By Andy Sambidge
New Phidar Advisory report says low yields for residential, office real estate are not sustainable in short to medium term
Residential prices for both apartments and villas in Dubai fell during the fourth quarter of 2014 compared to the previous quarter, according to a new report by Phidar Advisory.
Its Q4 research note also showed that office lease rates in the emirate remained relatively unchanged in the three months to December 31.
"The low yields for residential and office real estate are not sustainable in the short to medium term," said Jesse Downs, managing director of Phidar Advisory. "Recently, transaction volumes have slowed and investors active in the market are looking for higher returns."
The report said apartment lease rates remained stable with a nominal increase of 0.4 percent, while sale prices decreased 3.6 percent, pushing yields up slightly.
Lease rates for villas decreased 3.1 percent while sale prices decreased 1.7 percent, the report added.
Downs said the most significant residential opportunities for private developers is in affordable housing for the demographic with the equivalent monthly housing spend of AED3,000-AED5,500 per month, based on a 30-35 percent housing spend.
"In some areas, especially affordable communities, yields are starting to increase on the back of stable rents and softening sale prices," said Downs. "Considering these assets have some of the most stable supply-demand dynamics, this is an illustration that yields are adjusting to meet investor demand," she said.
Office lease rates decreased by 0.5 percent in Q4 while office rents increased by 0.2 percent, pushing yields down to 6.8 percent.
Phidar said it predicts new supply will likely keep average rents stable for 2015, but an increase in new supply combined with unsustainable yields will lead to average sale price attrition.
"From an investment perspective, the performance of an office asset in Dubai is more sensitive to location than most markets," said Downs. "Even though the average trends and projections may seem muted, there are interesting investment options in Dubai."
Last year, a Phidar research note said Dubai needs to build an additional 30,000 residential units through to 2018 to maintain rent stability in the emirate.