13 April 2015

Renter’s Ball: The Dynamics of the Tenancy Market in Dubai


Rents and prices have been strongly correlated where price is a leading indicator of rent with a strong correlation of +0.8. Recent weaknesses in prices have now filtered into the rental market. We believe that the tenancy sector has entered into the period of softening for the medium term.

A dissection of the income distribution of Dubai’s working population suggests that 84% of the working population is tenants (significantly higher than Hong Kong and London) and that income dynamics appear to be mismatched relative to supply dynamics. A further dissection of the demographics reveals that only 38% of the population can afford renting units independently, without any external sources of income. The purchasing power of renters reveals that leasehold areas are better options for their accommodation due to the discount available compared to freehold areas.

A rental comparison between Prime properties and city-wide properties in Dubai reveals a 69% rental differential in apartments and a 77% differential in villa communities. An analysis over a 5 year period of both prime and non prime properties has risen in tandem. However, in the last 12 month non-prime properties have had superior growth rates indicating a strong demand for affordable housing confirming the income dynamic mismatch. Over the next 12-18 months, the affordable housing segment will continue to provide superior yields for investors until the new supply begins to enter into the market causing a dampening effect.

Historically, apartment rentals have underperformed on MBZ road compared to the Sheikh Zayed Road corridor, whereas the opposite has held true in villas. As the migration effect takes hold, MBZ appears to be an increasing destination of choice for new tenants as the level of construction activity gathers pace ahead of the countdown to the world expo 2020. We opine that as destinations for living increase along this corridor, the rental discounts between the MBZ and the Sheikh Zayed Road corridor will converge. As this trend plays out, we opine that rent differentials between the two corridors will converge.

Download the full report: http://blog.reidin.com/PublicReports/RentersBall.pdf

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