Dubai tenants hoping for a slowdown in rental increases are expected to get some relief in 2024, according to a new study by industry experts.

The study by ValuStrat, a real estate valuation and advisory services firm, shows that rental increases across Dubai properties will show signs of slowing down next year, despite continued high demand for Dubai real estate in 2023.

The latest data from the ValuStrat Price Index (VPI) for Dubai's residential market shows an 11.7 percent year-on-year increase in the second quarter of this year, with the total index reaching 91 points.

Neighborhoods that saw the biggest increases included Jumeirah Islands (20.8 percent), Emirates Hills (19.6 percent), Palm Jumeirah (17.9 percent), Dubai Hills (17.3 percent) and Arabian Ranches (16.8 percent).

Rent increases

Rental prices for newly signed residential contracts rose sharply this year, up 32.6% compared to the same period last year and 3.5% compared to the previous quarter.

VPI's findings show that villas led the way in terms of new rent increases, with a significant rise of 52% for the year and 3.7% for the quarter, with the average asking rent reaching Dh394,500 ($107,420) per annum.

ValuStrat's data shows that valuations and rents for prime villas hit new records in the second quarter of 2023, with the average valuation of villas 1.2% higher than the previous peak set in 2014. Villa prices grew at an annual rate of 15.8% and a quarterly rate of 4.3%, totaling 114.9 VPI points.

Commenting on current market trends, Haider Tuaima, Director and Head of Real Estate Research at ValuStrat, said: "There is a general oversupply in Dubai, especially in the apartment market, which accounts for more than 85% of all residential units; this is the main reason why the apartment market has not seen the same growth as the villa market since the pandemic.

"In fact, the vast majority of apartments have not seen significant capital appreciation over the past two years, until now. As villas and townhouses have become increasingly unaffordable, investors are now turning to smaller, more affordable homes that haven't changed much since the market's experience during the 2020 pandemic."

Affordable market

The findings show that the affordable housing market has also seen significant growth for the first time since the pandemic, with areas such as the Motor City and Discovery Gardens seeing increases of nearly 5 percent.

"Intriguingly, for the first time since the pandemic, the affordable housing market saw significant capital appreciation, with significant quarterly growth in low-priced and high-yield areas such as Discovery Gardens (4.5 percent), Motor City (4.3 percent), Greenfield (3.9 percent) and Dubai Production City (3.4 percent)," Tuaima said.

Tuaima said, "The extension of Dubai Real Estate's 2.5-year rally to the affordable housing sector is expected as other areas may have reached their price ceilings while homebuyers are looking for higher values and hope for future capital appreciation. Renters are starting to buy homes in the face of rising rents, which is another driver of homebuyer demand. Rising transaction volumes in lower-priced areas are pushing up their prices."

However, as more tenants consider homeownership in affordable neighborhoods amid rising rents, this could also put leases in the spotlight in 2024.

"We expect new contract rents to continue to rise this year and next, albeit at a slower rate," said Tuaima.