UAE. Whereas off-plan properties in Dubai used to command a premium over finished devlopments - because of the investment opportunity they offered for a low outlay - the market has now completely turned around.

Global Investment House in a report this week said that there are wide variations in the price trends of different developments. Concerning the freehold market, it is important to distinguish between sales of finished or nearly completed properties, off-plan sales and the sales in the secondary market.

It has been reported that prices of off-plan sales and sales in the secondary market have been hit the most. However, it all depends on the location. Projects that were announced in 2008, and launched outside the CBD radius (a 5 kilometre radius from Burj Dubai) have been affected the most. Properties in the secondary market have fallen by as much as 40% and are continuing downwards for now.

Sales and rental prices have appreciated by double digit growth rates for the past five years. However, since the start of fourth quarter 2008, we witnessed a slowdown in growth in line with the recent developments in global markets and the credit crunch. Despite the decline witnessed in fourth quarter 2008, the increase in the first three quarters resulted in an average growth of 6% in apartment prices in 2008 according to a recent report published by Asteco property consultants.

But again, the degree of decline varied across different developments. Projects which were launched originally at high price levels were affected the most, whereas more affordable housing projects were less affected. Downtown Burj Dubai apartment prices have decreased from AED3,750 per square foot in third quarter 2008 to AED2,700 per square foot in fourth quarter 2008 recording a 28% decline. Dubai Marina rates have also declined by 18%, from AED2,200 per square foot to AED1,800 per square foot, again in fourth quarter 2008.

Asteco said the villa segment on the other hand fared better than the apartment segment with an average growth of 13% in 2008, also with varying trends across different developments.

Looking ahead in 2009, we can expect to see further price correction for freehold properties in the range of 15% to 30%, however, completed or nearly completed projects in prime locations will fare better than other projects. Dubai has certainly been the centre of attention and attracting most of the expatriate workforce, which is proving the most illusive and hard to predict segment of the market.

As for the rental market, after years of double digit growth rates, the rental market in Dubai has started to cool-off in 2008. The global financial crisis had little effect on the rental market which was almost stable in fourth quarter 2008. Nevertheless, the stiff credit conditions, and the shortage in mortgage financing have forced many potential buyers to turn into the lease market. Unlike the freehold market which witnessed a lot of speculative activity in recent years, the rental market is more demand driven.

Likewise, we can expect rents in Dubai to decline in 2009 due the lack of demand in line with the economic slowdown which forced many Dubai firms to downsize or halt their expansion plans which will likely result in a decline in the number of expatriates in Dubai who form around 90% of the emirate’s population.

However, most pundits are expecting residential rental rates to be more resilient to the downturn than the prices of freehold properties. Accordingly, according to Asteco we can expect rents to decline by 15% to 25% in 2009. Currently certain developments are already down by almost 50% on the 2008 pricing.

Dubai’s office market have been growing at double digit growth rates since the start of the property boom driven by the economic boom and the influx of foreign business into the country. Vacancy rates in Dubai office market did not exceed 2%, reflecting the demand-supply gap in the market. In fourth quarter 2008, there was a dramatic shift in the market in light of the recent credit crunch and the global economic slowdown which forced many businesses in Dubai to either downsize or put a hold on their expansion plans in the current market conditions.

According to Asteco, Dubai office rents have dropped by 11% to 16% in the last quarter of 2008. The free zone developments Sheikh Zayed Road, Bur Dubai, and Deira business district were the mostly affected. We can expect further correction in office rents in the range of 10% to 25% as businesses downsize and hold their expansion plans.

In the retail segment, the successful marketing of Dubai as global leisure and shopping destination had its impact on Dubai’s retail scene. The recent addition to Dubai’s retail’s scene was The Dubai Mall which opened in 2008 with a total GLA of 344,000 square metres. Another large scale development which is scheduled to launch in 2010 is Mall of Arabia (phase one), which will add an additional GLA of 400,000 square metres. 

Asteco said it expects the forthcoming retail supply which will likely hit the market in 2009, and 2010 to result in an oversupply situation which will likely push rental rates downwards in 2009, coupled with the general global economic slowdown which will likely lead to a decline in footfall and spending.

Unlike Dubai which has been experiencing a real estate boom since 2002, the real estate market in Abu Dhabi is somewhat in a different stage of the real estate cycle, and still lags that of Dubai. The residential market in Abu Dhabi is deeply undersupplied, with a population of 930,000 at the end of 2007, and only 180,000 units available as estimated by the Urban Planning Council at the end of 2007.

According to Colliers the supply of residential units in the UAE capital is expected to increase by 213,000 by 2010. An additional 140,000 units are expected between 2011 and 2013 following the completion of residential components within Al Raha Beach and Al Reem Island mega projects. With the addition of new residential units to the market, we can expect the residential market in Abu Dhabi to stabilise with the new supply coming from mega projects such as Al Reem Island and Al Raha beach in 2009.

The office market in Abu Dhabi is under supplied especially the primary office space. Office rental rates have appreciated by 14% between fourth quarter 2007 and fourth quarter 2008 according to Colliers international, with vacancy rates of almost 1%.

Rents in the Central Business District range from AED2,500 to AED4,000 per square metre in fourth quarter 2008. According to Colliers, the upcoming supply between fourth quarter 2008 and fourth quarter 2010 will be concentrated in Abu Dhabi Island, and then will be gradually fragmented to different locations including the ADNEC Capital Centre, Al Raha Beach, and Al Reem Island.

According to Asteco, the office segment in the capital has witnessed an increase of 11% in prices in fourth quarter 2008. It said it does not foresee any decline in Abu Dhabi’s office rental rates in the medium term. However, a slowdown in the rate of growth is expected due to the lack of demand in line with current financial crisis and the slowdown of economic activity.

Unlike its neighbour Dubai which turned into a major shopping destination, the Abu Dhabi retail market is mainly driven by Abu Dhabi residents and not tourist inflows. Shopping mall supply in Abu Dhabi is expected to increase from the current GLA of 820,000 square metres to 1.4 million square metres by 2010 according to Colliers. According to Plan Abu Dhabi 2030, retail space in Abu Dhabi will spread across the city evenly, with the existing downtown, Al Reem Island, Capital District, Sadaiyat Island, and Al Yas Island being key retail areas. Given the lack of supply, we do not foresee a softening in rental rates in Abu Dhabi’s retail market in the short term until new space is delivered in 2010. 

The UAE property boom was fuelled to an extent by speculators who helped inflate property prices to skyrocketing levels through purchasing the property off-plan with minimum down payments, and then flipping it within a short period of time in order to achieve higher returns. Those speculators, encouraged by cheap and available liquidity, drove the prices of off-plan or un-built properties up to - and above - the levels of completed properties or properties near completion. Now the tables have turned, and off-plan sales which used to witness the largest hikes are also the ones who are experiencing the greatest hit.

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