Dubai’s real estate market will gather momentum after the volume and value of sales transactions rose in the third quarter, but an influx of new supply could mute prices in 2019 while rentals continue to decline, analysts said.
The total value of real estate sales transactions in Dubai was up 56 per cent year-on-year to Dh15.7 billion in the third quarter of 2018, and 18 per cent month-on-month, according to the latest market update from Egyptian investment bank EFG Hermes.
Residential sales drove the increase, with all market segments (luxury, affordable and budget) recording higher transaction values on an annual basis in October. Total sales in the budget sector declined slightly on a month-by-month basis, the report added. The residential increase was driven by a 59 per cent rebound in off-plan sales on a monthly basis to total Dh2.3bn, a slight rise from the year-earlier period.
The best performing areas of Dubai in the third quarter were International City, Emirates Living and Mohammed Bin Rashid (MBR) City, while Arabian Ranches, Downtown Dubai and Jumeirah Park were the worst performing with the lowest uptick in transactions. Average selling prices across all segments climbed 3.8 per cent month-on-month to reach Dh1,315 per square foot.
However, rental values continued to fall in the third quarter, according to EFG, continuing a “persistent downwards trend” recorded across most of the UAE’s real estate market coinciding with a three-year slump in oil prices that started in 2014 but turned started to rebound at the end of last year.
The macro-induced squeeze on consumer purchasing power has prompted a fight for affordability in both the rental and sales markets, pushing down prices in recent years, although the sales market is recovering as higher oil prices buoy investor sentiment.
The sustained lull in prices, however, has weighed on the most prominent UAE property companies’ earnings. All of Emaar Properties, Damac Properties and Aldar Properties reported double-digit declines in annual net profit in the third quarter, as the companies look to strengthen their balance sheets after a tough few years.
While higher oil prices and an increase in construction activity in the lead-up to Expo 2020 Dubai is expected to boost real estate market growth next year, property prices could continue to decline on a year-on-year basis due to the impact of rapidly rising supply, UAE real estate portal Propertyfinder said in a report on Monday.
“Property prices are expected to continue to decline [in 2019] as we are most likely to see the materialisation of residential supply double, if not triple, the amount of units from past years,” said Lynnette Abad, director of research & data at Propertyfinder.
A total of 19,881 residential units have been completed in Dubai this year as of October, the report said, with an additional 14,707 due to be completed in the next two months. A further 33,982 units are under construction, about 65 per cent of which will be completed over the course of 2019.
At the same time, the US Federal Reserve is expected to hike interest rates again in December, making real estate-related borrowing more expensive, according to the report. Interest rates in the UAE move in tandem with the American central bank.
“With borrowing being more expensive, coupled with some general uncertainty about the direction the market will take, transaction values have dropped 23 per cent in the first nine months of 2018 compared to the same time period in 2017 [according to Propertyfinder data],” said Ms Abad. “Fortunately, lenders are becoming more creative when it comes to their lending practices, some of which are there to offset the effect of rising interest rates.”
A third report published on Monday, by consultancy Knight Frank, found that Dubai’s office rental market continued to soften in the third quarter of 2018, creating opportunities for existing occupiers to negotiate lower rents with landlords. Average office rents across Dubai softened by 5.8 per cent year-on-year in Q3, with average prime rents down 4.9 per cent.
“The short-to-medium-term outlook for Dubai’s commercial market remains negative with rents expected to continue to decline across all market segments,” the report said. “This trend is likely to be primarily driven by the delivery of additional supply, which we expect to total at over 400,000 square metres by the end of 2019.”
Abu Dhabi’s office rental market also declined in Q3, with average prime rents down 11.5 per cent, according the report. “While there is increased activity from certain sectors in the market, there has been a notable slowdown in demand from the general trading and professional sectors,” said Taimur Khan, research manager at Knight Frank.