Abu Dhabi: Striking a balance

Economic expansion and upcoming real estate regulations look set to help Abu Dhabi’s property market, where lower investor demand and an increase in residential and office supply have combined to encourage a drop in rental rates.

Prior to the global economic crisis, Abu Dhabi’s landlords enjoyed some of the highest yields in the world, as a perennial undersupply of housing kept prices inflated. Today, it is increasingly a tenant’s market, with property owners obliged to make improvements to older buildings and become more flexible regarding rent levels.

Property investors still achieve a healthy yield compared to mature markets, particularly on quality buildings, but the heady days of 2007 and 2008 where spectacular returns were the norm are over. Abu Dhabi residential rents fell by an average of 14% last year, but certain locations experienced drops as high as 35%, according to real estate services firm Jones Lang Lasalle.

One of the reasons for this change in fortune is the supply of completed housing stock outside Abu Dhabi Island in places such as Al Bandar and Al Raha, as well as many individual buildings.

In the city, Al Reem Island, which has been dubbed a landmark project for the capital, is expected to begin releasing apartments in long-delayed developments such as Marina Square and Sun and Sky Towers in the coming months. With this slew of new housing coming on-line, prospective homebuyers are sitting tight in the hope that prices drop further or until they can see the finished product.

It is a similar story for the office segment where a raft of additional supply is expected over the next 24 months. Increased inventory has meant office lease rates dropped approximately 13% in the last quarter of 2010, according to research by commercial property advisor CB Richard Ellis.

With more than 1.2m sq metres of office space due to be released in the next two years – a 50% increase on the current 2.2m sq metres –the market looks set to be especially competitive. Government regulations to move small businesses working out of villas in the capital into office towers should help to fill this space, however. Until now commercial businesses were allowed to operate in villas but, according to the Municipality of Abu Dhabi, complaints about parking and traffic in residential areas have resulted in a policy rethink.

The municipality and the Department of Economic Development have not officially announced the changes yet but some businesses are beginning to hear about the planned regulations while applying for commercial licence renewals.

Abu Dhabi’s real estate regulatory environment has been a hot topic in recent years, with industry experts calling for improvements to boost investor confidence. Although strata and escrow laws – both seen as imperative to the sector’s future health – are still under consideration by policymakers, other regulatory changes have come in to force.

In the fourth quarter of 2010, the Abu Dhabi Executive Council issued Resolution No. 64 in a bid to increase transparency by regulating property registration rights across the emirate. Put simply, all real estate transactions related to property ownership, land development lease and mortgage contracts must be registered.

In another step welcomed by the industry, the Department of Municipal Affairs has moved to introduce regulations relating to construction standards, which are expected to be implemented in 2011.

While new rules are looked upon favourably by the sector, creating the demand that is necessary to fill the emirate’s growing supply of residential and office space is viewed as top priority. By that measure, the government-led counter cyclical spending regime bodes well for the sector.

According to a study by the Abu Dhabi Chamber of Commerce & Industry, the capital can expect a GDP growth rate of nearly 8% (3.8% in real terms) in 2011. Developers will hope that this growth will, in turn, attract house-hunting foreign workers to relocate to the emirate’s shores.

As well as GDP growth, the study also predicts that the emirate will benefit from a boost in investment of nearly 15%, around half of which will come from the private sector. This should also help to create demand in its office market as the additional investment fuels further expansion of local businesses.

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