Focus: When will Dubai rents start dropping? The correlation between house prices, rental rates

Exclusive research looks at how residential rents are continuing to rise in many areas of Dubai, despite the ongoing drop in house prices. We asked some local experts to analyse the trends.
Focus: When will Dubai rents start dropping? The correlation between house prices, rental rates
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By Sarah Townsend
Tue 08 Sep 2015 10:01 AM

Residential rents are continuing to rise in many areas of Dubai, despite the ongoing drop in house prices, new research reveals.

Data compiled exclusively for Arabian Business by estate agency Better Homes suggests there is little correlation between rental rates and house prices.

As the graph below illustrates, average house prices started to soften in the second quarter of 2014, yet average rents have risen steadily since the first quarter of 2013 with a noticeable divergence from sales prices at the end of last year.

Better Homes’ figures place average house prices at around AED1,300 ($353) per square foot in the third quarter of 2015, and average rental rates per square foot at around AED90 ($24) per square foot per year.

Experts predict rents will remain stable over the coming six to twelve months – even if house prices continue to fall in the short term.

However, they say the sales market will bottom out before long as at least 20,000 new residential units hit the market in 2016.

Ryan Mahoney, CEO of Better Homes, explained that rental price trends do not always follow sales price trends.

“Sales prices are driven by a mix of rental yield, capital appreciation, payment plans, available financing, political risk, and so on; whereas rental prices are primarily driven by population growth and availability of properties.

“Renting is not a long-term investment in the way that purchasing is, so macro economics have less of an impact and it is primarily about the person’s immediate accommodation needs. As a result, rental rates do not necessarily track sales prices.”

Mahoney noted that the current market is very different to the market crash of 2009 – the last time house prices fell significantly – largely because most of the sales market involved off-plan property, and also because it was followed by population decline as many expats left the country.

“In 2009, we saw a dramatic crash in both sales and rental prices, falling about 70 percent in sales and 30 percent in rentals, with prices bottoming out over about 12-18 months, rising again in late 2011 or early 2012,” Mahoney said.

“Today’s current market slow down is very different. Most of the property that is purchased is already completed and either owner-occupied or rented out as an investment. Also the population is growing and not falling.

“As a result, sellers are for the most part not under pressure to sell as they can fulfill their mortgages with the rental income they are getting, and so sales prices have been very slow to fall.

“Meanwhile, rental prices have either not fallen at all or fallen very slowly as the population growth continues to absorb most of the new completed properties.”

Rental rates are unlikely to fall in line with house prices in the near future because they are driven by different factors, Mahoney said.

“My feeling is that sales prices will be driven by regional politics and economics. Rental rates, however, will continue to be driven by supply.

“If there are large numbers of units added to the market in a short period of time, then we will see rents fall in certain areas but other than that rental rates will remain quite stable.”

Other property experts agreed. David Godchaux, CEO of Core Savills, said there is currently a “major disconnect” rental rates and property values. “Dubai witnessed double-digit rental price increases between 2012 and 2014, but rates have only declined marginally in the first-half of 2015 despite falling prices,” he said.

“The contradiction of declining property values and steady rental prices is due to frictions that exist in the rental market which are not seen in the sales market. For example, many landlords in Dubai fail to recognise that it’s better to reduce the rent slightly rather than lose a tenant and leave a property vacant for a few months.

“As present the market isn’t dropping massively, so saving 3 percent - 5 percent [by finding a cheaper place to live, while paying the associated agency fees and so on] is not worth it for the tenant and the status quo remains despite falling prices.

“When there is a suddenly a possibility of saving 15 percent to 20 percent on rent by moving elsewhere, however, there will be a sudden shock in the market and prices can suddenly fall.”

However, Gibran Bham, co-founder of online real estate research agency Lookup.ae, predicted that rental rates will decrease gradually over the next year because of new supply. “Over the next 12 months rentals will decrease because of the addition of new supply.

“There are approximately 7,000 units that are still to be handed over in 2015 and a further 27,000 units in 2016. The new supply coupled with slower market conditions (global and local) will likely result in downward pressures on rents.

“This is part negative but part positive, as it makes Dubai more affordable and more competitive over the medium to long term.”

A separate market update from CBRE, published this week, underlines the findings of Better Homes’ research and the experts’ analyses.

CBRE reported that average rentals within the residential segment have remained stable during the third quarter of 2015, “although the market is highly fragmented with some affordable locations achieving growth whilst other areas witnessed more pronounced drops”.

Meanwhile there was further decline in the sales sector, with average prices declining by around two percent since the second quarter of 2015, and around six percent year-on-year, said CBRE, although it predicted that the residential sales sector would stabilise over the course of the next year.

However, PropertyFinder COO Lukman Hajje said: “The expectation that rental prices will decline is based upon the assumption that in large number of units will be handed over this year, but previous estimations of over 20,000 dwellings seem to have been significantly exaggerated.

“Buyers are keen to buy but are sitting on the sidelines waiting for prices to drop but owners in general are sticking to their asking price and a Mexican stand-off is taking place.

“In the meantime people are continuing to rent and we expect rents to remain relatively stable over the next 6-12 months.”

Click here for more detailed commentary from Ryan Mahoney, CEO of Better Homes.

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