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Slowing job growth may force families to vacate homes by end of school term
The Dubai residential market can expect to see a drop in rents with the onset of summer. With businesses rationalising spending and cutting jobs, families with school-going children are more likely to vacate or downgrade residential premises at the end of the school term. Add to this more supply in secondary locations and the scene is set for a drop in rents.
However, this could be more beneficial for new tenants than existing ones who are contracting on historic leases. Existing tenants are bound to pay rent increases in line with the Real Estate Regulatory Agency (Rera) Rental Index.
Where tenants have the upper hand
Tenants now find themselves in stronger bargaining positions in some areas in Dubai. "This is particularly so in areas such as Palm Jumeirah and Downtown where the rent drops have been more pronounced. However, many secondary locations have seen only very marginal changes in rents and consequently landlords still remain in a more dominant position, with demand for affordable housing options very high," CBRE's Matthew Green informs.
According to CBRE, average rents in Dubai declined by around two per cent during the first quarter (January to March). The rent decline was more pronounced in prime locations such as Downtown Dubai, Palm Jumeirah and Business Bay.
The consultancy says rent deflationary pressures have also crept into some of the more affordable leasehold locations such as Al Barsha, Oud Metha and Bur Dubai. CBRE attributes it to new supply on the market and slowing new job growth caused by ongoing economic challenges in the region.
Says Matthew Green, head of research and consulting, CBRE Middle East: "The two per cent decline in Q1 2016 reflects the change in current rents which would only apply for new leases, whereas existing tenants will be contracted on historic leases and rental rates. Upon renewal, the new rent will be dictated by the old rent and the relative position against the current Rera rental index. Hence for new tenants, or tenants seeking new premises, rents are now showing more widespread declines, although the rate of decline is still comparatively slow against the strong growth recorded during the period 2013 through to 2014."
With the summer lull and Ramadan fast approaching, landlords could find it hard to fill up vacant premises and could, in turn, bring rents down or offer bargains to attract tenants.
"The economic environment is causing businesses to rationalise spending, slow growth and cut jobs. Families tend to relocate during the summer months, when possible, to avoid pulling children out of school midyear. So, we expect rents to decline further in the summer months as households downsize and families leave Dubai," informs Jesse Downs, managing director and co-founder of Phidar Advisory, a real estate advisory firm in the UAE.
However, the job market does not necessarily take a dip in the summer. Even as many families leave in late June or July at the end of the school year, others arrive in late August or September in time for the start of the new school year.
"While some companies are letting staff go, others continue to recruit new staff and the overall economy is continuing to expand. With economic growth of 4.1 per cent forecast for Dubai in 2016, a net increase in employment can be expected, which would suggest that the number of new families arriving in September will at least match those leaving in June," says Craig Plumb, head of research, JLL Mena.
Also, keep in mind that Dubai rents typically trail capital values by a few quarters. CBRE estimates that average residential sales prices in Dubai dipped by around two per cent in Q1 2016, after a four per cent decline in Q4 2015.
"It is no secret that capital values have seen a downward trend over the past nine to 12 months. To compound that, a lot of projects are being completed and handed over, further adding to the supply. We have seen rents dip marginally in the last three to six months, but not big enough to encourage people to take advantage of the drop. The pressure on rents will continue for the next few months, spilling over into 2017 as well, giving opportunity to families looking to upgrade to better and bigger homes," explains Niraj Masand, director of Banke International.