, the majority of this space will be negatively impacted by its strata ownership title. During 2014, around 0.44 million m2 is scheduled for completion, with close to 30% of this total to be delivered in the Business Bay area,” noted Green.

Whilst rental inflation is becoming a very real issue in the residential sector, the commercial office market still remains comparatively cheap when compared against peak rates. However, with demand levels increasing steadily the office market is set for a period of steady rental growth, stated the report.

“This trend has been already apparent in recent months with good quality office properties in both prime and secondary locations experiencing solid improvements in performance. Whilst the recovery is exhibiting more universal signs of improvements, we can still expect that strata properties will continue to struggle in building their occupancy rates, particularly as fractional spaces will dominate the development pipeline over the next four years,” added Green.

“Overall, we expect the Dubai market to continue its recovery, with growth projected across all real estate sectors during 2014. The pattern of this growth is becoming more inclusive, although individual sub-markets, quality and ownership structures can still have a major influence on performance,” concluded Mat Green.