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The UAE government in October approved a trimmed federal budget of Dh48.5 billion for the new financial year, reducing spending by 1.1 per cent compared with last year. Although it is difficult to predict the impact of a revised budget, industry experts say a slowdown in job creation and possibly cutbacks could have a negative effect on the property sector.
“Even if the effects are actually limited, the negative sentiment resulting from uncertainty is likely to reduce investor appetite, as well as tenants spending beyond affordable levels on rents,” says Mario Volpi, Head of Projects at Asteco Property Management.
Abu Dhabi had been resilient last year, but the continued low oil prices make it harder for the property sector to remain unaffected. Real estate companies have so far responded to the situation sensibly by keeping new supply under control. This was helped by the timely implementation of a new real estate law and setting up of a real estate regulatory authority.
The new real estate law that came into effect in January includes provisions for escrow accounts, land and property registration, strata title, licensing of real estate activity and new fees and procedures.
“While the law will help support a better-regulated market, it is also likely to suppress supply growth,” says David Dudley, International Director of JLL Middle East and North Africa.
Abu Dhabi expects a more sensible amount of new supply this year, as many new projects are being put off or spread in phases to deal with the continued sluggish demand. However, there remains a shortage of supply in some pockets, mainly in grade A office and the affordable housing segment.
At a time when the demand is expected to be driven mainly by end users, industry experts say developers need to come up with products that suit the market needs, which essentially means building more affordable housing projects. According to Cluttons’ Abu Dhabi 2015/16 Winter Property Market Snapshot, the 34 per cent increase in average house prices since 2010 compounds the growing problem of a lack of affordable homes.
“This issue of affordability has been building for some time, initially following the introduction of the Federal Mortgage cap and doubling of property registration fees,” says Edward Carnegy, Head of Cluttons Abu Dhabi. The mortgage cap and increased fees had the desired effect of cooling the market, but Carnegy says many people are also forced to pay premium rents, limiting their ability to become owner-occupiers in the long term.
“This presents a major opportunity for developers to deliver housing that is genuinely affordable, while still of a high quality, with the potential to offer flexible access to home ownership through models such as rent-to-own,” says Carnegy.
Despite a general slowdown in the residential sales market over the last nine months, the overall performance of the Abu Dhabi market was positive last year, with the rental market being remarkably active as prime and high-end projects continued to achieve close to 98 per cent occupancy rates. As a result, Volpi says these segments recorded between 5 per cent and 15 per cent year-on-year rental increases. At upper end of the growth spectrum were Saadiyat Island developments (15percent) and Eastern Mangroves (14 per cent), while the top developments on Al Raha Beach and Reem Island were up by 5 per cent and 6 per cent respectively.
The average residential rents in the UAE capital grew by 4 per cent year-on-year, despite a slight decline in the previous quarter, according to the Q4 2015 Abu Dhabi MarketView by CBRE.
Dudley points out that the residential rental market grew at a slower pace than the sales market during the last upswing. “The contraction of the oil and gas and government sectors and a slowdown in domestic government spending will undoubtedly affect residential demand growth, however, with vacancy rates remaining low in high-quality schemes and limited new quality supply, we expect prime rents to generally be upheld.”
Sales prices, on the other hand, have stabilised over the last six months, strengthening yields and positively impacting the long-term prospects of landlords, especially as new supply is limited. The average sales price of two-bedroom apartments in Abu Dhabi remained flat over the year at about Dh16,000 per square metre.
While the market was relatively quiet, Matthew Dadd, Partner at Knight Frank, says there have been pockets of growth and activity. Dadd cites Masdar City, which he says has had an encouraging year. “The success of Masdar is testament to its popular location and accessibility to Dubai,” says Dadd. “We have also seen Aldar launch residential projects on Yas Island and Al Raha, which have been very popular with investors and end users.”
Volpi says the strong demand for villas in master-planned developments has resulted in good sales volumes for projects such as the Al Merief Development and Nareel Island, which are exclusively offered on a plot-sale basis to UAE nationals.
Close to 10,000 new residential units, out of a proposed 26,000, are expected this year, including those in Al Raha Beach, Saraya and Al Reem Island.
The local office market is starting to feel the strain of lower oil prices with declining demand and rentals. “The stability in rents is likely to come under increased pressure over the next six months as the hydrocarbon sector, which is the dominant occupier group in the market, contracts further,” says Carnegy. His worry is that this could lead to oversupply, not from new deliveries but as a result of consolidation as corporates return existing space back to the market.
According to the Q4 2015 Abu Dhabi MarketView by CBRE, average office rents recorded a 2 per cent decline in the fourth quarter to Dh1,050 per square metre. “The gradual reduction in Abu Dhabi’s rental rates highlights the emergence of a wider market slowdown, and it is envisaged that a more pronounced market reaction will manifest as we progress through 2016,” says Mat Green, Head of Research and Consulting — UAE at CBRE Middle East. “Without a sustained oil price recovery in the coming months, office occupancy rates are expected to decline further.”
Although demand for office space has been subdued, Dudley says office rents for grade A space have increased to about Dh1,850 per square metre due to limited availability. According to JLL’s UAE Real Estate Market Review 2015, grade A office rents in Abu Dhabi increased 7 per cent on an annual basis. However, secondary markets are likely to see sustained downward rental pressure.
According to JLL, around 340,000 sq m of office gross leasable area (GLA) is expected to enter the market this year.
The Abu Dhabi retail sector continues to see rapid change, with a Knight Frank report noting the market is witnessing major shifts in the retail supply. “Yas Mall is establishing itself, Reem Mall and Al Maryiah Central have both gained approvals and started construction,” says Dadd. “These malls, although close to each other, focus on different market segments and continue to develop the retail edutainment theme, which dominates the retail landscape in the emirates.”
Dadd says there is increased appetite by local and global retail brands looking to expand in the capital. “We have seen retailers focus on the growth in community malls to position themselves accordingly,” says Dadd.
About 120,000 sq m of retail GLA is expected to enter the market this year, dominated by non-mall retail within mixed-use developments. Retail rents, which were stable throughout last year, are expected to remain so over the next 12-18 months. “While significant retail space is set to enter the market from 2018, the development pipeline has reduced and demand growth remains positive, particularly linked to hospitality growth,” says Dudley. He says competition will polarise the market, with lower-quality malls needing to be repositioned.
According to Robin Teh, Country Manager of Chestertons UAE, the retail sector is expected to perform strongly as some areas in the capital lack high-end retail establishments. “We can expect some solid growth in that industry sector,” says Teh.
The hospitality market has continued to improve as tourism growth outstrips supply growth. Figures released by the Abu Dhabi Tourism and Culture Authority (TCA), show the total number of tourist arrivals last year in excess of four million, up by around 18 per cent year-on-year.
“The positive growth in tourist arrivals was also coupled by an increase in the average length of stay, which translated to 1.19 million guest nights, a 22 per cent rise over 2014,” says Green. Highlighting data from STR Global, he says the overall increase in tourist arrivals also delivered growth in average occupancy rate, which rose from 72.7 per cent in 2014 to 74.4 per cent last year.
Major projects that support hospitality growth include the expansion of the airport and Etihad Airline and the delivery of new visitor attractions on Saadiyat Island and Yas Island.
Abu Dhabi expects 3,600 rooms entering the market this year. The majority of future supply is positioned in the upscale and upper-upscale segments.
2016: A challenging year
While the real estate market faces a challenging year, Dadd does not expect a significant downturn, “as projects continue to be developed, including the Louvre Abu Dhabi and the Midfield Terminal”. Furthermore, market observers believe competitive pricing will be the key to securing investor commitment for new developments in Abu Dhabi this year. Meanwhile, with the limited amount of new supply, rents are expected to remain at their current levels.
This is due to most buildings throughout Abu Dhabi witnessing high vacancy levels that would only reduce if significant jobs were cut in the city,” says Volpi.
See related story: Developer-investors snap up Dubai's delayed projects
This year investors could find good opportunities, particularly in the off-plan segment, according to Teh. “Off-plan projects in Al Reem Island and Saadiyat Island have good potential in the long term,” says Teh.
While good long-term prospects abound, industry experts expect the year to be inactive for real estate, characterised by a reduction in demand, but with supply remaining well under control.
“The decline in oil price has led to a contraction in the oil and gas sector,” says Dudley. “This, coupled with the government reallocating funds to deal with regional matters, has also led to a major reduction in government domestic spending, causing a contraction of the government sector and economic diversification.” He says these factors could lead to a slowdown in GDP growth and employment, and ultimately affect end-user demand for residential and office real estate.
On a positive note, Dudley says supply remains under control. “We still expect demand growth to continue, albeit at a much slower pace, from projects commenced while oil prices were high, with projects such as the airport and Etihad expansion having an economic multiplier effect,” says Dudley.
Source: S. A. Kader, Special to Property Weekly