Dubai real estate sector to soften further in 2018, says Core Savills

Dubai real estate sector to soften further in 2018, says Core Savills

The National, January 18 2018

Residential prices in particular to see continued downward trend according to the consultancy’s investment outlook

Off-plan residential sales in Dubai last year were at their highest level since the 2008 financial crisis, with their share of total transactions rising to 60 per cent in 2017 from 10 per cent in 2010. Sarah Dea / The National

Dubai rental rates will continue to decline in 2018 following a challenging few years, with yield compression expected across residential markets in particular, according to the latest report from the consultancy Core Savills.

“Further rental declines, the ongoing strength of the US dollar and the imminent, albeit probably limited, inflationary effects of the introduction of VAT in the emirates are all expected to compress investment yields,” the report said.

Real estate developers’ margins are “precariously shrinking to below viable levels” in the wake of intensified competition on sales prices, particularly in the affordable segment, Core Savills added.

Its report highlighted numerous challenges to Dubai’s real estate market as rental demand remains muted and prices continue to fall. The drivers for yield compression vary according to segment, it said.

Prime residential real estate saw a weakening of prices between 2014 and 2016 and an acceleration of yield compression representing a stark 11.2 per cent decline in 2017. However, comparatively stable rents encouraged tenants to shift towards ownership, driving down rental demand and causing prices to steady last year.

“In the near-term we expect prices to continue stabilising in the prime and upper mid-market segment while the current decline in rents is anticipated to decelerate, allowing yield compression to slow down,” said David Godchaux, the chief executive of Core Savills.

In the affordable and lower mid-market segment, a stronger decline in sale prices and comparatively minor weakness in rents over the same period allowed yields to rise and buyer demand to pick up.

Yields declined by 3.8 per cent from mid-2016 to the end of 2017 – only half of that witnessed in the prime segment.

However, unlike for prime real estate, demand was led by investors not end-users, due to affordability issues. With developers increasingly drawn to this affordable and lower mid-market segment, a bulging supply pipeline currently means high yields for investors are unlikely to be sustained through 2018.

“If rental demand of these projects is insufficient at handover, this supply surge is expected to exert considerable downward pressure on rents, leading to faster yield compression,” Mr Godchaux said.

“Eventually, this contraction in yields will reduce investor demand, in turn pulling sales prices down over the mid-term.”