Price gap closing between Dubai, Abu Dhabi

dubai - Prices will start moving in tandem in the two cities soon as Abu Dhabi ramps up mid-income supply

Dubai and Abu Dhabi have always fed off each other's synergies and this trend is also evident in the two emirates' property markets. While Dubai is at a more advanced stage of the property cycle, Abu Dhabi typically lags behind its neighbour.

However, a recent report released by GCP and Reidin claims that prices will start moving in tandem between the two cities in the coming years as Abu Dhabi ramps up supply in the mid-income space.

According to the report, Dubai rents escalated five times to that of Abu Dhabi in the boom period. In the down cycle, both areas have fallen by a similar amount, indicating rental convergence between the two cities.

The peak rents in Dubai are down eight per cent, whereas Abu Dhabi is down 10 per cent.

"While there is semblance in the overall downward rental movements in Abu Dhabi and Dubai, the shortage of available residential options for low to middle-income groups in Abu Dhabi is key in holding rents amid the general rental deflation observed in the market. While Dubai is currently seeing more affordable projects being launched and under construction, Abu Dhabi has yet to tackle the problem," says Arlene Jimenea, senior research analyst, CBRE Middle East.

A price analysis of the freehold housing stock of both emirates reveals that units below Dh1,000 per sqft account for 18 per cent in Abu Dhabi and 50 per cent in Dubai, says Reidin. Dubai's housing structure has become relatively better positioned to cater to the mid-income segment, whereas Abu Dhabi still predominantly caters to the upper income segment.

"While weaker fundamentals could likely lead to market convergence, the two markets will continue to see the tangible disparity between prime residences and inferior housing products in secondary locations. Also, the prevailing market conditions support the process of convergence while not discounting the apparent cooperation and interdependence that exist between these two markets," adds Jimenea.

According to Mario Volpi, chief sales officer, Kensington Exclusive Properties: "The gap between the two cities is closing. Renters are always looking for better deals and this has lead to individuals formerly living in one city now migrating over to the other."

Areas in South Dubai and North Abu Dhabi are also beginning to develop contiguously.

"Due to demographic movements, Dubai South appears to be merging with Abu Dhabi North as price differentials are getting smaller. Supply in Abu Dhabi is a key factor as in the past, this has been less than Dubai but I believe this too will align over the longer term as more units are built and delivered," Volpi points out.

In 2016, Abu Dhabi was expected to deliver 5,000 units in the freehold space, but only 3,725 units were handed over (a completion rate of 75 per cent). Dubai was expected to deliver 27,000 units but handed over only 48 per cent. The number of units launched in Dubai in the past two to three years dwarf those in Abu Dhabi in the freehold space. But that is expected to change as Abu Dhabi begins to ramp up supply in the mid-income space.

In terms of comparison, Dubai prices have begun to bottom out as the month-on-month declines begin to taper. However, in Abu Dhabi, the month-on-month price drops continue to amplify, signalling that the market has not bottomed out as yet.

"Abu Dhabi is till seeing significant rental drops in some areas where new supply is coming online, such as Reem Island and the Corniche. Other areas such as Raha Beach and Saadiyat are holding up much better," says Ben Crompton, managing partner, Crompton Partners Estate Agents.

"Average residential rents in Abu Dhabi continued to decline during Q1 2017, depicting circa two per cent drop from the previous quarter. Weaker demand levels continued to bring down rents despite minimal increase in the overall residential inventory. Larger unit types and some higher-end residential developments are seeing more deflationary pressures compared to low-mid level housing units situated in central locations," CBRE's Jimenea points out.

Meanwhile, in terms of yields, in the villa space, Abu Dhabi has higher gross yields in freehold areas whereas in the apartment sector, Dubai records the higher figure. In the apartment space, Dubai yields are skewed towards the higher end of the spectrum, given its greater preponderance of supply at the mid end of the market (International City, Discovery Gardens, Jumeirah Village, etc).

In the villa sector, Abu Dhabi has higher yields due to the lower price per sq ft and similar rents to those of Dubai. Dubai villa yields are expected to increase with the new wave of launches in affordable villas and townhouses such as Nshama and Akoya Oxygen. There has been a trend towards convergence in both the cities as they adjust supply towards the affordable segment, Dubai towards the villa space and Abu Dhabi towards apartments.

- deepthi@khaleejtimes.com