Lower asset prices and tight supply drive rental yields up

Rental yields expanded in October on the back of lower asset prices and a tight supply market, as gross yields increased to 6.3 per cent from 4.7 per cent in September, said a new report. “Rental demand is likely to remain robust as we sense potential buyers are deferring their plans until there is better visibility in the credit markets,” HSBC Holdings said in a monthly real estate report. Yield expansion reflects the market tightness. The shortage of stock has been further exacerbated by a clear shift from holding to selling, as investors try to exit the market, Majed Azzam, co-author of the report, said. “This trend in part reflects risk aversion in the current period of uncertainty, especially since rental regulation in Dubai favours tenants (rental caps, anti-eviction laws, etc), making tenanted units less attractive.” Additionally, new government regulations prohibiting the sharing of villas by more than one family are likely to add to pent-up demand, particularly for smaller units. On the other hand, the change in visa requirements for relatives, whereby proof of either ownership or tenancy of a two-bedroom residence is required, should increase demand for larger units, Azzam said. Meanwhile, secondary prices showed weakness for the first time in October as property prices in Dubai and Abu Dhabi fell. Prices in Dubai fell four per cent from September, while prices in Abu Dhabi were down five per cent. Villas in Dubai were hit, with the average price falling 19 per cent between September and October on the back of tightening lending conditions. The decline in villa prices had more to do with “affordability than anything else, especially in light of lower mortgage loan to values (LTV)”, HSBC said. The average villa price of $2.6 million (Dh9.5m) in September would now require a minimum down payment of $650,000. Average apartment asking prices in Dubai were flat month-on-month, despite the majority of development prices being down. “This is due to a rise in the weighting of high-end projects,” Azzam said. Although prices in Abu Dhabi fell due to the emirate’s “heavy off-plan rating”, the capital offers the “best shelter for investors and provides good appreciation potential”, the report said. Apartments were down six per cent month-on-month, villas were up four per cent due to their scarcity. The report expects the market in Abu Dhabi to remain tight near term, as pent-up demand alone is more than enough to meet supply coming on to the market in the next two years. Raha Gardens, the only development that is ready, was down two per cent month-on-month. “We believe, similar to Dubai, this is because of the lower LTVs and thus affordability. However, it could also be related to the development’s liquidity as it is only open to local investors,” HSBC said. HSBC said in its September report that property prices had surged in the UAE, with Dubai and Abu Dhabi registering an increase of 17 per cent and 11 per cent month-on-month. “Price growth is picking up again after a brief moderation during the summer. However, while prices remain on an upward spiral, rental rates in Dubai seem to be stabilising, thereby compressing rental yields. This shows we have reached a level where affordability is getting breached,” the bank had said. Loan-to-values ratio falls As mortgage rates have risen on average by 100 basis points, loan-to-values for apartments have fallen from an average of 85 per cent to 60 per cent and for villas from 85 per cent to 75 per cent. The average down payment increased from $98,000 to $220,000, but the average monthly mortgage payment is down from $7,100 to $5,750, a decline of 20 per cent month-on-month. The average monthly rental payment is up from $3,600 to $4,500, 25 per cent increase, which means it now covers 80 per cent of the mortgage payment once the initial down payment is done. Parag Deulgaonkar business24-7.ae