Falling oil prices create headwinds for the UAE real estate market

Residential

In Abu Dhabi, house prices across the capital slipped by 0.2% in the second quarter of 2015, the first contraction since Q3 2012, and leaves the current average house price standing at AED 1,336 psf. Demand remains stable in the top-end luxury market according to the report, and more affordable sub AED 1,000 psf properties. This is driven by affluent Emirati and GCC buyers continuing to home in on schemes based on perceived exclusivity, while the large expat population that is being squeezed out of the rental market due to rampant rental growth, is targeting more affordable properties that are perceived as better value for money.

The Cluttons report points to a 1.5% rise in average rents, registered during the second quarter, pushing annual growth in the capital up to 3.9%. Hydra Village was the strongest performing submarket, with rents for three bedroom for villas surging by almost 32% during the first six months of the year to AED 125,000 per annum.

Faisal Durrani, Head of Research at Cluttons said: “With government spending subsiding, the rate of job creation and residential demand is also expected to stabilise. With this in mind, it is our view that the residential market will see further slight to moderate price falls over the remainder of 2015. Overall, quarterly house price declines of between 0.5% and 1% can be expected in both Q3 and Q4, while rents are expected to remain largely flat during H2.”

In Dubai, the total number of residential real estate transactions has remained fairly stable this year, according to data from Reidin. There has been almost no change in average apartment values during H1 2015, with a 0.6% fall recorded between January and June.

Durrani added: “The villa market continues to bear the brunt of the Federal Mortgage Cap restrictions, which have made affordability a central issue for potential buyers who are now required to hold significant equity to fund upfront costs. Values on average declined by 3.4% during Q2, bringing the annual rate of change down to -7%. We expect a further 5% to 7% fall in villa values is expected this year as supply levels rise and affordability issues challenge buyers”.

Cluttons’ report shows that during the second quarter of this year, average rents in Dubai declined by 0.9%, taking the overall change in the six months to June to -1.3%. Apartments in affordable communities have held steady in 2015, while the villa market has witnessed a 1% drop during Q2. Looking further ahead, the rental market is set to be boosted by Expo 2020 moving from being on the medium-term event horizon to the short term, with infrastructure projects moving forward and in turn supporting job creation. The expected population growth to 2.8 million by 2020 will also help to increase demand for space.

Durrani continued: “We expect the sales market to weaken further this year based on a combination of the Federal Mortgage Cap, affordability challenges and a strengthening supply pipeline, which has seen 41,000 new units announced already this year. It is our view that the rental market will continue to perform at a reasonably stable level, with further declines in the region of 1.5% to 2% likely during the second half of the year. The severity of the decline is being hugely offset by the strong rate of job creation and population growth, which remains stable, strong and diverse”.

In Sharjah, tenants are now firmly in the driving seat as the lettings market slows in response to declines in Dubai and the introduction of what is perceived to be high-quality accommodation in neighbouring Ajman. The Emirate recorded a 2.3% dip in average rents, yet these still stand 3.3% ahead of this time last year. Apartments registered a 4.2% decline during the second quarter, while villa rents edged up slightly by 1.4%.

“In the sales market, world-class master planned communities such as Al Zahia and Tilal City are quietly growing in popularity and setting the benchmark for future master planned communities. These affordable upscale developments, which are designed around the emirate’s rich Islamic heritage are allowing for the emergence of a niche residential market that caters for families who have been priced out of other UAE markets and those that have been waiting for more affordable communities in surroundings that echo their more traditional lifestyles”, said Durrani.