Abu Dhabi: A measured approach

The real estate market in Abu Dhabi is continuing to undergo a period of correction, with prices flat, slower demand and more supply expected to come to market in 2012. But while the market is expected to remain subdued in the near future, new real estate laws anticipated in 2012 could improve the situation in the longer term.

In this environment, it is scarcely surprising that Aldar Properties, an Abu Dhabi-based developer that has been involved in major projects in the emirate, has turned to the government for an injection of funds.

In late December the government of Abu Dhabi stepped in to support Aldar, agreeing to purchase certain assets and waive some loans. Under the terms of the deal – which is worth about Dh16.8 ($4.6bn) – the state will purchase these assets from Aldar, including Central Market, a city centre redevelopment, as well as homes that are part of the company’s Al Raha Beach development.

The government will also provide financing to complete the Central Market and write off debt related to infrastructure development on Yas Island, another major Aldar project that is home to the emirate’s Yas Marina Formula 1 Circuit and the Ferrari World Abu Dhabi theme park.

According to Ali Eid Al Mheiri, the chairman of Aldar, the deal is part of a larger effort to restructure the company. “The transactions we are announcing ... are designed to create the solid financial foundation needed to drive returns to shareholders,” he said. “We have realigned our organisational structure and reduced headcount.” Indeed, in November the developer announced that it had shed about 25% of its staff. At the time, the company said it would focus more on property and asset management.

This was the second time the government stepped in to help the developer in 2011. In January of last year, the government agreed to purchase other assets from Aldar, including Ferrari World Abu Dhabi. In total, the earlier deal, which included the issuance of a Dh2.8bn ($762.16m) convertible bond to Mubadala Development Company, a government-owned investment company, was valued at about Dh19.2bn ($5.2bn). In early December, Mubadala converted part of these bond holdings to stock, bringing its total equity stake to 49%, up from 27%.

Like many other developers in the UAE, Aldar has faced challenges in paying off its debt, as property prices have continued to fall from their historic highs in 2008, declining by more than 45% according to some estimates. In December 2011, Asteco, a Gulf property management company, reported that annual rent for a two-bedroom apartment in the Corniche stood at Dh152,500 ($41,511) at the end of the year, compared to Dh160,000 ($43,522) at the end of the first quarter, a 5% decline.

Rents had largely stabilised by the fourth quarter, in part due to a delay in home handovers. Some 10,280 homes came onto the market in 2011, fewer than originally anticipated. However, Elaine Jones, the CEO of Asteco, cautioned that new supply in 2012 could further depress prices. “The delay in handover this year will only exacerbate the volume of new supply delivered in 2012, and consequently, rents will again come under further downward pressure,” she said in an interview with the local media in December.

The property management company has projected that almost 25,000 homes will be completed in 2012, with about 12,000 to come during the first half of the year. This could mean a decline in rental rates by another 10-20%. Local developers are already offering discounts to potential customers in the residential segment, Paul Middleton, the executive director for sales and marketing at the Abu Dhabi-based Sorouh Real Estate, told Gulf News in December.

Incentives offered at the company’s Shams Abu Dhabi development on Al Reem Island include 10% cash back and six weeks of free rent. “There’s more competition in the marketplace and there’s more modern stock coming in. As a developer and owner of some of the new stock, we are doing our best to listen to the market,” he said.

While prices may continue to decline in the immediate future, one factor that could boost demand for property in the emirate in 2012 would be the issuance of new real estate laws, which have been expected for some time. According to a report by Mohammad Kamal and Richard Davies, partners at the Abu Dhabi office of law firm Berwin Leighton Paisner, “The real estate community is expecting the most significant piece of real estate legislation to be issued since it introduced its first real estate laws in 2005”.

It is anticipated that the new laws will include measures that would support the development market, particularly in the investment zones, such as Saadiyat Island, Reem Island and Al Raha Beach, Kamal and Davies wrote. They will also likely govern strata tenure, as well as oblige developers to set up escrow accounts, the latter of which would safeguard investors’ money, especially in off-plan sales. These measures would bring Abu Dhabi’s real estate laws in line with those found in the other emirates, making the local market more attractive to investors.

While it appears that several challenging months may lay ahead for Abu Dhabi’s developers, such legal changes – as well as the financial backing of the government – could help them weather the worst of these challenging times.