Landlords bullish as Dubai realty projects gather pace

Dubai continues to see strong economic performance from its core sectors such as services, trade and tourism, with a GDP growth forecast of close to 4 percent for 2013, according to the latest Dubai MarketView by CBRE, the leading international real estate consultancy.
This sentiment is mirrored in the positive performance of Dubai International Airport (DXB), now the world’s second busiest airport by passenger numbers. Year on year passenger arrivals rose by 18.7 percent with over 5.4 million travelers passing through DXB during the month of April alone.
This follows the successful opening of Concourse A in January, with the airport’s total capacity now increased to around 75 million passengers per annum.
The airport’s performance has also been aided by Emirates Airlines’ recent tie-up with Qantas, which has increased the total number of routes through their codeshare agreement.
With year on year figures to April up over 15 percent, there is now a very realistic chance of breaking the 65 million passenger barrier during the course of 2013.
Dubai’s construction pipeline is once again starting to show signs of increased activity, with new off-plan launches from the emirate’s principle developers, combined with the reactivation of previously stalled developments and mothballed masterplanned projects.
The residential sector is currently leading the recovery in development activity, although there have also been a number of new commercial projects launched, despite the high headline vacancy in the office sector.
The Dubai office market continues to experience rising demand with new leasing inquiries and live requirements reflecting the improving state of the sector.
The majority of these inquiries have been generated by firms seeking expansion or consolidation space, with a number of major international corporates seeking new headquarters in prime locations.
Despite the high headline vacancy rates the availability of good quality office accommodation on contiguous floors is limited, and this is encouraging developers to push ahead with developments.
Office rentals in the CBD remained flat during Q2 2013 at AED1,500/m²/annum.
Despite high vacancy rates, there has been an improving picture in some secondary nodes. We have seen further evidence of rental growth for good quality office accommodation in JLT, Business Bay and Tecom, resulting in a 6 percent increase in rents during the quarter.
Average secondary office rents are now AED 1,050/m²/annum, with inferior quality strata accommodation in less desirable locations still around half this rate. Landlords with inferior products continue to face difficulties in increasing their occupancy levels amid stiff competition to secure tenants.
Total office stock has now reached over 7.5 million m² with new supply being delivered principally in the Freehold location of Business Bay and leasehold areas around Trade Centre 1 & 2. The CBD office inventory has grown to over 1 million square meters, representing around 14 percent of the emirate’s total office accommodation.
The residential sector is experiencing widespread growth, with some secondary locations actually outperforming prime areas during the quarter, as a noticeable spill over effect is being felt across the market. The rising cost of residential rentals in Dubai is now being noticed, with some residents downsizing or relocating to more affordable communities. Over the past 12 months landlords have become increasingly bullish, leading to an increasing number of rental disputes being raised at the Rent Committee.
The rental index states that a landlord may only increase rent if the rate is more than 26 percent below the current market rate (as per the RERA rent calculator). If the rent is lower than the index by 26-35 percent, then the increase should be no more than 5 percent. If it is 36-45 percent lower then the permitted increase is 10 percent; 45-55 percent is 15 percent and over 55 percent the increase should be a maximum of 20 percent.
Locations such as International Media Production Zone (IMPZ), Dubai Sports City and Jumeirah Village have all seen very strong rental growth during the quarter, albeit from a low base. This has been driven by improvements to infrastructure and the completion of complementary facilities and retail in the area.
According to Dubai Land Department figures, the total value of real estate transactions reached AED 28.8 billion during the first half of 2013, with AED23.2 billion being transacted in cash (around 80 percent of the total market) and the balance through mortgages.
Dubai Marina once again recorded the largest number of transactions with 3,748 transactions amounting to over AED 6.6 billion. The established residential locations, such as Dubai Marina, Emirates Living, Palm Jumeirah and Downtown Dubai, continue to dominate the sales market, with the majority of all transactions both in volume and sales terms.
Average residential rentals have now grown by over 30 percent over the past 12 months, with half yearly figures rising close to 14 percent. After a solid second quarter, the new masterplanned communities have emerged as the best performing locations, which is a market shift from performance trends during 2012. Although prime locations continue to see growth, the comparative affordability of projects such as Jumeirah Village and Dubai Sports City have made them popular cost-sensitive options for tenants, and that has subsequently driven up rents.
Villa properties continue to see solid upward movement in both rents and sales pricing, with six consecutive quarters of growth. Average villa rents rose by nearly 6 percent during the quarter, with smaller two bedroom units registering the highest rate of growth, rising 36 percent year-on year.
Office rental rates are expected to see further growth over the remainder of the year, with good quality property in all locations currently in short supply. However, the overhang of inferior and unattractive strata accommodation will continue to rise, adding to the already high headline vacancy rate.
The residential sector is showing increasing signs of overheating with lease and sale rates rising far too quickly to be justified by the current economic environment, as rental growth significantly outpaces growth in wage levels. The result is the rising cost of living, which could start to impact on Dubai’s competitiveness if sustained at current levels for too long.
Continued unrest in the region is clearly playing a part in Dubai’s current growth scenario, with increasing occupier demand and solid investment volumes that show no sign of slowing down despite an escalation of political uncertainty in Egypt and no respite for the situation in Syria.
After several years of slowing pace, the development pipeline is again starting to grow and with momentum behind it, the construction sector is set to enter a new growth period.