The upturn is being sustained by a profusion of upcoming projects

The residential segment was the first in Abu Dhabi’s real estate market to experience recovery from the sustained post-2008 downturn. Prices in the segment have been rising since the end of 2012, when, according to Jones Lang LaSalle (JLL) data, asking prices for residential units in investment zones (areas where expatriates are allowed to buy apartments) in the emirate bottomed out at Dh10,200 ($2776) per sq metre, down from Dh17,500 ($4764) per sq metre in late 2009. By the fourth quarter of 2014 they had recovered to around Dh16,000 ($4355).

Furthermore, the market has shown no sign of slowing in recent months. According to JLL, apartment rentals were up 11% year-on-year in the fourth quarter of 2014, while sales were up 18%. For villas, the figures stood at 12% and 25%, respectively.

Growth Drivers

Several factors have underpinned price growth in the segment. “Demand is high as a result of factors such as growing investment and the fact that the emirate is viewed as a safe haven in the region,” said Mai Hassan, a financial analyst at JLL. Additionally, in November 2013 the government removed a cap that had previously limited annual rent increases to a maximum of 5%. “Rents started to increase in 2013, at first mainly in prime developments in investment areas. However, with the lifting of the rent cap this spread to secondary areas too,” Hassan told OBG, adding that she believed they would carry on rising.

Some industry figures have said the change has had a particularly strong impact on tenants at the lower end of the property market, with local media reporting in November 2014 that rents for “lower-end secondary stock occupied by the same families for at least five years” had roughly doubled over the course of the year since the changes were implemented. However, in other segments the impact of the changes has been limited.

Demand has also been boosted by new regulations implemented in September 2013 mandating that Abu Dhabi government employees live in the emirate rather than commute from Dubai, as was common. Furthermore, the residential segment, like the office market, is suffering from a lack of supply, especially outside the top of the market. “There is still a supply gap at the affordable end of the market,” Mark Morris Jones, a director at CBRE Abu Dhabi, told OBG. “Private investors in general do not appear to be strongly interested in the segment, in part because land is expensive.”

In its 2014 report, Cluttons noted that large numbers of new workers were entering the emirate as a result of government efforts to diversify the economy at a time when the pipeline for new projects is relatively light. In addition, that major companies, such as Etihad Airways, were found to be purchasing stock before its public release, exacerbating the trend of shortages. SinoGulf’s Capital House is a prime example of this, as all 332 of the apartments in the building were leased to Etihad Airways prior to the marketing launch in October 2014. Morris Jones told OBG that few major residential projects are being launched at the moment, and that many residential projects on Al Reem Island – one of the city’s major investment zones – remain on hold.

Expanded Supply

The market supply includes Aldar Properties’ Al Bandar development at Al Raha Beach. Set among landscaped lawns, tennis courts, swimming pools and a marina, Al Bandar is an island development of 511 glass-fronted apartments and duplexes, loft residences and larger family apartments. Al Raha Beach is also the setting for Aldar’s Al Muneera development, with 1445 villas and apartments, as well as a commercial and retail area. Al Zeina, on the eastern edge of Al Raha Beach, features 973 apartments, 119 townhouses, more than 150 podium and sky villas, and beachfront villas.

One of Aldar’s most ambitious projects, located in the Al Reem Island investment zone, Shams Abu Dhabi is a new community for 45,000 residents that offers high-quality retail and commercial space. Out of 98 sub-developments planned for the district, eight have been completed and construction has commenced, or will commence, on another eight in 2014/15. The Sun and Sky Towers form part of Shams Abu Dhabi and are the two tallest buildings in the district. The 74-storey Sky Tower consists of a mix of residential and commercial units, while the 65-storey Sun Tower is entirely residential. Both feature one-, two-, three- and four-bedroom apartments and penthouses. Sky Tower has 474 residential units and 75,300 sq metres of commercial office space, while Sun Tower will accommodate 680 residential units. There are 10 penthouses between the two towers, bringing the total number of units to 1154.

Another popular development is the mixed-use Gate Towers, with 3533 residential units in four towers as well as retail and leisure facilities, and The Arc, a nearly 1000-unit residence. The development has proven to be very lucrative, and by August 2014 the residential project had helped to drive Aldar’s second-quarter revenue to Dh2.19bn ($596.12m), a 74% year-on-year increase. By October, less than one year after being launched, The Gate Towers and The Arc were fully leased. The real estate developer also signed an agreement with Cleveland Clinic Abu Dhabi to lease 607 units to hospital employees.

Off-Plan Sales

In terms of sales, Aldar’s announcement in April 2014 that it would resume off-plan sales at some of its projects is likely to support further sales price growth. “Aldar’s resumption of off-plan sales at developments such as Al Hadeel has been successful, which suggests the move will be extended to other developments,” said Hassan.

However, the impact of this will be limited by some restrictions aimed at curbing speculation on properties before they are completed, as well as discouraging flipping, which sees multiple resales of the same property before it is completed – a practice that was blamed in part for the regional property market bubble and subsequent burst in 2008. To that end, the firm announced in April 2014 that it would prohibit buyers from selling properties purchased on an off-plan basis until they have paid at least 50% of the purchase price.

Financing Restrictions

Furthermore, in December 2013 the central bank made regulatory changes to bolster market stability, including the imposition of a 50% loan-to-value cap on mortgages for off-plan purchases. The changes also affected mortgages for completed properties, setting the maximum mortgage for units below Dh5m ($1.36m) in value at 75% of the purchase price for expatriates and 80% for nationals. Mortgage ceilings were also implemented for more expensive units, at 65% for expatriates and 70% for nationals. The introduction of the new rules followed an increase in property registration fees from 2% to 4% to disincentivise flipping.