The glut of commercial spaces rapidly growing in Dubai due to market oversupply and under demand could portend well for the emirate in the long term, Landmark Properties’ Director Research & Advisory Services Jesse Downs has said.
Currently, according to real estate brokerage firm Landmark Properties, the commercial market is witnessing increased supply from new developments like Business Bay, where 6 million square feet of office space is due for completion this year.
While the superfluity may be interpreted in different ways, Landmark Properties sees it as an opportunity for Dubai to revitalize and bolster real estate demand in the medium and long term, as landlords become more flexible in rent negotiations in order to retain and attract tenants.
“As lease rates decline, Dubai will become a more attractive place to set up and expand existing regional hubs,” says Downs, adding, “of course, the office market will depend specifically on the growth of office jobs, which is typically centralized around industries like financial services, insurance and real estate.”
In an interview with Alrroya.com, Downs revealed that Landmark Properties is steadily getting enquiries from companies considering relocating their operations in Dubai.
“These enquiries are coming not only from other emirates, but from companies across the region looking to expand into or relocate offices to Dubai,” Downs said.
Indices on mortgage data prone to volatility
Recent study reports on Dubai’s real estate show that office lease rates remained relatively unchanged in Q1 2010, while some figures show the sector is the upward mend, however, Downs says some indices, especially those based on mortgage data, are prone to volatility and generally are not representative of the whole market.
“Based on our research and transactional data, the local markets are not recovering. Historically and today, mortgaged property transactions still constitute 20 per cent of total transactions. In fact, in the current market it is often lower than this,” she says.
The director says that the sector’s current property buyers “are a combination of investors and end users.”
“In some cases, investors will buy for capital appreciation, but yield is an increasingly important factor in an investment decision. Currently yields are low as rents decline faster than sale prices, which is limiting residential sales. End-user demand is limited by mortgage constraints – this refers to both availability and affordability of mortgages. For offices, the lease and sales rates will continue to decline as the market oversupply increases.”
As many projects in the emirate near completion and the city’s infrastructure continue to develop, the director says the risk of oversupply is higher on the commercial side, than residential.
It is estimated that 41,000 residential units (both freehold and non-freehold) will enter the market by the end of 2010. Most of this supply will be positioned in the low to mid income segment of the market.
“This could be highly problematic, especially given concerns about overall economic growth in Dubai, but specifically growth of office jobs. Even if the economy does recover in the short term the amount of new supply is so vast that an oversupply of office space will inevitably continue in the medium to long term,” she says.
Property investors looking more for value
The weakening economy has had an adverse effect on property buyers and of course renters as many have had to be cautious on their spending. Due to this, Downs says investors are looking more for value, rather than luxury.
“It’s also worth noting that the definition of “luxury” properties has changed drastically over the past few years because there is often a disparity between the quality promised and quality delivered. This has led to widespread reshuffling the market, which has been increasing over the past 18 months as large chunks of supply have been handed over,” she avers.
“Potential for capital appreciation and revenue generation through rents are both factored into the value equation for investors. There has been greater concern about affordability amongst investors, but it’s not the only factor consider when making an investment decision."
New developments are faster becoming popular with customers wanting to rent or buy commercial or residential properties, especially in waterfront areas as well as developments in areas like the Business Bay and villa communities such as The Meadows, The Greens and Arabian Ranches. This, Downs says location has become critical to investors as is quality and value.
“Quality refers to the actual unit and building – this is a function of both the construction quality and the quality of maintenance,” she explains, adding, “The concept of high quality maintenance is currently undervalued and will lead to a widening of quality gap in the years to come. With a significant supply pipeline in the coming 2-3 years, the market will only get more competitive and this will be distinguishing factor.”
Recently Dubai suffered bad press following the debt standstill proposal by Dubai World to its creditors. As far as international property investment is concerned, Downs reveals the main concern for investors is a perceived unpredictability in policies and regulation of properties.
“Limited mortgage availability and concerns about job security have pushed end-users into the rental market and limited end-user demand in the sales market,” Downs says.
Consider also reading:
Lack of clear valuation plays havoc on property prices
Property market set to attain demand-supply balance
Dubai realty prices dive 7pct as banks tighten lending
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