Signs of caution in Abu Dhabi real estate market
JLL report says Abu Dhabi real estate market remains stable in Q3 but warns of a slowdown in government domestic spending and a reduction in transactions.
By Issac John
Published: Wed 14 Oct 2015, 12:00 AM
Last updated: Thu 15 Oct 2015, 9:48 AM
The real estate sector in Abu Dhabi, while remaining relatively stable in the third quarter, is showing increased signs of caution with a slow-down in government domestic spending and a reduction in transaction volumes and investor sentiment, according a new market review.
Property consultants JLL said it expects future residential rental demand in the capital city to be affected by the decline in oil prices - directly impacting the oil sector and indirectly affecting other sectors due to a reduction in government spending.
"The UAE government plans to cut spending, leading to job cuts and cost controls in government entities and a delay to the commencement of new mega projects. Further increases to cost of living (through the removal of utilities and fuel subsidies combined with further potential measures to introduce taxes) may further impact future end-user demand," JLL said in its Real Estate Market Overview.
The report noted that while the residential supply remains under control with minimal vacancies in high quality schemes, and rents being maintained, JLL expects weaker end-user demand next year even as annual supply completions remain lower than historic levels.
"As we predicted earlier in the year, we are expecting single-digit rental growth during 2015, following 17 per cent growth in 2013 and 11 per cent in 2014, as supply and demand become more balanced," said David Dudley, International director and head of Abu Dhabi Office at JLL Mena.
He said the general trend for the third quarter and indeed the first three quarters of 2015 has been stability, with value performance of most sectors remaining flat, and a slight increase in hospitality performance.
"While the market has remained relatively stable there are increased signs of caution - with a slowdown in government domestic spending and a reduction in transaction volumes and investor sentiment.
"In the second quarter we had reported that the market was at a 'tipping point' with its future direction being dependent on the extent to which government maintained domestic spending in the current period of reduced oil prices," said Dudley.
During third quarter, he said it has become clear that the level of domestic government spending will reduce in the short-term, as the government remains cautious and re-allocates funds to regional priorities. Job cuts have occurred in the oil and gas and government sectors and some of Abu Dhabi's mega projects are expected to be delayed further and phased over a longer timeframe. On the positive side however, supply remains under control," he said.
Following a two year bull-run where residential price growth at 25 per cent per annum outstripped GDP growth of three per cent to five per cent per annum, a period of stabilization is not a bad thing - allowing market dynamics to catch up with sentiment, he said.
"We still expect demand growth to continue, but at a slower pace. Demand growth will continue to be sustained from projects commenced while oil prices were high - with projects such as the airport and Etihad expansion having an economic multiplier effect - but there will be greater scrutiny of new projects, which will be phased outwards."
With no other major deliveries, total office stock increased slightly to reach approximately 3.3 million sqm gross leasable area (GLA). An additional 73,000sqm of office GLA is expected to enter the market throughout the last quarter.
While approximately 700 units were added to the residential stock during third quarter, with no major deliveries during the current quarter, the total residential stock has remained almost the same as last quarter at 244,000 units. According to JLL, approximately 5,000 residential units are scheduled to enter the market by the end of 2015.
In the retail sector, no major deliveries took place during the third quarter keeping retail supply stable at 2.6 million sqm of retail GLA.
Approximately 44,000sqm of retail GLA is expected to enter the market by the end of the year, dominated by non-mall retail within mixed-use developments. Retail supply is expected to increase significantly from 2018 with the delivery of new Super Regional Malls.
Affordable housing push to unlock expat tenant category
International real estate consultancy Cluttons on Tuesday welcomed the announcement by the Abu Dhabi Urban Planning Council to decisively address the capital's affordability challenges.
Like Dubai, the lack of what is classed as affordable stock remains limited and has, as a result driven tenants and buyers into markets on the peripheries of the city. At Al Reef for instance, year on year rents jumped by almost a third as tenants were drawn in by the relatively affordable annual price tag of Dh125,000 for a three-bedroom villa, which compares to Dh189,000 for three bedroom villas elsewhere in the city's residential investment zones.
In order to truly tackle the problem of affordability, it's important to run the numbers. When you consider that an average expat household aspiring to purchase a home has to contend with an average annual rent of Dh204,000 against an average household income of Dh199,000, the problem of the lack of affordable housing in the UAE capital is incredibly clear, especially when you factor in the 34 per cent increase in average house prices since 2010.
You have a growing city where the vast majority of developments have been skewed toward the luxury end of the market and with the Abu Dhabi Urban Planning Council's decision to enact legislation requiring 20 per cent of every new development to offer "affordable homes", it remains to be seen whether these take the form of discounted rental properties, are offered under some sort of rent-to-own scheme or if they are simply sold at a discounted market rate to those who are eligible.
The eligibility criteria set for potential buyers will need to be carefully checked and enforced if the scheme is to be a success. No property re-sales for a period of five years may be a way to deter speculative activity and would also mirror moves being mooted by the UK's conservative government as a way to limit buying activity to genuine end users.