Dubai at risk of two-tier real estate market

Discovery Gardens sees 10% drop in sale prices as Nakheel supply undercuts market
Nakheel banners
By Elizabeth Broomhall
Thu 13 Oct 2011 11:18 AM

Prices in Dubai’s Discovery Gardens plunged 10 percent in the third quarter as developer Nakheel released new units to the market at rents that undercut owners, said Asteco.  

Landlords in the development cut their losses after failing to attract tenants at rates to cover their mortgage payments, the real estate consultancy said in a report.

“Nakheel released a significant number of units at reduced rental rates, which, coupled with the high service charges, forced some owners to sell at a reduced price,” said Elaine Jones, CEO.

Nakheel, the developer of Dubai’s Discovery Gardens and International City, said in May it would give tenants up to two months rent-free in units in the lower-priced developments, as it moved to release new units on to the market.

The state-owned company said last month it would hand over up to 1,663 units by the year-end in International City, where studio rents have already fallen to around AED15,000 a year.

Analysts have warned Dubai risks developing a two-tiered property market with villas and apartments in poorly maintained developments proving difficult to rent out or sell.

In a research note this week, property consultancy Cluttons said units in poor locations, with limited access to amenities and poor finishes would see ongoing declines in value.

“[Such properties] are falling further in demand and this ultimately reflects in lower values,” the report said. “The supply-demand gap is still apparent in less desirable locations and unfortunately this will be around for some time.”

The emirate-wide decline in rents has increasingly allowed tenants to upgrade to prime developments with little impact on their pockets, said Matthew Green, head of research at CB Richard Ellis in Dubai.

“The addition of new supply across the market allows occupiers to upscale and move to newer and better specification units at lease end, often for no additional rental cost,” he said.

Some 5,000 new homes are expected to hit Dubai's market by year-end, property consultancy Jones Lang LaSalle said in a recent report, with a further 27,000 seen in 2012, taking total stock across Dubai to around 358,000 homes.

Prices for properties in sought-after locations such as Palm Jumeirah and Dubai International Financial Centre fared better in the third quarter, Asteco said, with units largely holding their value.

Sales prices and rents for villas declined 1 and 4 percent respectively, largely in response to the summer lull and Ramadan, said Jones.

“This is the third consecutive quarter that quality buildings in established locations have experienced steady sales prices and rental rates” she said.

Property prices in Dubai soared after the city opened its real estate sector to foreign investors in 2002, granting them freehold ownership rights at many developments.

From start-2007 to mid-2008, prices rallied almost 80 percent, Morgan Stanley estimates showed, with billions of dollars worth of new projects launched by local developers.

But home prices in Dubai, the Gulf property market that had the biggest reversal because of the financial crisis, fell more than 60 percent in the wake of the global credit crunch.

Jones Lang LaSalle said in September the emirate had shown small signs of recovery with house prices rising in certain areas and the number of transactions rising.

The Gulf emirate has also benefited from being seen as a safe haven amid the Arab Spring, toppling leaders in Tunisia, Egypt and Libya, the consultancy said.

Subscribe to our Newsletter

Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.