Low end of Dubai villa market drives transactions
The first half of this year has witnessed an increase in the number of transactions in the Dubai residential real estate market. Most of this activity has come from off-plan and affordable segments of the market, while the secondary sales and premium segments of the villa market have struggled, which is reflected in the subdued sales and rental numbers.
The current momentum in the sales activity is driven primarily by end-users, first-time buyers in particular, who are now entering the market enthused by the low prices and encouraged by attractive payment plans offered by some of the developers. The introduction of new innovative mortgage products by some of the local banks has also contributed towards this increased activity. What this really means is, property price points and accessibility criteria for home mortgage, traditionally the two biggest entry barriers for new entrants to the property market, have been lowered, resulting in an uptick in market activity.
The locations where these transactions are happening add another dimension to this story. The Property Monitor Dubai House Price Index, which tracks the average sales prices of residential units across the emirate, has shown a decline in the average sales prices of villas. The average sales price of villa transactions in Dubai has decreased from Dh3.7 million in Q3 2016 to Dh2.2 million in Q2 2017.
While part of this movement can be explained by the declining property values on a per square feet basis, the major contributor to this decline is the increased activity in the lower end of the villa market due to new supply of affordable units. The new supply is spread among locations such as Arabian Ranches 2, Layan Community, Nshama Town Square townhouses and Emaar’s Urbana Townhomes in Dubai South.
This trend holds true in the secondary sales transactions market as well. In 2016, established villa communities such as Emirates Living and Arabian Ranches dominated the secondary villa sales market in terms of the number of transactions. However, in 2017, this situation has changed, wherein affordable villa communities such as Mira have witnessed the most number of transactions.
This dichotomy in the villa market can be explained through the declining rents witnessed in the high-end villa market. The larger four and five-bedroom villas in established locations such as the Palm Jumeirah and Arabian Ranches have struggled to lease ever since the decline in oil prices and the subsequent downsizing of the big employers within that sector. The fall in rental yields has resulted in the decline of sales prices and transaction volumes. The developers who were concentrating on the premium end of the market for years are now forced to focus on the affordable segment.
Interestingly, the attractive pricing of affordable villas has enabled this segment to capture some market share from the residential apartments market as well. Two factors have helped this minor exodus. Since most of the new off-plan villa communities are in upcoming peripheral locations, the land cost for developers is relatively low, which has resulted in lower price points. Secondly, several key developers, in their new master-planned communities, have recently launched compact townhouses and villas which are much smaller than the average market sizes. This has also brought down the price points considerably, making the low end of the villa market compete directly with the mid to high-end apartment products.
Even though this minor momentum in off-plan villa sales is positive, it is difficult to see this have a positive impact on property values any time in the near future. Notwithstanding this increase in off-plan villa demand, the supply is expected to outstrip demand as substantial new villa inventories are expected to enter the market in communities such as Arabian Ranches, Dubai South and Akoya over the next three years.
It is also worth noting that a sizeable volume of new supply, currently under construction in GCC freehold locations such as Al Barsha 2 & 3, Al Barsha South and Al Warqa’a, will put further pressure on the declining villa rentals. All things considered, Dubai residential market is expected to continue to be a tenant’s market.
The current momentum in the sales activity is driven primarily by end-users, first-time buyers in particular