Dubai real estate investment yields to compress in 2018, report says

Investor buyers continue being drawn to the affordable segment due to the current high yields, says Core Savills Dubai Investment Outlook 2018
Dubai real estate investment yields to compress in 2018, report says
In the affordable and lower mid-market segment, stronger declines in sale prices and only slight decreases in rents between 2014 and 2016 allowed yields to rise, increasing buyer demands.
By Bernd Debusmann Jr
Sun 14 Jan 2018 09:22 AM

Rents in Dubai will continue to decline, resulting in yield compression in several areas, according to a new market outlook from Core Savills.

The Core Savills’ 2018 Dubai Investment Outlook notes that as 2017 came to a close, “a clear trend in residential sales prices remains elusive.”

“In 2018, a variety of economic parameters in Dubai are beginning to face headwinds, with the real estate market facing its own particular challenges,” the report notes. “Further rental reclines, the ongoing strength of the US dollar and the imminent – albeit probably limited inflationary effects of the introduction of VAT in the emirate are all expected to compress investment yields.”

In the residential market, Core Savills CEO David Godchaux noted that while the sector is experiencing downwards adjustments in rents and yield compression in some areas, “the underlying fundamentals for this compression vary significantly by segment.”

Between 2014 and 2016, the prime segment saw a combination of weakening prices, but relatively stable rents, which Core Savills believes will encourage tenants to shift towards ownership. This, in turn, drove down rental demand and caused prices to gradually stabilise over 2017.

“In the near-term we expect prices to continue stabilising in the prime and upper mid-market segment, while the current decline in rents is anticipated to decelerate, allowing yield compression to slow down,” Godchaux said.

In the affordable and lower mid-market segment, however, stronger declines in sale prices and only slight decreases in rents between 2014 and 2016 allowed yields to rise, increasing buyer demands. Most of the buyer demand, however, was from investors, rather than end users.

“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,” Godchaux said.

“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 hand-over, are unlikely to be sustained.

“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,” he added. “Eventually, this contraction in yields will reduce investor demand, in turn pulling sales prices down over the mid-term.”

The report also found that while occupancy levels in Dubai’s office market are high and lease acquisition costs remain low, a strong pipeline over the course of the next three years suggests that there will be downward pressure on rents and yields.

Additionally, the report noted that the UAE’s REIT sector “saw expansion accelerate over 2016-2017” with a number of high profile acquisitions having taken place.

“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,” Godchaux explained. “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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Last Updated: Sun 14 Jan 2018 08:54 AM GST

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