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Interest rates, credit constraints & rent declines belie recent stability,


Phidar Advisory released its Dubai residential research note for March, on Monday. The report shows nominal to moderate declines in quarterly price and rents, and a softening of projects.

“The market is undergoing a false start now,” said Jesse Downs, Managing Director of Phidar Advisory. “Apartment sale prices declined only nominally this quarter and volumes increased, which could be mistaken for an impending recovery, but the market fundamentals still do not support this in the short-term,” she added.

In the first quarter of 2017, quarterly apartment lease rates declined 2.5%, while sale prices declined 0.5%, pushing gross yields down to 7.55%, a three-month loss of 15 basis points, according to a three-month moving average of the Phidar House Price Index: Dubai 9/5. Lease rates for Single Family Homes (SFH), also referred to as villas, decreased 2.9% and sale prices declined 5.4%, which pushed yields up to 4.75%, a quarterly gain of 10 basis points, using a three-month moving average.

“After eroding through the end of last year, villa yields have started to expand and now apartments need to go through a similar correction,” Ms. Downs said. “Rents continue to decline due to weak demand and changes in housing budgets, which will have the starkest impact on high income housing.” she added.

In Q1-17, Phidar’s Dubai Real Estate Investment Demand Index REIDI decreased by 20.4% compared to 2016, driven by exchange rate fluctuations and downward revisions in GDP forecasts. In the first quarter, the US dollar – and therefore UAE Dirham – strengthened against 9 of the 14 floating currencies included in the REIDI, compared to Q4-16.

“It is unsustainable to have yield erosion amid rising debt cost and liquidity constraints,” she said. “As interest rates creep up and banks are likely to impose tighter lending standards, residential volumes and prices should decrease,” Ms. Downs added.

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