Dubai rents slow, prices rise, yields compress: what next?
Posted on 21 April 2008 with no comments from readers
First quarter rental growth has flattened out in Dubai, according to the Quarterly Residential Report from local blue-chip estate agent Asteco. But the outlook for rental yield compression and rising capital values remains strong.
The company said an increase in the availability of rental units since the delivery of the International City and a few towers in Jumeirah Lake Towers and Downtown Burj Dubai have slowed rental increases, alongside the rent cap reduction from seven to five per cent.
Salary multiples high
Home owners may also have reached the limit of what they can afford to pay in rent in Dubai. Salaries have been going up but not nearly as fast as rental payments.
On the other hand, Asteco highlights isolated cases of big rental increases in popular locations. A studio in The Greens, for example is up from $18,000 to $23,000 per annum over the past year, while the rare two-bedroom units in International City jumped from $19,000 to $26,000 per annum.
Villa rental levels have remained fairly static, although capital prices have risen sharply due to investment demand and falling returns on other assets.
Asteco thinks rents in Dubai had reached something of a natural ceiling, with residents unwilling or unable to pay more. But the global phenomenon of yield compression – with landlords accepting lower returns as the cost of money falls – will likely continue to mean solid capital gains, although not as the rate of recent years.
Maturing market
This marks a maturing of the Dubai real estate market, and a move towards a phase characterized by more stable rent levels but continuing capital appreciation. Only when rental yields are compressed from their current levels of six to eight per cent to the internationally recognized low point of two to three per cent should capital values start to come under pressure.
How long will it take to get to that point in the Dubai property cycle? With no local precedent it is hard to be exact, but international parallels suggest at least two to three years.
