A positive trend: Demand for prime real estate is up across all segments

After nearly five years of decline, rents in Abu Dhabi’s real estate market are stabilising, with prices for grade-A office space holding steady and prime residential rents rising for the first time since 2008-09. Driven by government investment in infrastructure and economic and social development projects, along with increased regional investment in the UAE, demand looks positive for the near future. The signs of rebound are welcome news for property owners, who have watched average rents fall more than 50% since 2008-09. “The uptake has not been as quick as people expected it would be,” Mark Morris Jones, director at CBRE’s UAE office, told OBG. “Many developers have been sitting on properties, putting whole projects on ice for two to three years.” Indeed, in the last year developers have restarted a number of paused projects and landlords have begun turning over units held off the market.

The uptick in transactions and rentals, however, remains relegated to the much smaller high-quality segments. Landlords of mid- and low-tier commercial, residential and retail space continue to face falling prices and high vacancy rates. “For most asset classes, in spite of market-wide over-supply, there is also a shortage of high-quality stock in terms of design and construction quality, property management and suitability to end-user requirements,” Jones Lang LaSalle (JLL) stated in its second-quarter 2013 report on the local market. “This continues to drive product differentiation, with two-tier performance between high-grade and low-grade property. 

Residential

Sales and rentals of prime residential properties have picked up in the last couple of quarters after several years of price declines. Rents for prime two-bedrooms stayed stable in the second quarter of 2013, after recording an 8% increase in the first quarter of the year in the first uptick since 2008, according to JLL. Local real estate services firm Asteco reported prime rent increases of up to 10% in the first half of the year. On the sales side, JLL reported a 5% hike in the asking price for residential properties in investment zone areas in the second quarter, while Asteco reported asking prices rose rapidly during the first half of the year. “If you look at overall rates in Abu Dhabi, you can see that they are just turning,” Christopher Taylor, the CEO of local lender Abu Dhabi Finance, told OBG.

Rising demand for quality residential properties comes on the back of a growing economy. Government spending initiatives designed to diversify the local economy have increased job growth and job security. “Now there is a real demand,” said Nasir Al Mulla Al Jesmi, director of PR and communications at the Department of Municipal Affairs (DMA). “It’s not like before. People are paying in cash, buyers are the end-users and it’s a much more mature market.”

Further demand has been driven by a regulation that came into effect in 2012, requiring all government employees to live in Abu Dhabi in order to qualify for the state-funded housing allowance (see analysis). Additionally, “The UAE property market is benefitting from the country’s status as a safe haven amid turbulence in the MENA region,” Al Jesmi told OBG.

Meanwhile, the 5% rent cap for properties in Abu Dhabi was removed in November 2013 in a move which was welcomed by real estate managers. As the emirate’s property market is well supplied and hundreds of new units are coming on to the market in the near future, there is little likelihood of widespread rent rises.

Prime Real Estate

 The upswing in both sale and rental prices has occurred primarily in master-planned areas where properties are high quality and offer onsite amenities. Thanks to the delivery of newer, higher-end stock, the residential landscape has shifted to the point that, in the middle of 2013, Asteco reclassified properties once deemed high-quality as mid-tier. “Recently completed properties often provide a significant improvement over older stock and hence rents cannot be compared,” Asteco stated in its first-half report. The firm’s methodology designates as prime properties only the St. Regis Residence on Saadiyat Island, Nation Towers and Capital Plaza on the Corniche, Etihad Towers in Bateen and Eastern Mangroves on the East Corniche. High-quality tier-two properties include developments at Al Raha Beach and Reem Island. Rents for high-quality apartments have increased over the past nine months, in spite of significant vacancy rates within older buildings. “Some newer, higher-quality developments have achieved take-up rates of 80% within the first three months from project launch, reflecting the strength of demand for the right quality residential product,” David Dudley, regional director and head of the Abu Dhabi office at JLL, told OBG. “There remains a limited stock of units available for sale within the investment areas and many residents therefore continue to rent units, especially in new, well-designed projects that offer good lifestyle amenities.” High-end supply is expected to increase in the coming years, as total residential stock rises from 210,000 units in mid-2013 to 254,000 units by the end of 2015, with the lion’s share coming in master-planned areas, according to JLL data. A total of 10,000 units will be turned over in the second half of 2013, including luxury units in the Saadiyat Beach Residences and Eastern Mangroves Promenade. JLL and Asteco forecast the increased supply will reduce rate increases, but neither predicts a return to falling prices.

Meanwhile, the availability of higher-end housing stock has allowed Abu Dhabi residents to upgrade and has further depressed prices for mid-tier and low-tier properties. Local realtors emphasise that the property market recovery so far remains restricted to the prime segment. “The overall market remains a tenant’s market,” said CBRE’s Morris Jones. Indeed, for the many of the emirate’s developers, the days of rental schemes to entice tenants are not yet in the past.

Demand And Financing

 Increased demand for residential purchases from nationals and expatriates has renewed local demand for financing. In September 2013 local media reported a 40% year-on-year increase in the number of mortgage valuations international firm Cluttons had been asked to perform in the preceding 12 months. “There was a resurgence in demand for mortgages in 2012,” Taylor told OBG. “One of the factors, aside from improved confidence in the housing market, was because banks had built up a lot of liquidity and in places like Abu Dhabi this often translates into good offers to consumers as lending becomes increasingly affordable.” As the mortgage market gets competitive, according to Taylor, margins are tightening and he predicted rates would rise in the near future.

With demand for financing increasing across the emirates, the UAE central bank is taking steps to reduce the possibility of another speculative bubble. The banking authority introduced new mortgage restrictions in the end of 2012, and after consultation with local lenders, released revised regulations in 2013 to limit loans for properties up to Dh5m ($1.4m) to a maximum of 80% loan-to-value (LTV) ratio for UAE nationals and 75% for expatriates. The allowed LTV ratio is lower for higher-value properties and second homes. The regulations will have an impact as any regulation would, Taylor said, but the new thresholds are more in line with industry averages. Abu Dhabi Finance, for example, has an average LTV ratio of about 70%, with mortgages equally divided between expatriates and nationals.

Richard Paul, the director of residential valuations for Cluttons Dubai, told local media he was confident the market would remain strong. “We are carrying out a large amount of mortgage valuations at the moment for different banks all over Dubai and Abu Dhabi, and we are very aware that our counterparts are doing similar business. This is a trend we expect to continue.”

Abu Dhabi’s market for residential sales is segmented between nationals and expatriates, who are limited in where they can buy. Foreign nationals can only purchase property in designated investment areas, which include locations such as Saadiyat Island, Reem Island and Al Raha Beach. Meanwhile, in January 2013 the Abu Dhabi Executive Council announced plans to provide Dh3bn ($816.6m) in home loans to 1500 Emirati citizens and to build an additional 12,500 Emirati homes in nine new developments.

Office Space

 While office rents remain far below their 2008 peak, prices for grade-A commercial space steadied in the first half of 2013, even as new supply was delivered to the market. According to JLL, average rents for grade-A office space stabilised at Dh1540 ($419) per sq metre in the third quarter of 2012, and stayed flat through the second quarter of 2013, marking the longest period without a price drop since 2008. Asteco also reported flat commercial rents during that period, and stated, “Grade-A developments continue to hold headline rental levels, although rent-free periods have increased to attract or retain tenants.”

Prices for grade-B office space have continued to slip, falling from an average of Dh1250 ($340) per sq metre in the first quarter of 2013 to Dh1200 ($327) in the second quarter, according to JLL. Grade-A office space is limited in Abu Dhabi, allowing prime rents to hold steady even as occupancy rates remain high across the sector. Of the 2.95m sq metres in existing office space, the majority is grade B and grade C, JLL said.

SinoGulf, asset manager for a GCC real-estate fund, first noted the opportunities in this underserved sector in 2006, and then began developing International Tower in the Capital Centre, a master-planned district designed to serve as a second downtown. The building offers 24 floors and a total of 41,000 sq metres of adaptable, international-standard grade-A office space.

Another new addition to the landscape, the Nation Towers turned over units in the second quarter of 2013. One of the two towers is home to the St. Regis Hotel and high-end apartments, while the second building offers grade-A office space. By September 2013, office occupancy rates stood at 95%, local media reported.

With 960,000 sq metres in additional stock set for release onto the market by the end of 2015, the share of grade-A office space is increasing, JLL reported.

Any downward pressure on prices caused by the influx of high-end supply is likely to be met with increased demand from businesses upgrading to higher-quality locations. Some companies have already opted to do this. For example, Abu Dhabi Tourism & Culture Authority, Ernst & Young and Wintershall have relocated to the Nation Towers, while AECOM and Aafaq have moved to the International Tower.

Further, new clients, attracted by the government’s efforts to diversify the economy by investing in large-scale infrastructure projects and industry, are establishing a presence in Abu Dhabi’s top-end commercial buildings as well. “Business ebbs and flows depending on the government’s budget and investment decisions,” David Cockerton, fund manager at SinoGulf, told OBG. “All the government-driven projects are massively important, but the most important thing that Abu Dhabi is doing is investing in itself.”

Indeed, the International Tower tenants include a number of aerospace and defence firms, including BAE Systems and major engineering companies such as AECOM which were attracted to Abu Dhabi by the government’s increased investments in those fields. However, the majority of commercial clients (64%) are local entities, largely government agencies or government-backed firms, according to JLL.

It can be a challenge for private firms, which look to lease an average of 300-400 sq metres, to find appropriate space with open floor plans in the emirate’s grand buildings. Newer developments, including International Tower, have offered more flexible floor plans to serve this segment. While growth has not yet returned to the commercial sector, many analysts see the price stability as a sign of health in the market. “All the new growth is based on the sound underlying real economy here in Abu Dhabi,” Cockerton told OBG.

Industrial

 Efforts to grow local industry are leading to increased demand for high-quality industrial real estate, and some locations have seen leasing rates rise. Rents for factory and warehouse space in the Industrial City of Abu Dhabi (ICAD) and the Al Markaz area were up 10% in the first nine months of 2013 compared with a 2012, hitting Dh550 ($150) per sq metre, according to data from real estate services firm Knight Frank.

Managed by Abu Dhabi Business Hub (ADBH), ICAD’s facilities offer grade-A warehousing and office space and services to clients including Etihad Airlines, twofour54, Petrofac and Mubadala. High-quality facilities like those available at ICAD remain in demand.

“The current capacity for warehousing adequately supplies the needs of the market. However, there is a significant lack of high-quality facilities that have the capability to control temperature and humidity levels, as well as utilise advanced IT solutions to manage inventory,” El Fatih Said, the CEO of ADBH, told OBG.

Rents in the older Mussafah industrial area were up by around 5% during the nine months from January to September 2013 compared with the previous year. Rents were stable at the Khalifa Industrial Zone Abu Dhabi (Kizad), which opened at the new Khalifa Port in September 2012, because the developer purposely held rates flat, the Knight Frank report stated. As the government continues to invest in local industry and fund large-scale projects, the real estate consultancy forecast that industrial rents would rise by an additional 10% in the coming year.

“Kizad’s contribution to the economy is expected to be calculable in terms of percentage of GDP,” Morris Jones said. Indeed, ADBH’s Said told OBG that increased activity at Kizad would boost the whole sector. “Existing industrial zones such as ICAD provide investors with a range of dedicated facilities to support both light and heavy manufacturing, engineering and processing industries. Therefore, as overall connectivity improves, ICAD is well placed to complement the growth of heavy industries at Kizad” (see Industry chapter).

Retail Stock

 While a large supply of high-end retail space is now in the pipeline, there was little addition to available space in first-half 2013 and rents at regional and super-regional malls posted a rise of 5% in the second quarter, the first gains since 2008, according to JLL. Abu Dhabi’s retail stock stood at around 1.78m sq metres as of the middle of 2013, but this was expected to rise by at least 349,000 sq metres by the end of the year and reach a total of 2.6m sq metres by the end of 2015 (see Retail chapter).

“There remains an undersupply of high-quality retail space within Abu Dhabi, relative to the spending power of the population – resulting in a significant leakage of retail spending to Dubai. This will be addressed over the next few years with the completion of new high-quality malls in Abu Dhabi, with new projects such as Yas Mall, Saadiyat District and those on Al Maryah Island providing a new quality of retail offering for Abu Dhabi residents,” said David Dudley, regional director and head of JLL’s Abu Dhabi office.

 Urban Planning

 The emirate’s municipalities have launched efforts to improve city living more broadly. In a key initiative designed to make it easier to get around the capital city, the Abu Dhabi Executive Council launched a plan to standardise the address system. Current street naming and numbering make navigating the municipality, and mail delivery, a challenge. The implementation of the new address system will be completed by 2015 and will involve renaming 6000-7000 streets in the greater Abu Dhabi City area, starting with the main thoroughfares. “Building an integrated spatial data infrastructure for the emirate's development projects such as infrastructure projects, no objection certificates and the new ‘Street Addressing, Geo-Names and Signage System Project’ will enable the municipal system to better facilitate traffic flow and way finding,” Ahmed Shareef, undersecretary of the DMA, told OBG.

In addition to the street name upgrade, the DMA has implemented 11 new regulations regarding city nuisances like noise, graffiti and litter. New rules come alongside large government investments in public transport, utilities and sanitation infrastructure. These sorts of investments will be particularly important given the forecast growth of the population: by 2030, according to the Department of Transport, metropolitan Abu Dhabi is expected to be home to 3.1m people, up from 0.9m in 2008. At the same time, the emirate is aiming to enhance municipal services to transform Abu Dhabi into one of the top-five cities in the world, Al Jesmi said.

Outlook

The flight toward quality is expected to continue across property segments in the coming quarters. Rental and sale prices are beginning to rebound from post-recession lows, and new commercial, residential, retail and industrial stock will increasingly adhere to international standards and offer high-end amenities. Meanwhile, the government is set to continue investing in infrastructure and maintain its focus on long-term urban planning with an eye to making Abu Dhabi one of the world’s leading cities and destinations.