Landmark Advisory also says distressed sales leading to accelerated price declines.
The oversupply of Dubai homes is set to peak in 2012, with vacancies projected at between 25-28 percent, the latest real estate report by Landmark Advisory released on Wednesday states.
The ‘Q3 2010 Dubai and Abu Dhabi Real Estate Report’ also said distressed sales were leading to accelerated price declines.
“As prices are falling faster than rents, this is pushing up yields,” said Jesse Downs, director of Research & Advisory Services at Landmark Advisory.
“This is positive for the market as higher yields are required to attract investors wary of the weak market fundamentals and perceived downside risk. At the moment, financing remains limited, which means investors continue to dictate market trends.”
The report found that sale volumes slowed in the second quarter, compared to the first. Prices for villas declined by five percent, while those for apartments dropped 5.8 percent as a result of limited buyers and tighter lending restrictions.
In neighbouring emirate Abu Dhabi, quality issues could lead to rapid reshuffling of the market as the new higher quality supply is delivered, Landmark Advisory said.
Downs said only 20 percent of high-end properties in the pipeline will meet the standard, which will have a knock-on effect on prices for mid-range homes.
“However, we predict that this trend will be temporary, with performance weakening and not recovering once the truly high-end developments are delivered,” she said.
In both emirates rental costs declined across the board with Dubai villas down 4.4 percent and apartments 5.8 percent during the quarter.
Abu Dhabi rents dropped sharply with an 11 percent drop compared to the marginal fall of 3 percent in the first quarter.
“These declines are supply driven following new on-island deliveries such as Khalidiyah Palace, Al Aryam Tower, Silver and Wave Tower,” Downs said. “Static sales prices and declining rents have resulted in further yields compression; currently at 5.1 percent, and we anticipate that yields will continue to compress in the short term.”