In the GCC, countries like the UAE, Qatar and Bahrain are feeling the global financial crisis in their real estate rental markets. This is due to many factors, including a decrease in demand resulting from the outflow of expatriates, as well as a fall in property prices and new supply coming online. Currently most rent prices in the UAE and Bahrain are somewhat stabile, and a decline in rental rates was already felt in the office market in Dubai in the last quarter of 2008. Experts predict, however, if demand and property prices continue to drop, rents will soften in 2009. In Qatar, Asteco’s general manager David Oayda seems more optimistic. He predicts that rents will stabilize and not decrease, since Qatar’s real estate market is less affected and its demand will remain strong.
Lower demand
Since the financial crisis began, some experts expected that rental demand would increase as people were shifting from being buyers to tenants due to lack of mortgage financing. This would certainly be a positive sign for the rental market. However, the downsizing of companies and less available cash on the part of tenants is having an effect on the rental market and leading to a slowdown in demand and prices. Nicholas Maclean, managing director of CB Richard Ellis Middle East Region, explained that, “in the residential market, there was some level of rental growth, but I think that the view for the market at the moment is that rents have declined for weeks in Dubai, partly because of people leaving due to redundancies in the real estate sector and also due to the lack of confidence.” The same applies to the office market since businesses are currently delaying expansion plans and even shrinking, which results in a lower demand for office space.
In Bahrain, the market is mainly based on domestic demand and is therefore less affected than the UAE. However, general manager of First Bahrain Amin Al Arrayed, explained that the expatriates in the kingdom are seeing smaller incomes. When that is combined with unemployment, demand for apartments might slow down. “A lot of jobs, especially in the banking and real estate sector are heavily commission based, so a lot of people’s incomes have been affected because they are not making as much commission as before,” explains Al Arrayed. He adds “If the economic situation keeps deteriorating, we could see more weakness in that market since there are less jobs and people will start to move elsewhere.”
Rents and prices
Another reason why rental rates are expected to come down is their tendency to track asset prices. However, the change in rents is slower and not as significant. So when property prices were increasing quickly in the last couple of years, rental rates were following suit. “Prices of apartments, offices and homes were all going up very quickly, so there was a lot of inflationary pressure on rental rates,” says Al Arrayed. He added that, “this crisis has resulted in the fall of asset prices and so the expectation is that we will see more softening in rental rates if [the crisis] continues for much longer.”
Iseeb Rehman, the managing director of Sherwoods Property Consultants, links the decrease or stabilization of rental rates to rental returns, which investors expect to range between eight and 10 percent. Therefore, if the value of the property has decreased, it is normal for the rental rates to slow down. Yet it is important to keep in mind that rentals “hold stronger” than property values and therefore do not decrease as fast.
New supply
Additionally, the real estate rental market is expected to be negatively affected by new supply coming to the market, not only from developers, but also investors who are unable to sell their properties and therefore choose to rent it in order to secure income. The increasing availability, assuming that the demand will further decrease, will trigger downward pressure on rents in all sectors.
In Qatar, David Oayda, the general manager of Asteco Property Management, explains that some developers rethink their strategy when it comes time for the handover and they decide to rent instead of selling due to the current situation. However, Oayda does not seem worried about the increase in supply since he thinks Qatar — even if witnessing a slowdown in its real estate market — is better positioned to handle the current crisis. “We are looking forward to [the new supply]. There are going to be some handovers taking place within the next six months on the Pearl and throughout West Bay,” asserts Oayda. “We have already got registrations and expressions of interest for lease, commercial and residential.”
Facts and figures
So far, the crisis has hit rental rates in Dubai where office rents in free zones have dropped in comparison to 2008’s third quarter numbers. Rents in Jumeirah Lake Towers, Media City and Deira have already dropped by 16, 11, and 14 percent respectively, according to Asteco’s fourth quarter report. Asteco also stated that the rental rate growth for apartments and villas in 2008 was only four and eight percent respectively, with no changes over the last three months.
Abu Dhabi stands stronger since property has always been less available in the emirate, which has inflated real estate prices further in recent years. Experts agree that the capital’s rental market will be less affected by the crisis than Dubai since demand will continue to outstrip supply due to the city’s better economic situation and the lower availability of property. “The rental market in Abu Dhabi will remain stronger because it is the capital and a lot of diplomatic missions are there,” said Rehman. “That is naturally a good catalyst for rental. A lot of companies are based there and supply is very short,”
Some villa rental rates even witnessed growth in Abu Dhabi in the last quarter of 2008, with the highest seen in Al Raha Gardens and Khalifa ‘A’ developments. The rental appreciation for three-bedroom villas in these projects was 14 and 16 percent respectively according to Asteco. This growth was driven by companies using villas as offices since rental rates are cheaper compared to office space in towers. While villas were still in high demand, apartments and offices did not follow suit. Rental rates for one-bedroom apartments increased only one percent, while two and three-bedroom apartments did not witness any change since people are currently looking to more affordable units for rent. Demand for large offices has decreased but no numbers were available.
In Qatar and Bahrain, it seems that there is more of a stabilization in the rental market since a high portion of growth was mainly driven by domestic demand and both markets were less speculative, which made the impact of investors’ withdrawal less damaging than in the UAE.
In Qatar, Oayda explained that opposed to what press releases or distributed figures might say, prices of properties have not been reduced and consequently rents did not witness a decrease. However, a certain level of stabilization is observed in the market, since prices of residential property over the fourth quarter have increased less than 10 percent and office rents showed no variation during the same period. “Landlords were certainly asking very courageous prices,” said Oayda. “Now companies are reconsidering what they have been paying and they are certainly being more stringent in what price they are paying.”
However, the real estate markets in both countries are witnessing a slight dip in high-end property leasing. The demand for this sector was mostly investor-driven and with the withdrawal of these investors, prices of high-end properties are declining, consequently causing rents to drop. Additionally, people are trying to lower their expenditures due to lower incomes and financial pressure and thus choosing more affordable properties. Al Arrayed estimated that the decrease in rents for high-end properties could be estimated at 20 percent in Bahrain. No numbers were available yet for the Qatari market. Al Arrayed said that the rate of decrease is hard to estimate since rental rates that are advertised can be negotiated with the landlord and are not final. However, it should not be significant since middle-income housing was relying on domestic demand, which is still strong.
Extended rent payments
Paying one upfront check to landlords for the whole year’s rent is becoming more and more unaffordable in the UAE, especially with tight lending from banks and the uncertainty of tenants about their future. Therefore, landlords are settling for quarterly or even monthly payments in order to attract tenants in the prevailing market conditions. “I have lived in the UAE for years and I have not seen that before,” said Maclean. “I think the reason for that is the landlords are competing with one another for the tenants,” he added.
Expectations
In the UAE, experts predict a drop in rental rates, though it is still too soon to tell how far the fall will be since it depends on many factors, like the future redundancies expected by companies, property prices and investors’ sentiment in respect to the sector. “The market is going to soften up and landlords are expecting lower rents,” predicted Rehman. “They are going to be coming to more affordable levels and it remains to be seen where the bottom is.”
Maclean expects rental rates to decline in 2009 and by the end of the year the property sector will stabilize. He explains that it is good for the UAE since “the market was too overheated” and lower rents will create more confidence in the market.
Al Arrayed expects rental rates to soften in Bahrain in 2009, especially for high-end properties, since middle-income demand was not as much affected. Additionally, if the fall in property prices continues and banks do not start lending like before, the declines in rents will be stronger.
Oayda believes that in the next three months, rents in Qatar will be stable and the new supply will certainly not have an adverse effect on prices of rents since the lack of confidence in the market has no basis in Qatar, and once the confidence starts to rise, the whole market will start picking up again.
