Although it has risen to become a strong contributor to GDP and diversification over the past 15 years, Abu Dhabi’s real estate sector is feeling the pressures of an economic slowdown, brought on by a period of depressed oil prices and spending cuts that have affected markets across every property segment.
The office, residential and retail markets, long buoyed by undersupply, now face the opposite challenge, with a host of large-scale new completions coming on-line in recent years. This weighed heavily on sales prices and rental rates in 2016, although bright spots remain in the mid-market residential segment, as well as in prime up-and-coming neighbourhoods and commercial districts. The government is now moving to boost investment in the sector through sweeping legal reforms aimed at improving transparency, reducing off-plan sales risks and supporting growth within the emirate’s financial free zone, Abu Dhabi Global Market (ADGM) on Al Maryah Island, as well as the broader capital region.
History
Abu Dhabi’s real estate sector recorded tremendous growth between 2002 and 2008 as the population rose rapidly and demand for new space surged, driving project development, rental rates and sales prices. The market was characterised by persistent residential and commercial undersupply, eventually resulting in a nationwide, speculation-driven real estate boom. Significant requirements and slow delivery of new units created unprecedented demand and inflation, with rents and prices peaking in 2008, though by the end of the year the resale market for off-plan properties was at a virtual standstill. The global financial crisis of 2008-09 saw real estate prices and rental rates in the emirate decrease by more than 60% from their fourth quarter 2008 peak, according to a December 2015 report by Asteco, reaching a low in 2012. Only 8000 new units came on-line in 2008-11, even as supply levels remained insufficient to meet rising demand.
Post Financial Crisis
Though not matching demand, supply did improve as the emirate’s first master-planned developments came on-line between 2008 and 2011, including Al Bandar and Al Zeina at Al Raha Beach. Rental rates continued to fall, driving internal tenant movements favouring higher-quality developments, and kick-starting growth in the leasing market, while transaction volumes picked up as demand slowly increased throughout 2011. Sales prices declined until the second quarter of 2012, when the market began to show signs of recovery, and as the emirate turned its attention to new projects on Reem Island, Al Raha Beach, and landmark developments on Saadiyat and Abu Dhabi islands. Off-plan sales successfully restarted in 2013 and 2014, with Asteco reporting that prices recovered by 28% compared to their lowest point in mid-2010, with both the residential and office markets achieving stability, and supply quality improving.
The largest real estate developers operating in Abu Dhabi are Aldar, the Tourism Development & Investment Company (TDIC), and Mubadala Investment Company, while the Abu Dhabi Executive Council and the Abu Dhabi Urban Planning Council (UPC) work to formulate and approve urban master plans, long-term strategic development and sustainable building practices.
Aldar Properties
Aldar Properties is a major property development, management and investment company active in the residential, commercial, retail, leisure, hospitality, education and medical segments. Established in 2004 and listed on the Abu Dhabi Securities Exchange in 2005, Aldar’s property portfolio includes major projects and redevelopments on Yas Island, Al Raha Beach, the World Trade Centre Abu Dhabi, Al Falah and Noor Al Ain. Aldar also owns significant quantities of land in strategic locations across the emirate. The firm reported that net operating income from recurring revenue rose by 49% in 2015 to Dh1.5bn ($408.4m), up from Dh1.01bn ($275m) in 2014. Development sales reached Dh3bn ($816.8m) in 2015, with the company reporting that its launch cycle is likely to comprise 1500 units annually in the future, subject to market conditions. Aldar also achieved its gross debt target in 2015, with interest expenses falling from Dh727m ($197.9m) in 2013 to Dh382m ($104m) in 2014 and Dh240m ($65.3m) in 2015. The company took further action to strengthen its balance sheet in August 2016, when it refinanced Dh1.8bn ($490.1m) worth of bank loans set to mature in 2018, with its average debt maturity now extending to four years. The company obtained interest-only loans after reaching agreements with a total of three local and international banks over five-, seven- and 10-year maturities. These highly competitive facilities underscore its strong growth outlook, with Standard & Poor’s Global Ratings upgrading its long-and short-term corporate credit ratings to “BBB/A-2” with a stable outlook in the same month.
Standard & Poor’s attributed the upgrade to an improved operating performance and steady recurring income from a wide rental portfolio. In February 2017 Aldar reported that its net profit rose by 8% to hit Dh2.8bn ($762.3m) in the 2016 financial year, from Dh2.6bn ($707.9m) in same period of 2015. The company attributed this to continued performance above market rates of its diverse asset base, as well as its successful destination development strategy. Aldar saw Dh1.6bn ($435.6m) in reoccurring revenue from net operating income, a 17% increase in developmental sales value to Dh3.5bn ($952.9m) and Dh3bn ($816.8m) in construction contracts awarded throughout 2016.
Yas Island
Initially conceived as an entertainment and residential hub – it hosts a Formula One track, water park and Yas Mall – Yas Island is now witnessing residential development.
The lead developer is Aldar Properties, which has several major projects ongoing. In October 2016 Aldar began selling 260 villas and townhouses under the third phase of the Dh6bn ($1.6bn) Yas Acres, its flagship golf and waterfront development on the island. The project will offer two- and three-bedroom townhouses along with three- and four-room duplexes. The developer is offering a payment plan for buyers through which 30% of the purchase price is payable during construction, with the 70% balance due on handover. Aldar earlier said 90% of Yas Acres homes released to the market have been sold, with the first two phases sold out. “We see residential developments as an essential component of the Yas Island mix,” Mohamed Abdullah Al Zaabi, CEO of Miral, the entity responsible for the development and promotion of Yas Island as a leading destination in which to live, work, play and invest, told OBG. “Residential helps the many food and beverage outlets, footfall at Yas Mall, and the theme parks and other leisure attractions. The developments released already have fared extremely well, especially considering the current environment.”
In addition, in December 2016 it was announced that the first SeaWorld marine life park outside the US will be built on the island. SeaWorld and Miral said that the park would open in 2022, alongside a new Warner Brothers theme park set to open in 2018.
In May 2017 Miral announced a new Dh12bn ($3.3bn) master plan to develop the southern end of Yas Island. The plan focuses on three distinct areas: Yas Bay, a public waterfront and entertainment district; the Media Zone, which will include the new campus of twofour54, a tax-free media zone; and the Residences at Yas Bay.
Reem Island
In June 2015 the UPC approved a revised master plan for Reem Island drawn up by the island’s three master developers, Aldar, Tamouh and Reem Investments. It included homes for up to 210,000 people, 10,000 hotel rooms, 1.4m sq metres of office space and 850,000 sq metres of retail. The document details the social infrastructure that will be built on the island as part of its ongoing development. These include transport links, parks, schools, mosques and hospitals. Private developers are actively involved on Reem Island, with Al Qudrah Real Estate, a subsidiary of Al Qudrah Holding, launching its Al Sadu Towers at Cityscape, an annual real estate event, in 2016.
The concept consists of five towers and 1360 luxury units, as well as shops, and food and beverage outlets. The unique architecture, utilising the crossing of horizontal and vertical lines, is inspired by traditional Emirati weaving patterns.
Tamouh is responsible for Reem Island’s City of Lights mixed-use development, which will fall on 144 acres and house 60 towers and over 12,000 residential units. Tamouh’s Horizon Towers, a major project in City of Lights, received its final round of funding in late 2015.
In addition, Aldar’s planned Shams Marina serviced apartment scheme on Reem Island was one of a number of projects signed off by the UPC in the final quarter of 2016. According to consultants working with Aldar, the project will include two blocks of branded residences and two blocks of hotel apartments. Amenities will include retail, food and beverage outlets and a beach club. In March 2017 a new 2.4-km canal on the island was undergoing final testing. Aldar said that commissioning work on the project was under way ahead of the scheduled opening in April. The canal, which is crossed by 10 bridges, runs through the Shams development. Aldar is close to completing more than 23 km of walkways, 1550 metres of cycle paths and 3650m of promenades on the island.
Tdic
Created in 2006 as the government’s master developer of major tourism, cultural and residential destinations, TDIC is the dedicated tourism asset management and development arm of the Abu Dhabi Tourism and Culture Authority. TDIC has been involved in a number of Abu Dhabi’s most high-profile tourism projects, including the Shangri-La Hotel in Qaryat Al Beri, Anantara’s Desert Islands Resort and Spa, and the Qasr Al Sarab Desert Resort.
Saadiyat Island
TDIC is also the driving force behind dozens of projects on its flagship development, Saadiyat Island. The 27-sq-km island has been planned and created using sustainable and environmentally friendly principles, with developments built around its natural features and projects concentrated in three main areas: the cultural, beach and marina districts. The cultural district features designs by five Pritzker Architecture Prize winners.
The island is home to a number of residential communities, including The Residences at the St Regis Saadiyat Island Resort, the Saadiyat Beach Residences and Saadiyat Beach Villa. TDIC forecasts that the island will have a population of some 145,000 residents when development finishes. The island also offers educational options from nursery school to universities, including the Redwood Nursery, Cranleigh Abu Dhabi and the emirate’s branch of New York University. TDIC-backed projects that have reached completion on Saadiyat Island include the UAE Pavilion and Hilton Capital Grand, while major upcoming projects include the Louvre Abu Dhabi, Guggenheim Abu Dhabi and Zayed National Museum, The District Mall, and the Jawaher Saadiyat and Mamsha Al Saadiyat mixed-use projects.
Progress
Some of these, including the three museums, have seen their deadlines pushed back – the Louvre, for example, will open in 2017, while contracts for the other two have yet to be awarded. Several projects on the island moved forward in 2016. In July, for example, Al Jaber Group subsidiary, Al Jaber Building, was awarded a Dh370m ($100.7m) contract for the Jawaher Saadiyat villa complex, a gated community of 83 four-bedroom houses and four-to-six-bedroom villas, as well as a community centre, gym and playground. As of early 2017 construction was 20% complete and the development is expected to be opened in August 2018. In August 2016 it was announced that work on Bloom Properties’ Soho Square residential project, a 302-unit apartment complex on Saadiyat Island, would begin shortly, following the award of an enabling works contract to Dutch Foundation and Concrete Rehabilitation Company. The contractor will begin site preparation, including the construction of access routes, security fencing and ramps, under the contract, with main building work expected to begin in 2017. Located adjacent to the New York University Abu Dhabi campus, the project’s offerings range from studio apartments to townhouses and penthouses. Bloom, which is owned by National Holding, has already developed Park View, a mixed-use residential and hospitality project comprising two buildings, one residential and one related to hospitality. The residential component consists of 207 units, ranging from studio to two-bedroom apartments. The development also features 217 serviced hotel apartments. Bloom is also planning to build three mid-range projects on a 2m-sq-metre plot of land it owns close to Abu Dhabi International Airport (AUH). In addition, the developer hopes to build two similar schemes at Al Raha Beach and in Baniyas.
Meanwhile, the first phase of the Saadiyat Lagoons District remains in the tendering phase and includes 820 townhouses set in a gated community on Saadiyat Island. The district is expected to eventually house 29,000 residents across more than 4300 mid-range homes. Mamsha Al Saadiyat, the first residential development within the Saadiyat Cultural District, is scheduled to be delivered in June 2018 and with a total investment of Dh1.2bn ($326.7m). A 1.4-km beachfront mixed-use project, it will feature nine low-rise residential buildings with 461 units, of which 414 are apartments ranging from one- to four-bedrooms, as well as five-bedroom duplex penthouses and 47 townhouses.
Mubadala Real Estate & Infrastructure
Undefined Mubadala Real Estate & Infrastructure (MREI) is a division of Mubadala Investment Company working in the UAE and overseas. Among its projects is the UAE University, Zayed Sports City, Zayed University, Paris-Sorbonne University and facilities management company Khadamat. MREI develops commercial, residential and leisure projects that are aligned with the long-term vision of Abu Dhabi, in addition to social infrastructure, such as schools and hospitals.
MREI is also developing ADGM and is the master developer for Al Maryah Island (see analysis). Completed projects on the island include the Four Seasons Hotel Abu Dhabi, Rosewood Abu Dhabi and The Galleria luxury shopping mall. Meanwhile, a new 1.9m-sq-metre master plan unveiled at Cityscape Abu Dhabi in April 2017 laid the groundwork for the company’s new Arzanah project, which aims to redevelop Zayed Sports City. The community district will include residential housing, retail, hotels, education, sports, and health care facilities, with investment plots available for third-party developers. Additionally, a new agreement with Eshraq Properties, signed in early 2017, explores the possibility of joint development plots owned by Mubadala on Al Maryah Island and Eshraq on Reem Island.
Social Component
The Abu Dhabi Executive Council plays an important role in approving new projects, many of which focus on the provision of social housing for Emiratis, as well as granting approvals to subsidised mortgage applications for Emirati citizens.
Under the government’s current framework, Abu Dhabi Housing Authority (ADHA) develops Emirati housing projects, programmes and lending products, with citizens benefitting from housing grants, and low- or zero-interest loans for home purchase, construction and renovation. Under ADHA’s home-purchase loans programme, for example, it is possible to obtain facilities of between Dh500,000 ($136,000) and Dh2m ($545,000) for ready-built homes. Loans are repaid in monthly or flexible instalments as determined by the authority, with a maximum tenor of 25 years, and a two-year grace repayment period.
In October 2016 the council announced that it had approved home loans to 1250 Abu Dhabi citizens valued at Dh2.31bn ($628.9m). Major Emirati housing projects include the Al Dhafra Region’s Al Silaa, with 448 luxury villas, Ghuraibah near the Hafeet Mountains in Al Ain, with 1022 villas, the 12.5m-sq-metre Al Falah, on the east side of AUH, with more than 4800 villas, Watani in Khalifa City A, near Abu Dhabi Golf Club, and Yas Island, which hosts a major Emirati housing project spanning 78 ha, and including 500 villas.
Upc
Another major player in the real estate sector, the UPC, is the Abu Dhabi government’s urban planning agency. The council’s remit includes establishing transport and traffic systems, promoting equitable and simultaneous development of the Al Ain and Al Dhafra regions to keep pace with the capital, and encouraging decentralised distribution of economic activities and benefits. Under its Plan Abu Dhabi 2030: Urban Structure Framework Plan, and the recently updated Plan Capital 2030, the UPC has outlined a 25-year master plan for the capital region. The council projects that the city could be home to more than 5m people by 2030, with population growth incorporated into an overarching objective of sustainable, environmentally friendly urban development. Priorities include cutting-edge design, protection of cultural assets, responding to local cultural preferences, and engendering interaction between citizens and their built environment, by creating pedestrian-friendly, mixed-use centres and encouraging public transit ridership.
Zayed City
Zayed City took on renewed importance at Cityscape Abu Dhabi, when in April 2017 UPC officials announced that the zone was being developed to be the new residential and commercial hub of the capital under a recently unveiled development model.
Housed between AUH and Mohammad bin Zayed City, the zone will span 45 sq km and house 370,000 residents once complete. The Dh3.3bn ($898.5m) residential and commercial district within the development is expected to house its first tenants in 2021. In October 2016 the Abu Dhabi Executive Council approved a contract award for a Dh1bn ($272.3m) infrastructure package to include roads and power supply, and as of early 2017 around 20% of essential infrastructure was completed – including roads, lighting and sewage.
Role Adjustment
The UPC is set to play a larger role in the emirate’s real estate development. In November 2016 Sheikh Khalifa bin Zayed Al Nahyan, president of the UAE and ruler of Abu Dhabi, issued a law amending the functions of the council. The UPC is now in charge of preparing and approving the emirate’s general strategic urban plan, policies and urban development system. Municipalities in Abu Dhabi will work with the UPC, preparing the design of documents and maps specifying engineering works needed to carry out UPC plans. The UPC will also be responsible for granting permission and building permits for projects deemed to have strategic importance, in addition to checking building permits issued by municipalities. The council can suspend the approval process or permits issued by municipalities if they are not in line with already existing regulations.
Project Pipeline
In April 2016 the UPC announced that it had approved 27 large-scale real estate projects and master plans in the fourth quarter of 2015, bringing the total number of projects it approved in 2015 to 101. The approved projects have a total gross floor area of 13.58m sq metres, a 26% increase on 2014. Of the 27 approved in the final quarter, 21 are located in the Abu Dhabi Metropolitan Area, and the rest in Al Ain and Al Dhafra. Development of Al Reem Island took centre stage in the UPC’s 2016 project approvals, with the council granting approval to the 185,000-sq-metre Reem Mall, Najmat Towers – a two-tower residential complex, which will add 574 units to the market – and the Meera Shams 408-unit residential development.
Long-term development approvals included a new project in Zayed City, the 27,550-sq-metre Al Jazeera Institute of Science and Technology. The first phase of Saadiyat Island’s lagoons, comprising 820 residential plots in the mid- to high-end range, was given the green light, and the UPC also approved a master plan for Al Fahid Island, located between Yas and Saadiyat islands, which is set to be developed in five phases. Phase one was approved in the fourth quarter of 2015, and includes construction of new residential units along the waterfront. Outside of the capital region, the UPC’s project approvals included the fourth phase of Al Jimi Mall in Al Ain, comprising 22,768 sq metres of gross leasable area (GLA), as well as the 20,200-sq-metre Al Ain Stadium and an adjoining four-star hotel.
The UPC also approved the Al Khrair Emirati Housing Initiative on the eastern side of Al Ain City, which will see construction of 3m sq metres of residential gross floor area, providing 3017 plots for Emirati families. In October 2016 the Abu Dhabi Executive Council also approved an Emirati housing project in Al Hayer, Al Ain City, which includes 300 residential units and 30 land plots valued at Dh687m ($187m). The overall site area spans 153 ha, and includes road works, infrastructure and related services, with villas to be constructed in accordance with the Estidama Pearl Rating System.
In October 2016 the UPC approved 40 more development projects that will cover 7m sq metres. Among these were expansion works on the Mayan residential project, near Yas Links Golf Course, with gross floor area of 69,500 sq metres.
The scheme will provide more than 500 residential units, ranging from studio flats to one-, two- and three-bedroom apartments. Covering a gross floor area of nearly 59,600 sq metres, the Al Naseem project for residential development is located near Sarooj and will feature 93 villas. In Madinat Zayed the council approved a development project to construct Al LuLu shopping mall, which will have a total floor area of almost 22,000 sq metres and will house 72 shops, 13 restaurants, a coffee shop and other entertainment facilities.
Oil Market Impact
Although Abu Dhabi’s real estate market has recovered since 2010, it has been affected by an economic slowdown attributable to a period of sustained lower global oil prices since 2014. This prompted a general reduction in investment, as well as in the rate of rents and sales price growth in 2015.
Asteco reported that average residential rental rates rose by 4% in 2015, led by rental growth of 7% in prime apartments, 6% in mid- and lower-end apartments, and 4% in high-end apartments.
Annual rents for a one-bedroom apartment averaged Dh105,000 ($28,600) in 2015, compared to Dh101,000 ($27,500) in 2014, Dh83,000 ($22,600) in 2012 and Dh165,000 ($44,900) in 2008.
Two- and three-bedroom apartments followed similar trends: average rent for a two-bedroom apartment fell from Dh246,000 ($66,980) in 2008 to Dh113,000 ($30,800) in 2012, before recovering to Dh146,000 ($39,800) in 2015. Annual rates for three-bedroom apartments dropped from a high of Dh323,000 ($87,900) in 2008 to Dh148,000 ($40,300) in 2012, and rebounded to Dh194,000 ($52,800) in 2015.
Supply & Sales
In 2015 total residential supply in the emirate stood at 234,000 units, while office supply reached 3.3m sq metres of GLA. Demand remained stable through the year as a result of limited new supply, with internal tenant movements continuing to pressure older properties. Sales focused on completed units rather than off-plan products, while the leasing market favoured prime and high-quality residential projects, with Asteco reporting that 2000 new apartment units, 100 villas and townhouses, and 106,000 sq metres of office space were completed in 2015.
Notable completions included phase one of Reem Island’s Hydra Avenue and the Sea Side Tower residential project, with 850 and 160 units, respectively; Bawabat Al Sharq Phase 2 in Baniyas, with 567 units; and Creek Tower in Saraya on the Corniche, with 312 serviced apartments. ADDAX Tower on Reem Island was the largest commercial completion in 2015.
International real estate services company JLL reported that average rents in the emirate fell by around 5% in 2016. The largest drop was in villa and apartment sale prices, at 11% year-on-year (y-o-y), as of the fourth quarter of 2016. Villa rentals fell by 4% y-o-y, and apartment rentals by 7%. Abu Dhabi saw 3100 residential units completed in 2016, bringing the total stock to 248,000 units.
In the fourth quarter of 2016, 700 units entered the market, mainly from the Marina Bay One and Marina Bay Two towers on Reem Island. JLL expects completions in 2017 along the Corniche, Al Raha Beach, Reem and Saadiyat Islands to add around 5000 units. Major deliveries in 2016 included Bloom Central Apartments on Airport Road, Reem Island’s Nalaya Villas, and residential buildings in Danet and Rawdhat. ”Reduced supply completions in 2015 and 2016, compared to previous years, have mitigated the impact of reduced demand following the decline in oil prices,” Mai Hassan, senior analyst at JLL, told OBG.
Knight Frank reported that residential prices in Abu Dhabi remained stable between January and July 2016, on the back of a shortage of quality supply. According to the company, the general REIDIN sale price index indicated a 1% y-o-y increase in the first half of 2016, although demand has since declined as a result of corporate restructuring and government spending cuts. Broadly speaking, valuations remain relatively attractive in Abu Dhabi, with rental yields at 7-7.5% between 2014 and 2016. According to REIDIN, rental yields sat at 7.1% in the fourth quarter of 2016. “In the current environment, we believe that the residential segment will continue to be the most attractive,” MPM Properties’ chief strategy officer, Vaibhav Sharma, told OBG. “We expect the market to remain resilient and to improve as the sentiment in the global economy improves.”
Office Space
In its 2016 “UAE Real Estate Mid-Market Review”, Knight Frank reported that Abu Dhabi’s office market was feeling the effects of restructuring at oil and gas firms and government-related entities, the largest occupier cohort in this segment. According to the firm, asking rents in ADGM maintained earlier levels of Dh2500 ($681) per sq metre during the first half of the year, as landlords elsewhere were also able to maintain asking rents as a result of limited high-quality stock and reduced supply completions. However, JLL reported that completion of Abu Dhabi National Oil Company’s new headquarters on the Corniche, as well as Bloom Central on Airport Road, contributed to the Abu Dhabi office market seeing the completion of 214,000 sq metres of GLA in 2016, bringing the total stock to approximately 3.5m sq metres.
A further 170,000 sq metres of GLA is expected to enter the market in 2017; supply, however, remains under control and grade-A vacancy rates remain low, offsetting the negative impact of reduced demand. “While grade-A supply completions remain limited, mergers and consolidation in oil and gas companies and government entities is expected to push up vacancy rates and place downward pressure on rents, with grade-A rents being upheld,” Hassan told OBG.
Retail
JLL reported that no major completions occurred throughout 2016, with total stock remaining at 2.6m sq metres. Approximately 57,000 sq metres of retail space is scheduled for completion in 2017, mostly in residential communities or towers. Vacancies remained stable in the majority of malls, at 2%. As no major malls are scheduled for completion in Abu Dhabi during 2017, JLL does not expect rental performance to change significantly.
In the medium term, supply is expected to increase significantly with the delivery of Al Maryah Central Mall in 2018, followed by Reem Mall and others over subsequent years. This could significantly shake up the environment for Abu Dhabi retailers, causing some level of market segmentation (see Retail chapter). “As significant retail space enters the market in 2018 onwards, lower quality malls are expected to suffer creating a tier two market,” Hassan told OBG.
On the more traditional front, Cityscape 2016 saw the launch of a Dh750m ($204.2m) traditional Arabic souq on the shores of the Maqta Canal near Sheikh Zayed Mosque, completed as a build-operate-transfer arrangement between the Abu Dhabi Municipality and Al Qudrah Holding. The new market will be spread over 245,000 sq metres, with space for shops and outlets.
Hospitality
Abu Dhabi saw the addition of around 1000 new hotel keys in 2016, according to JLL, bringing total supply to 21,400 keys. The fourth quarter of 2016 saw the completion of 422 rooms in the Millennium Bab Al Qasr. Other significant completions were the Four Seasons, with 190 rooms and 125 serviced apartments, the Marriott Downtown, with 315 rooms, and the Marriott Executive Apartments Downtown, with 64 units. The hospitality market has felt the effects of increased room numbers, and JLL reported that in the year to November 2016 average daily rates fell by 10% to $127, while the occupancy rate dropped to 71%, down from 74% during the same period in 2015. JLL expects a total of 1300 additional hotel rooms to be introduced in 2017, and total supply is forecast to reach 25,300 rooms by the end of 2019.
Investment Adjustment
Although the sector was sluggish in early 2016, medium-term growth should improve as a result of sweeping legal reforms. The long-term outlook is also positive after a spate of new project and master plan approvals announced in mid-2016. Abu Dhabi has actively sought to develop a robust international real estate portfolio through the Abu Dhabi Investment Authority and the Abu Dhabi Investment Council. However, growth in inward foreign direct investment (FDI) to the emirate’s real estate sector has contracted in recent years. Statistics Centre – Abu Dhabi (SCAD) reported that total stock of foreign investment in the emirate rose 43% to Dh34.35bn ($9.4bn) in 2012, before moderating at Dh31.16bn ($8.5bn) in 2013 and Dh27.4bn ($7.5bn) in 2014. Total FDI in the sector has also wavered, rising from Dh20.23bn ($5.51bn) in 2011 to Dh23.6bn ($6.43bn) in 2013, before falling to Dh23.5bn ($6.4bn) in 2014. This could be attributed to the oil price collapse in mid-2014 and subsequent weakening investor sentiment, although it contrasts with broader trends – SCAD reported that total FDI in Abu Dhabi rose by 12.8% to hit Dh81.1bn ($22.1bn) in 2014. Real estate nonetheless accounts for the largest amount of FDI inflows in Abu Dhabi, with its share of total FDI stock standing at 29% in 2014, followed by manufacturing (19.1%) and financial services (15.7%).
Reit
While real estate investment trust (REIT) development remains limited in the GCC, a number of new announcements in 2016 and 2017 signal an uptick in activity in the UAE. In April 2017 the Abu Dhabi Financial Group, an alternative investment company, said it would be setting up a new REIT by year’s end, with a total of 10 properties listed across four emirates and developer Eshraq Properties serving as a founding shareholder. One month prior, Emirates NBD Asset Management floated another REIT on the Nasdaq Dubai, which was oversubscribed, according to the company. The UAE’s first REIT, Emirates REIT, was set up in 2014 and floated on the Nasdaq Dubai by fund manager Equitativa. ADGM has also been involved in laying foundations for the wider application of REITs in the emirate, allowing stakeholders to cater to different clientele through its licensing process and private REIT regime. Equitativa moved their asset management branch to ADGM in 2016, and has since established four funds, including a hospitality property fund, a logistics fund and Sportativa.
In February 2017 it debuted its second REIT, and the UAE’s first residential REIT, which is likely to set new benchmarks in the market. While some activity is picking up, the GCC market for REITs has continued to suffer somewhat from a lack of investment-grade real estate, a limited supply of liquidity and a significant market downturn that is continuing to affect fund performance. “Bloom and other developers are looking into opportunities structured as REITs, but the timing is not particularly favourable. This is one of the next steps for the development of Abu Dhabi real estate,” Sameh Muhtadi, CEO of Bloom Holding, told OBG.
Major Reforms
The government began rolling out expansive legal reforms for the sector in 2015. The first of these is the Offshore Law, comprising the Property Regulations 2015 and Strata Title Regulations 2015. The Offshore Law applies to property within the geographical areas of ADGM, and came into force in June 2015. Abu Dhabi Law No. 3 of 2015, or the Onshore Law, came into force in January 2016, and applies to any property in Abu Dhabi that is not located in ADGM. These laws are expected to significantly bolster Abu Dhabi’s competitiveness, reducing investor risk by establishing a more stable and transparent legal platform for investing, developing and financing real estate, according to a July 2016 analysis published by White & Case.
Key Changes
The Onshore Law introduces new requirements for developers, brokers, surveyors, valuers, auctioneers and co-owners’ association managers, including that they be licensed by the Department of Municipal Affairs and Transport (DMAT) before carrying out any business activities.
Licences must be renewed annually, and all applicants are required to undertake compulsory training if mandated by the department. Anyone carrying out business activities without the necessary licence can face a fine of up to Dh2m ($545,000).
The Onshore Law is not generally applicable within ADGM, according to White & Case, although developers and other key industry participants must also obtain licences from the DMAT prior to conducting business in the island free zone.
The new laws also introduce a legal framework for strata title ownership, mandating that developments in Abu Dhabi can now be subdivided both vertically and horizontally, and sold to investors on a freehold basis, with common areas held communally by a collective or an association. Developments are also now permitted to be subdivided on a volumetric basis into different use components, of which some or all may be subject to strata ownership, with others owned by a single entity with a distinct title. This is expected to encourage mixed-use developments.
Off-Plan Protection
Mandatory escrow account provisions were also included in the new laws, with the aim of protecting off-plan buyers. Developers anywhere in Abu Dhabi are now required to establish an escrow account for any proceeds from off-plan sales, with the capital ring-fenced for exclusive use on the project. “Off-plan sales are very common in Abu Dhabi, as it is not always economical to build and then sell. The new regulation was instilled to protect all parties involved in a sale,” Muhtadi told OBG.
Payments from the escrow account are only permitted under certain circumstances, which are largely linked to construction progress. The escrow agent is also required to retain a minimum amount of escrow proceeds as security for repair of any latent defects. In addition, the Onshore Law introduces new protections from project delays and cancellations, as well as termination rights for predefined circumstances, including unreasonable delays or fundamental defects in construction. These measures should reduce off-plan sales risks, which affected the market in 2008 and 2009. “The requirement to create project escrow accounts to allow for the sale and marketing of off-plan units is a major positive,” Sharma told OBG. “The construction-stage-linked withdrawals mean that developers have to fund, via equity or sales revenue, at least the first 30% of the project’s construction value. This provides assurance developers will deliver projects without diverting funds, and provides compensation to buyers in case of delays.”
Mortgage Amendments
Legal reforms have also given new clarity to the necessary procedures for mortgage lenders in the event of a default. In the case of property within ADGM, lenders are now able to access a broader range of interventions, including the power to sell the property under a private contract rather than at public auction, as well as the authority to enter into possession and receive rents and profits from it.
Lenders may also now appoint a receiver in the event of a default, which should further contribute to the development of a loan-to-own market in ADGM, in which distressed real estate can be acquired by buying and enforcing on mortgage debt attached to it.
While this reduces risk for institutional investors, and could open new channels for institutional investment in the event of another market crash, it will not go far in promoting home lending growth, with some stakeholders arguing that the government should further reform its mortgage framework by increasing lending caps.
In an effort to control housing inflation and speculation-driven growth, the UAE Central Bank introduced a mortgage cap for buyers in 2013. Any expatriate buying property for under Dh5m ($1.36m) must produce a minimum deposit of 25%, which rises to 35% for any properties priced above that amount and 40% for second properties. Regulations for Emiratis are less strict, with loan-to-value ratios capped at 80% for homes under Dh5m ($1.36m) and 70% for second properties or homes priced higher than Dh5m ($1.36m), yet the changes place new burdens on potential buyers.
JLL reported that those earning between Dh10,000 ($2720) and Dh30,000 ($8170) per month will find it difficult to pull together the Dh170,000 ($46,300) deposit required for a mid-range two-bedroom flat, which costs an average of Dh670,000 ($182,000). This has led many to turn to the off-plan market, where more attractive financing options are on offer.
Market Reaction
Despite these concerns, the new laws were welcomed by many stakeholders as a major step forward in attracting institutional investment. At time of press, there were indications that the laws supported a late-year recovery that may well extend into 2017. In November 2016 UAE real estate portal Bayut reported that the market’s downward trajectory appeared to be nearing its end, with average annual apartment rentals in Abu Dhabi rising by 1% to hit Dh130,000 ($35,400) in October, while overall residential yields averaged 7%.
Studio apartments recorded a 9% increase in average rents compared to September, reaching Dh58,000 ($15,800) annually, and earning an average yield of 8%.One- and two-bedroom rental rates rose by 2% and 1%, respectively – one-bedroom apartments averaged Dh92,000 ($25,000) in October, and two-bedroom apartments Dh130,000 ($35,400), while rental yields averaged 7.2% and 7%, respectively. Rental rates for three-bedroom properties rose by 2% in October to hit Dh174,000 ($47,400), while yields stood at 6.4%, according to Bayut. Annual rental rates for four-bedroom properties rose by 3% over September to hit Dh254,000 ($69,200), and by 5% during the first nine months of the year. Yields in this category were the lowest in the segment, however, at 6%.
Outlook
Looking ahead, Bayut said a large number of recent project launches and new mortgage products targeting first-time and genuine end-buyers will help support and encourage growth.
“It is safe to say that the real estate market is heading towards maturity … where genuine demand from stakeholders regulates supply,” Bayut reported. Cluttons was less positive, reporting in December 2016 that the emirate’s residential market saw capital values fall by 2.4% in the third quarter of the year, outpacing a 1% average rental decline in the same period.
Rents in residential investment areas were down by 9.4% over the first nine months of the year, according to Cluttons, while prime and secondary office rents dipped by 5% and 8.3%, respectively. The DMAT announced in December 2016 that it would reinstate a 5% rental increase cap, which had been suspended in 2013, although falling rental rates mean the cap is not expected to make a serious near-term impact.
Indeed, Cluttons reported rates in some grade-A buildings dropped by as much as 20% in the year to August 2016, and forecast that villa values would fall by 10% in 2016 and a further 7% in 2017, while apartment values would decline by 4% and 2-3%, respectively, over the same periods. Nonetheless, a recent series of government master plan and project approvals, and steady demand will all help to stabilise the market in 2017, while ongoing reforms are expected to bolster FDI inflows and encourage home lending.
Read More from OBG
