Residential yields in Dubai's affordable market are expected to decline much faster than in the prime market, say a report released by real estate consultancy Core Savills.
Over 2014-2016, the prime segment saw a combination of weakening prices but comparatively stable rents, encouraging a share of tenants to shift towards ownership. This drove down rental demand and gradually caused prices to stabilise over 2017.
This caused yield compression by an average of 57 base points, representing a relative decline of 11.2 per cent across prime and mid-market communities during 2017.
David Godchaux, CEO Core Savills, says: "In the near term, we expect prices to continue stabilising in the prime and mid-market segment but the current decline in rents to decelerate, allowing yield compression to slow down."
Meanwhile, in the affordable and lower mid-market segment, the stronger decline in sale prices and only a slight weakness in rents over 2014-2016 allowed yields to rise and in turn increase buyer demand. However, most of this buyer demand was led by investor buyers as opposed to end users; who could not afford to shift to ownership due to continued affordability issues.
Godchaux states: "Investor buyers continue being drawn to the affordable segment due to the current high yields and easier payment plans while a few developers see robust off-plan transaction volumes as an encouraging sign and continue bringing more stock to the market. Given that affordable segment's supply pipeline is looming with substantial off-plan deliveries in the run-up to 2020, the high yields expected by many investors post handover are unlikely to be sustained."
He further adds: "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. Eventually, this contraction in yields will reduce investor demand, in turn pulling sales prices down over the mid-term."
Dubai's overall real estate market faces other headwinds as well - the "ongoing strength of the US dollar and the imminent - albeit probably limited - inflationary effects of the introduction of VAT are expected to compress investment yields."
Developer margins fall
According to the report, developers have seen total expenses rise significantly over the past few years. This is largely due to increasing overhead and compliance costs associated with the introduction of regulations which require developers to raise construction and development standards.
The high charges associated with compliance are placing a major burden on budgets. Developers have seen profit margins decline significantly.
"Developers' margins are also being compressed by increasing price competition in the market, and many are reducing their prices per sq ft, bringing down average prices particularly in the off-plan market. Despite rising costs, their competitors are being forced to do the same, thus further shrinking developer profit margins," explains Godchaux.
Over the long term, such competition is likely to drive less efficient developers out of the market. This effect is most likely to impact smaller developers that cannot benefit from significant economies of scale.
More power to Reits
Real estate investment trusts (Reits) in UAE are increasingly becoming an instrument of investment, both for institutional and retail (individual) investors, says the report.
"The UAE's Reit sector saw expansion accelerate over 2016-2017, including a number of high-profile acquisitions such as the purchase of The Edge, Uninest and South View School by ENBD Reit," cites the Core report.
Godchaux explains: "Given that Reits currently represent a notably small share of the UAE's listed real estate market compared to other global hubs, the sector is expected to continue expanding over the mid-term. By further integrating real estate and capital markets, Reits will potentially increase funding avenues for developers as well as provide smaller investors access to diversified property investments."
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