Growing demand and tight supply seem likely to continue over the next few years

The real estate sector in Abu Dhabi is currently in a period of growth and rising prices, after a downturn following the global financial crisis that began in 2008. According to a real estate market overview for the emirate by Jones Lang LaSalle (JLL), the third quarter of 2014 saw all segments simultaneously in recovery for the first time since 2008. The firm reported that the office, hotel and retail segments were all in the early stages of a period of accelerating growth in late 2014, while rents in the residential segment were transitioning from a period of accelerating growth to slowing growth, though not yet in decline.

Major Players

Aldar Properties is one of the most prominent real estate developers active in the emirate, with a portfolio of Dh14.1bn ($3.8bn) of investment properties and Dh2.7bn ($735m) of investment work in progress as of September 2014. The Abu Dhabi government is a major shareholder in the firm, via a 29.75% stake owned by government investment firm Mubadala Development Company; it is also listed on Abu Dhabi Securities Exchange. Aldar is the master developer for several major projects, including the leisure, retail and tourism development Yas Island. The company was created through the 2013 merger of government-backed developers Aldar and Sorouh. Until the merger, the latter was the master developer of Al Reem Island. In December 2014 Aldar saw its rating upgraded by Standard & Poor’s from “BB+” to “BBB-” with a stable outlook, reflecting its improved financial profile.

Another major player is the fully government-owned Tourism Development and Investment Company (TDIC), which describes itself as the “master developer of major tourism, cultural and residential destinations in Abu Dhabi”. The firm’s flagship project is the development of the 27-sq-km Saadiyat Island, where three major museums – Louvre Abu Dhabi, Guggenheim Abu Dhabi and Zayed National Museum – are being built, in addition to other developments, such as several hotels. “Saadiyat can be thought of as an extension of Abu Dhabi with a special emphasis on culture,” Ali Al Hammadi, the CEO of TDIC, told OBG. “The development of its three museums bolsters the growth of the leisure and hospitality industries.” Outside of Saadiyat, the company is also undertaking several projects on Abu Dhabi Island and in the Al Gharbia region.

Mai Hassan, a JLL financial analyst, told OBG the government is set to maintain its high level of involvement in real estate investment development for the foreseeable future. “The government is likely to want to remain active as a major player, as it appears to want to manage supply and demand, and keep the market stable.”

Big Names

Founded in 2004 and based in Abu Dhabi, Tamouh Investments is a real estate development company focused on developing communities and sustainable living. In April 2014 the real estate developer scaled up construction activity on Al Reem Island projects. The island covers an area of 6.5m sq metres – 60% of which has been allocated to Tamouh for development in accordance with the “city within a city” master plan.

The firm is planning for a community of 100,000 residents, as well as daily commuters and professionals. Tamouh’s offerings on the island include: Marina Square, home to more than 8500 residents with 3440 units, all of which are smart home enabled; Paragon Bay, a community mall with more than 100 specialty retail and dining options; City of Lights, a mixed-use development project comprising seven residential towers and two buildings for offices and commercial use. City of Lights is set to be completed in stages between 2014 and 2016.

Tamouh resumed work in late 2014 on Meena Plaza, a 246,500-sq-metre project that consists of three apartment towers and one office building, and includes recreational areas, a cinema and health care facilities. Joe Ong, managing director of Tamouh, told OBG, “Projects like the development of Al Reem Island and Meena Plaza illustrate the complexities of accommodating a diverse resident profile in Abu Dhabi. The island is home to families that enjoy the quality of life and calmer surroundings, while also attracting more and more young people.” Tamouh is also building some 3000 villas for nationals at Jebel Hafeet in Al Ain. The development will also include associated infrastructure, such as parks, eight mosques, a family centre and a health clinic. The contractor Trojan is responsible for construction, with the project scheduled to be completed in mid-2016. Ong told OBG, “It is important to remember that there is also growth to tap into across the emirate. Our project in Al Ain illustrates that there is an appetite for comprehensive development with an emphasis on complete lifestyle offerings, including amenities such as parks, activities and family resources.”

Founded in 2010 and headquartered in Abu Dhabi, Aabar Properties is a real estate development, management and investment company focused on developing a range of properties. The firm’s developments are spread across Al Raha Beach, Al Reem Island, Rawdhat and Saraya. Aabar Properties’ offerings include: The Wave, a 23-story residential tower located in Najmat along the marina waterfront; Al Durrah Tower, a 40-storey residence on Al Reem Island; Al Raha Beach, which will comprise four tower blocks stretching over 87 km of waterfront; and Hard Rock Hotel, a five-star hotel that will house the international restaurant of the same name, as well as offer 378 luxury apartments.

Aabar Properties recently announced the launch of its Al Raha Beach project. Construction is already under way and is expected to be completed in 2017, with Ghantoot Murray & Roberts – a joint venture between Ghantoot General Contracting and South Africa-based construction firm Murray & Roberts – winning the contract for construction in March 2014. A month earlier, Al Futtaim was awarded a $180m contract for the Hard Rock Hotel, and Dubai-based Arabtec signed a memorandum of understanding with the real estate firm for its subsidiary, Arabtec Construction, to build 37 towers in Abu Dhabi and Dubai worth Dh22.44bn ($6.11bn).

Urban Planning

In addition to its involvement via state-backed developers, the government is seeking to directly shape the urban development of Abu Dhabi through a range of planning strategies and regulations. Chief among these is the Abu Dhabi Urban Planning Council (UPC) plan for the development of the emirate’s capital, which was issued in 2007 as Plan Abu Dhabi 2030: Urban Structure Framework Plan. The UPC began updating the scheme – since renamed Plan Capital 2030: Urban Structure Framework Plan. “The plan serves as a clear set of guiding principles for the real estate sector. To that end, there is a relatively clear direction in terms of where the sector is headed,” Jassem Al Ali, the CEO of First Gulf Properties, told OBG.

Speaking in October 2014, Falah Al Ahbabi, director general of the UPC, told OBG the agency was in the final stages of preparing the revised version of the plan, and that among the main changes from the 2007 plan were limits on the expansion of Abu Dhabi City’s metropolitan area. “We have focused on the growth boundaries of the city and on shrinking its geographical growth – in particular in the north and east, to ensure the efficient use of resources and infrastructure,” he said.

One of the main thrusts of the UPC is the Complete Sustainable Communities (CSC) initiative, which aims to develop sustainably built homes, comprehensive internal infrastructure and facilities such as streets, schools, parks and mosques, with the aim of ensuring that the needs of residents are largely met within such communities. “CSC applies to all development master plans in the emirate,” Al Ahbabi said. “Our aim is to help achieve better, healthier and happier communities by providing them with better spaces in which to live. Today, many people travel from outside of the city into Abu Dhabi; we want to encourage people to live and work within their communities.”

The UPC has designed new communities, such as North Wathba, in which residents can, as the UPC puts it, “lead a high-quality lifestyle close to home”. A key aim is enabling people to live, work and play all within a walkable distance – aided by infrastructure such as shaded footpaths – to improve their health and quality of life. In line with the initiative, in September 2014 the UPC announced new Abu Dhabi Community Facility Planning Standards, mandating the provision of a minimum level of community facilities – such as schools, medical facilities, community, sports and leisure centres, and police stations – in new communities in the emirate, as well as existing ones that are being redeveloped, though these depend on the size of the community. All development proposals for communities of over 2000 residents must comply with the standards.

Another key feature of Plan Capital 2030 is the creation of a second main hub – Zayed City. The planned development, originally known in the Urban Structure Framework Plan as Capital District but subsequently rebranded, is located on the mainland east of the existing centre, between the city’s airport and Mohammed bin Zayed City. The planned district will span 45 sq km and accommodate more than 290,000 residents. Its detailed timescale is currently being established.

Sustainability

In 2008 the government introduced an initiative called Estidama, meaning “sustainability” in Arabic. One of its key components is a sustainability ratings system for new buildings, villas and communities, which was launched in 2010 and is based on a scale of one to five “pearls”. The government has mandated that all new privately backed projects in the above categories achieve at least one pearl, and that all government projects achieve at least two. At present there are no plans to raise the mandatory ratings beyond the current levels, said Al Ahbabi of the UPC, which created and manages the Estidama programme.

Al Ahbabi said the initiative had been well received in the construction and real estate sectors. “When Estidama was first introduced, there was some resistance from industry, which is normal,” he said. “However, by 2012 the programme had been fully accepted by the market.” The construction industry is already accustomed to following such standards, having worked with other sustainability initiatives such as LEED. Al Ahbabi said the application of the initiative to the construction of villas was also accepted: “We demonstrated at the April 2014 Cityscape exhibition that applying Estidama to villas is feasible; it adds between 3% and 5% to the initial costs, while quickly bringing savings,” he told OBG (see Environment and Real Estate chapters).

Cost Impact

Industry figures suggest the initiative should not have too big an impact on development costs, that meeting one-pearl ratings does not require major changes from existing practices, and that developers should not find it constraining unless they are seeking the top ratings. However, some developers were seeking to do just this. “Four- and five-pearl ratings are not easy to achieve; yet in the public sector in particular, we are seeing more and more projects attempting to achieve higher ratings than the mandatory minimums as this has become an issue of prestige,” Al Ahbabi told OBG. The UPC works with developers to help them achieve such ratings while also keeping down costs. “We work together throughout the design and construction process; it is not just a one-off exercise,” he said.

David Cockerton, fund manager at SinoGulf Real Estate Investments, told OBG that the additional costs of sustainability represent a good investment for real estate firms in the emirate. The company developed two buildings – International Tower and Capital House – in the Capital Centre development, adjacent to the Abu Dhabi National Exhibition Centre, which were among the last to be built before Estidama’s requirements were implemented, but which were built in accordance with the internationally recognised sustainability certification scheme LEED. International Tower is the first commercial office building in Abu Dhabi to be accredited with LEED gold status. “LEED gold accreditation was worth pursuing, as it both attracts tenants and helps reduce some operating costs,” said Cockerton.

Support Services

As the sector grows, there is clear potential for support services. One such firm, Khidmah, a full-service integrated management company owned by Aldar Properties, is looking to take advantage of expansion opportunities by providing energy-efficiency solutions to developers during the planning stage rather than after construction is completed. In April 2014 Musanada awarded Khidmah a Dh45m ($12.25m) contract for management of 225 mosques in the emirate’s Al Gharbia region for a period of three years, as well as a separate Dh34m ($9.25m) contract for 27 government buildings in Al Ain.

Khidmah’s portfolio includes 10 other Aldar developments totalling 12,000 units, and a villa community for Hydra Properties with 450 units. The firm’s interest in green initiatives is exemplified by the green mosque project under way in the UAE. The Sultan Bulfara Al Kobaysi Mosque in Madinat Zayed is one of the 225 in Khidmah’s contract and has been designated an ecomosque. The building will be retrofitted to ensure maximum energy efficiency, making air conditioning and subsequent energy demand more sustainable. Following a technical feasibility study, plans are under way to better manage power and water consumption, as well as options to remotely monitor and control energy use.

Office Market

According to JLL, total office space supply in Abu Dhabi City stood at 3.1m sq metres at the end of 2014, with the 11,000 sq metres from Rotana’s Capital Centre Arjaan being the only addition in the final quarter. JLL expected another 360,000 sq metres to become available in 2015, followed by an additional 80,000 in 2016. The segment’s performance has seen marked improvements, with the vacancy rate down year-on-year from 39% to 25% at end-2014, while average rents for grade-A office space were up from Dh1540 ($419) per sq metre to Dh1730 ($471).

A shortage of supply in the coming years appears set to maintain price growth, particularly at the upper end of the market. “In the last two to three years, more high-quality space has come onto the market. However, that space is now running out and it is not clear what the alternatives will be, as there is no steady pipeline of new projects under way,” Cockerton told OBG. JLL’s Hassan also expects supply to remain tight. “Although the supply of grade-A space is starting to improve, as a lot of projects that were on hold have now been restarted, the availability of high-quality office space will increase only gradually, in particular as a lot of upcoming projects will be owner-occupied,” she told OBG, adding that most major projects currently in the works will not be completed until 2017 or 2018.

Much high-end office space coming onto the market has been quickly snapped up; for example, Arabtec announced in April 2013 that it was leasing the entirety of one of the largest prime developments to come on-stream in recent years – Aldar’s 59-storey office tower at its World Trade Centre development.

“The major question is whether increased demand will work as a catalyst for new supply,” Cockerton told OBG. He said that the prospects for this may be limited at present, as major developers’ attention appears to be elsewhere; “Aldar is going through a period of postmerger stabilisation and the government is very focused on existing projects, such as Saadiyat Island.” According to Cluttons’ “Commercial Market Outlook, Winter 2014”, the shortage of prime office supply is also pushing up prices in the secondary and tertiary markets, with tertiary rents up 13% for the third quarter of the year.

A prominent example of a recently completed highend office project is the Abu Dhabi Global Market Square development on Al Maryah Island, which Hassan described as offering “prime” office space. However, in April 2014 the project’s developer, Mubadala, suspended leasing until the government finalised the rules for the financial free zone in which it is built. The decision left two of its towers, at 98,000 sq metres, vacant for now (two others have been largely leased). “There is a little in the way of other prime space in the pipeline,” said Hassan. Elsewhere, other recently developed grade-A buildings – including SinoGulf’s International Tower – are now close to already being fully leased. “We have only three out of 24 floors available at the top of the building,” Cockerton told OBG.

Retail

According to JLL, the supply of retail space in Abu Dhabi City stood at 2.5m sq metres at the end of 2014. Some 326,000 sq metres of supply came onto the market in the fourth quarter, thanks to the inauguration of Yas Mall in mid-November.

Almost all of the mall’s retail space was leased prior to opening, meaning that its impact on rental rates had likely already been priced in, according to Hassan. “Rents in the sector are likely to be stable for the next few years as there are no further major openings in the pipeline until around 2017. Furthermore, major projects are prone to delays in their schedules,” said Hassan. JLL put average rents for line shops in major malls on Abu Dhabi Island at Dh3000 ($817) per sq metre in the fourth quarter of 2014, up from Dh2900 ($789) a year earlier; off-island, rents fell from Dh1900 ($517) to Dh1860 ($506) over the same period.

Sanyalaksna Manibhandu, research manager at National Bank of Abu Dhabi Securities, told OBG that Yas Mall was likely to satisfy demand for now. “There will not be room for another super-regional mall in Abu Dhabi for a while. There is lots of supply in Dubai and people are still happy to travel there.”

Prior to the opening of Yas Mall, the most recent major retail development was the mall at Aldar’s mixed-use World Trade Centre, which was inaugurated in October 2013 and contains around 160 shops spread out over four floors. The mall was opened shortly after the opening in August 2013 of the Galleria on Al Maryah Island, which is aimed at the luxury market.

Residential

The residential market was the first to start recovery in the emirate, beginning in late 2012 and driven by factors such as growing investment and limited supply in some segments (see analysis). Notable aspects of the market include the fact that expatriates, who make up a majority of the emirate’s population, are limited to buying properties in designated investment zones, such as Al Reem Island, Lulu Island and the Al Raha Beach area. As a result of this, combined with other factors like the rolling out by the government of residential communities aimed exclusively at citizens, nationals and expatriates tend to live in different areas. “Most Emiratis tend to live further out of the city and most development projects aimed at them are offisland, as they tend to prefer to live in villas,” said Mark Morris Jones, a director at CBRE Abu Dhabi. “It can cause problems with high-end apartment sales as nationals – at whom they are largely aimed – tend not to want to live in towers.”

According to JLL, around 1600 units were added during the fourth quarter of 2014 alone, bringing the total residential stock in Abu Dhabi to 243,000 units. Going forward, demand is expected to remain strong across the board, and given the anticipated reduction in new supply, prices are likely to rise in the near term.

Speaking to OBG about the state of the residential real estate market on Saadiyat Island, Al Hammadi of TDIC said, “The market is healthy as evidenced by the equilibrium of demand and supply. There is a good balance between the kinds of buyers that look to invest and those who look to purchase property to inhabit. This is possible due to the fact that there is a range of home sizes and qualities on the island.”

INndustrial

Abu Dhabi is increasingly at the centre of regional networks, thanks to developments like the construction of Khalifa Port, the expansion of the international airport and the development of the Etihad Rail network – all of which serve to provide more opportunities in industrial real estate. Waha Capital is investing in the segment through its wholly owned subsidiary, Waha Land, offering facilities to manufacturers, logistics companies and trading firms. “Industrial real estate is greatly underserved, especially if we take into consideration Abu Dhabi’s growing trend in manufacturing and retail. Logistics companies, as well as small and medium-sized enterprises, are driving demand for warehouses and related services,” Salem Al Noaimi, the CEO and managing director of Waha Capital, told OBG.

Outlook

Growing demand –the result of factors such as increasing investment in the emirate – coupled with tight supply in some areas suggest that overall prices will continue to rise across most market segments in 2015 and probably beyond. In particular, both the prime office and mid-residential segments appear likely to be short on high-level supply for several years. “There continues to be a positive outlook regarding the interest level of foreign investors looking for opportunities in the local market,” Al Ali told OBG.

Over the longer term, the authorities’ urban planning efforts are set to reorganise Abu Dhabi into more discreet, sustainable communities in which residents can live, work and spend their leisure time. This will help to reduce commute times and traffic congestion, as well as improve the quality of life for the emirate’s residents.