Analysis

In Focus: Abu Dhabi property market

Retail and tourism are on a high, but oil prices and housing affordability remain key concerns

PHOTO: About 1,600 units were added to Abu Dhabi's residential stock in Q4 last year, according to JLL. Credit:

Playing host to major global events like a F1 Grand Prix and the Volvo Ocean Race in the past few months has been a great help in putting Abu Dhabi on the map as far as tourism is concerned. Coinciding with the Grand Prix was the opening of the much anticipated Yas Mall, Abu Dhabi’s first major destination mall, developed by Aldar Properties. Yas Mall and other new retail projects like Capital Mall and Al Reef retail added 326,000sqm of retail space to the market in the fourth quarter of 2014, according to a report by real estate consultancy JLL.

While no major malls are expected in 2015 or 2016, from 2017 onwards, shoppers will have more to choose from, with projects like Al Maryah Central, Saadiyat District, Reem Mall and a Marina Mall extension scheduled to enter the market.

In line with developments on the leisure and retail front, the hospitality sector fared well in the city last year, with hotels reporting average occupancy rates of 85% in the events season. The tourism sector is expected to continue to flourish in coming years as other anticipated projects open their doors, like the Louvre and Guggenheim museums in Abu Dhabi.

However, as the emirate looks to cash in on tourism, it continues to face key challenges like providing affordable housing in the wake of increasing inflation. Additionally, oil prices – while perhaps not a major concern at the moment – have already led to softening of some segments and could slow development.


Residential performance in 2014

Average residential rents in the capital increased in the fourth quarter of 2014 by about 3% on the previous quarter, and by 17% compared to the same period in 2013, according to a report by real estate consultancy CBRE. “Despite rising housing stock, the Abu Dhabi residential market continues to outperform most other property assets,” says Matthew Green, head of research and consultancy at CBRE.

“In total, around 35,000 new residential units are expected to be completed over the next three years, with a large portion being from within master-planned communities. Additionally, widespread relocations are expected as residents look to move away from inferior properties.”

According to JLL, about 1,600 units were added to residential stock in Q4 last year with the delivery of the Burj Mohammed Bin Rashid in the World Trade Centre (WTC), along with mixed-use schemes in Khalifa City A and Capital House in Capital Centre. Q4 2014 also saw a spike in interest from end users looking to buy their own homes, prompted by imminent lease expirations or planned relocations as rents continue to rise. Rising rents are not the only issue Abu Dhabi residents have to contend with. Data from the Statistics Centre Abu Dhabi suggests that inflation has been rising, as the consumer price index grew 4.1% year-on-year in December, with residential costs contributing 6% while utilities and fuel contributed 7%.

“As the cost of living has risen over the past 12 months, there has been a more noticeable increase in demand for low to middle income units and also for non-prime areas of the capital,” Green notes, adding that this is driving rental growth in more affordable locations.

The push for affordability means that residential units on the outskirts of the city have surged in popularity, with housing units in areas like Mohammed bin Zayed City, Mussafah and Khalifa City A and B becoming viable alternatives for budget-conscious tenants. More residents are flocking to these areas as they see a growing number of schools, healthcare facilities and retail centres, the report says.

The lower and middle income range of the residential market has probably been “underserved in terms of development”, Green says. “You can see that by the way that the market has evolved, where people try to use split villas and split apartments. And that has been driven by the fact that there hasn’t been a significant amount of development which has been focused on the right types of areas.”

But the challenge with building housing specifically meant to be affordable is that market forces inevitably boost demand, leading to escalating prices, Green points out. “If it looks affordable, then it can obviously attract speculation, it can attract sectors that will basically ultimately end up pushing the price up. It’s open to market fluctuations. Now, if there’s not enough supply in the market, then obviously rents can be pushed up quickly and something which is supposed to be affordable will not be affordable for particularly long.”

The government will have to take a more proactive approach in ensuring rents remain affordable for lower income segments, rather than leaving things in the hands of individual landlords, he adds.

Outlook for office space

The office market remained largely stable in 2014. Grade A office rents increased by 5% on average in Q4 2014 for the second quarter in a row, while average grade B office rents remained stable for the last five quarters, JLL notes. Government spending remains the key driver for demand in 2015, but with the oil and gas sector facing a continued slump in prices, demand for new office space could slow down, reports suggest.

“Given the current environment, it is likely many existing new office requirements could be placed on hold, with a possibility of some occupational downsizing should the current pricing trend be maintained for a sustained period of time,” Green says.

While neighbour Dubai has diversified away from oil, Abu Dhabi will be more affected by declining prices. But although certain sectors may face slower growth due to the oil slump, cheaper oil can boost other segments, Green points out. For instance, sectors like tourism and retail could potentially see more growth as airfare and costs of distribution get cheaper.

What to expect in 2015

Looking ahead, rents are not expected to undergo very dramatic increases in the capital. “Certain projects may still [see] some level of growth, but generally pretty much across the board it’s going to be pretty flat, and that is a consequence of slightly subdued economic conditions,” Green says.

While residential rental rates will recover this year, it will be at a slower pace than the first half of 2014, with JLL forecasting growth slowing from double digits to single digits on account of cuts in government spending. However, Green says there are a few residential and commercial projects to keep an eye on.

“Reem Island is where the majority of new residential supply is going to be completed over the next three years, and I think that’s going to be the main focal point of the market,” he concludes.

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