9 June 2015

Dubai: Killing Them Softly

Since Dubai’s price recovery in 2012, a flurry of off-plan units were launched in the market as developers tried to capitalize on the rising prices and strong demand. Initially, the launches were skewed towards prime properties as developers tried to maximize margins. However, developers changed course to service the need of the mid-income market since the demand and supply mismatch began to widen.

As the flurry of off plan launches gathered momentum, liquidity was sucked out from the secondary market, while investors and speculators rushed to the primary market to capitalize upon payment plans. This has resulted in a drop in secondary market activity of 26% on a Y-o-Y basis.

Initially, off plan launches were at systematically higher prices than what was prevailing in the secondary market. This trend has reversed in the last 12 months, where off plan launches have been at levels that have averaged 20% below the secondary market rates; causing prices to soften in the secondary market by approximately 15% on a city wise basis. With launches expected to continue post Ramadan, the outlook for capital gains in the medium term remains limited.

A bivariate analysis of launches between residential and commercial units shows that only 4% of new launches have been in the office segment. Developers have not yet focused on the commercial domain, due to the lingering effects associated with the boom bust cycle that culminated in 2008. However, since Dubai’s asset price revival, office vacancy rates have fallen as company formation gathers momentum, which is reflected in rental rates between both segments in the last 12 months (Offices have outperformed: JLT-Residential: 3%; JLT-Office: 10% and Business Bay-Residential: -2%; Business Bay-Office: 19%).

As residential prices in the secondary market begin to dip due to the discounted offers in the primary market, we opine that developers will shift course towards the office segment in order to cater to the pent up demand. Moreover an upward trend will be curtailed until off-plan launches remain below the secondary market prices.

To download the full report click here:  http://blog.reidin.com/PublicReports/killing_them_softly.pdf