Wealthy property investors in the GCC are taking advantage of depressed conditions by snapping up assets at the bargain end of the market.
Consultancy Cluttons said that Dubai remains the most popular destination for high net-worth investors in the GCC, favoured as first-choice destination by 27 per cent of respondents to its Middle East Capital Survey, compared with 21 per cent citing Abu Dhabi and 8 per cent for Sharjah.
Survey respondents were individuals who own at least US$1 million outside their city of residence, and almost two-thirds said they were planning to spend at least $1m on property this year.
However, rather than seeking trophy assets in Palm Jumeirah or Dubai Marina, the top three destinations for residential purchases were The Springs, Bur Dubai and Deira. There is also considerable demand for worker accommodation due to the high yields generated.
Richard Paul, a director of residential valuations for Cluttons, said that prices were continuing to soften, with anecdotal evidence of job losses in the banking and oil and gas markets weakening sentiment. He expects capital values to drop by a further 5 per cent this year.
Despite this, he said that there are submarkets that have already bottomed out offering attractive yields.
“The Springs has probably felt the hardest drop in values over the last 18 to 24 months – in certain communities down 20 per cent,” he said. “The people in the know feel, and I would agree with them, that it’s reaching its lowest ebb and people are trying to get in at a choice time.”
He said that The Springs remained a popular area, attracting typical rents of Dh115,000 to Dh135,000 per year for a two-bed property, giving investors a yield of 5.5 to 6 per cent.
Similarly, GCC investors have been keen to snap up entire buildings – residential and commercial – in Deira and Bur Dubai.
Rents in Bur Dubai for a two-bed property are Dh83,000 to Dh112,000 per year, giving the owner of an entire residential building a yield of 8 to 8.5 per cent.
Office buildings in Deira let for between Dh60 to Dh120 per square foot, generating yields of 8.5 to 9 per cent.
Murray Strang, the head of investment and agency at Cluttons, said that such space is often older and more dated, meaning that it requires more hands-on management.
“But it very rarely lies vacant – the occupancy levels are extremely strong. They might not always be the best buildings to look at but in terms of the reliability of income and strength, you’re getting yields of 8.5 per cent to 9 per cent compared to 7.5 per cent in Downtown Dubai.”
Worker accommodation can attract yields above 10 per cent, and is growing in sophistication, said Mr Strang, with many corporate occupiers seeking entire buildings to house staff.
“Build to suit” deals, such as the five towers under construction in Dubai Silicon Oasis for Emirates airline staff, are popular with occupiers, he said.
“If not build to suit, [occupiers are] looking at taking space in bulk that means they’re not managing accommodation spread across the city in different locations and different contracts.”
Earlier this week, the research firm Phidar Advisory warned against those calling the bottom of the market, with the managing director, Jesse Downs, stating there had been “a flurry of positive headlines over the past month with limited evidentiary support or analysis”.
It said that prices dropped by 2.2 per cent year-on-year in the first quarter of this year, adding that the continued strength of the US dollar, weak oil prices and the rising cost of debt had reduced liquidity and consumption, were negatively affecting jobs and occupier demand.
“Unsubstantiated optimism can have a destructive impact on a market,” said Ms Downs.
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