This week’s big project launches are sure to trigger much debate about their effect on prices and current supply.
While we have so far seen a continued average increase in both sales and rental rates in the third quarter of about 2 per cent, it is important to highlight that there remains an increasing disparity in the residential sector between low to mid-priced properties and mid to high-priced properties.
We are predicting a potential very slight increase in prices in the lower segment through the fourth quarter, while we cautiously suggest that prices are consolidating at the higher end and may remain flat or decline slightly through the end of the year.
One very important change to the market other than price movement is demand volume and conversion rates between inquiry and transaction. There has been a very marked slowdown in volumes of transactions, and while price adjustments could create a slight increase in conversion, the demand curve seems to be flattening.
Our internal research suggests that demand has dropped during the present quarter by as much as 15 per cent at the higher end.
There are a number of suggestions as to what has been the catalyst for these changes – in truth, while prices have continued to rise throughout 2014, volumes started to become sluggish midway through the second quarter.
There is traditionally a reduction in activity during both the peak summer months and Ramadan, but the anticipated “return to action” after these periods has not been experienced. The dynamics of the off-plan market have changed completely as a result of the new mortgage laws and the ways developers must treat monies paid.
These changes, as well as increased transfer fees and restrictions on transfers during construction, have resulted in more developments being phased through to completion as well as focused launches rather than entire master-plan launches.
There is much speculation and anticipation as to what Cityscape will bring this year with rumours of some significant launches of new projects or reinventions of previously stalled or postponed projects.
The key focus to assess the effect these factors will have on the already changing market will be in the price aspirations of developers and perhaps more importantly in the timelines of delivery and phasing. There is obviously a close relationship between the sales and rental markets as an investor’s decision to acquire assets is in many instances dependent on the return they expect to achieve.
The increase in sale prices at a steeper rate to the increase in rental rates has dampened investment returns and investor sentiment.
Rents, much like their sale equivalents, have continued to increase across the current quarter. The biggest difference between the sales and rental markets is that volumes in the latter have continued to be strong – fuelled by new laws requiring more equity from buyers, which in many instances has kept them in the rental pool.
Perhaps the most contentious part of the rental market remains the payment of annual rents in a single or bi-annual payment. This also restricts small business growth as many companies struggle to cover their staff’s rental contracts and recover the expense through monthly pay cheque deductions.
With the market dynamics changing, we strongly believe that the market fundamentals remain strong. Enhanced transparency and underlying focus should ensure we do not experience the severity of previous corrections. Rather, a period of stability and transition is expected.
Tenants and investors are better informed, and the short-term gain philosophy has changed with many looking at longer rental relationships or longer-term options in terms of occupancy. This potentially provides opportunities to both landlords and developers to target their offerings to capitalise on this, whether through more targeted sales offerings or increase in rental payment frequency to six cheques or monthly direct debits.
It will be very interesting to see whether Cityscape 2014 will have a material effect on the market and the strong fundamentals that we see as currently underpinning the strength of the market.
Simon Townsend is business development manager – Middle East at DTZ
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