Developers in Dubai are shifting their strategy to affordable housing. However, how much of the announced new supply is actually affordable to end-users in Dubai? Not much.

"Anecdotal evidence suggests a mismatch between affordable stock and the requirements of prospective home owners. While studio and one-bed units appeal to investors, end-user demand is for smaller two-bedroom units at similar entry prices," according to a new report released by property consultancy Core Savills.

Lower-income occupiers remain hesitant to buy while investors drive demand for off-plan sales, particularly below the Dh1 million price point.

Sales transactions for ready units in the third quarter of 2017 increased modestly at seven per cent, but were overshadowed by the 62 per cent rise in off-plan sales when compared to Q3 2016. Even with this spike in off-plan transactions, the average unit value is 11 per cent lower than last year, reflecting the strategy shift that developers are resorting to by bringing lower entry products to the market while competing on prices.

"Instead of adjusting supply to demand, a few developers are taking the risky route of adjusting prices - by occasionally offsetting quality or shrinking their margins. This brings a significant amount of lower quality stock to the market which may find short-term investor take-up on the back of lucrative payment plans, sometimes aided by the high level of marketing spend. If sales and tenant demand for such products has been overestimated, this may not be sustainable in the long term," warns David Godchaux, CEO Core Savills.

Burgeoning off-plan activity is also affecting the ready sales market. Individual landlords are trying to keep pace with the overhang of off-plan projects by reducing sales prices, as a result bringing the area average down. This presents opportunities for home buyers.

For instance, in Dubai Marina, due to increasing competition from off-plan apartment deliveries launched at higher entry points, many investors are opting for ready units at lower prices.

The weakest performing villa districts in terms of sales were Jumeirah Islands and Jumeirah Park, both dropping almost six per cent. A two per cent price increase was recorded in Emirates Hills while few large transactions of new or refurbished villas on the Palm Jumeirah have seen average prices in the area decline by 2.5 per cent, according to Core data.

Rental market

The consultancy claims there has been widespread rental contractions across districts in Dubai. As sales prices have not dropped at the same rate, yield compression has been witnessed across most areas and is expected to continue in 2018.

Godchaux explains: "Widespread falls in rents continue to force the market to adjust downwards - an effect that will persist as the next cycles of lease renewals inspire further rent reductions and relocations, particularly among tenants whose rents are yet to reflect the softening market. Although widespread, the magnitude of these drops will likely remain limited."

According to the report, Dubai Marina and the Palm Jumeirah were the weakest performers, with rents dropping by 10 per cent year on year.

Source: Khaleej Times