Capital strength - A glimpse on Abu Dhabi real estate

Sales and rental property prices in Abu Dhabi have decreased or remained constant compared with previous months but have registered healthy growth year-on-year, according to latest statistics. But experts believe growth can be subdued this year, although the emirate is on course to perform better overall compared with other emirates.

Sustained government expenditure despite falling oil prices, strict policies governing the property sector and controlled supply are among the reasons Abu Dhabi's residential property market has remained resilient. A correction, however, is essential to prevent prices from continuing to rise sharply, which would make the capital uncompetitive.

Residential property sales prices increased by 5.4 per cent year-on-year in January, according to Reidin's UAE Residential Property Price Indices. Apartment prices remained constant compared with the previous month, but were up by 4.8 per cent year on-year, while villa prices dropped by 0.56 per cent month-on-month and rose by 3.4 per cent compared with the previous year.

Rental prices showed a similar trajectory, registering a 5.7 per cent increase year-on-year. However, the increase is pegged mainly to villas. The report says apartment rental prices decreased 3.8 per cent year-on-year; villa rental prices, while decreasing 0.14 per cent month on-month, increased by 10.6 per cent compared with the previous year.

JLL, in its Q4 2014 Abu Dhabi Real Estate Market Overview, notes that the residential market has shown strong fundamentals despite the short-term softening of values. ''The residential market has witnessed strong growth, averaging 25 per cent for prime sales in 2013 and last year, with prime rents increasing 17 per cent in 2013 and 11 per cent last year,'' the report says.

''Despite rising housing stock, the Abu Dhabi residential market continues to outperform most other property assets,'' Mat Green, Head of Research and Consultancy — UAE at CBRE Middle East, tells Property Weekly. ''Widespread relocations are expected as residents look to move away from inferior properties.''

Green says the lack of available good-quality supply and strong occupier demand are likely to help maintain rental rates, despite the economic impact of the slump in oil prices.

''The Abu Dhabi market tends to lag [behind] Dubai by 12-18 months [in terms of prime property supply], so while we do not expect to see significant [price] growth this year, [it] might outperform the Dubai market.''

Government regulations and spending affect the Abu Dhabi property market and the way it functions. In 2013, a directive requiring Abu Dhabi government employees to live in the emirate to be eligible for a housing allowance contributed to a spike in rents.

David Dudley, Head of JLL Abu Dhabi, tells Property Weekly that a rise in demand and the removal of the rent cap also contributed to the rental growth. ''The rent cap historically restricted rental growth on existing tenancies to 5 per cent a year. We understand that the government is currently looking to implement a new rental control mechanism, but this has not occurred yet.''

The practice of sharing accommodation has also reduced, in part due to Tawtheeq regulations requiring the registration of tenancies. David Godchaux, CEO of Core-Savills, UAE, tells Property Weekly, ''The government regulation with regard to parking restrictions, with permits being given only to those with legitimate tenancy contracts and utility bills, means that sharing of housing units has become less attractive.''

The focus on real estate policies also contributes to market stability in the long term. In January, Abu Dhabi's new financial free zone, Abu Dhabi Global Market, released draft regulations covering freehold property. Dudley says the proposed new measures will ensure a better-regulated market and improve consumer and investor protection. ''As these [regulations] take effect, they will improve demand in the sales market,'' he adds.

Meanwhile, the demolition of poor-quality housing has reduced the amount of supply available at the lower price points, but it also reflects a churn in the market. On the other hand, JLL predicts the current shortage of quality housing will further push rents up, but at single digit rates rather than the double-digit figures seen in the past two years.

''Fundamentally, residential rents are driven by the overall supply-demand balance,'' says Dudley. ''Abu Dhabi's prime residential rental market had witnessed annual rental growth of 17 per cent in 2013 and 11 per cent last year. This was driven by major demand growth [through new job creation, reduced levels of commuting from Dubai and reduced household sharing] outstripping supply, leading to minimal vacancy rates in high quality schemes.

''Another factor has been that high-quality schemes in areas such as Saadiyat Island, Al Raha Beach, parts of Al Reem Island and the Corniche have established critical mass, leading to rental growth within them.''

With the cost of living rising over the past 12 months, there has been a noticeable increase in housing demand from low- and middle-income households and also for units in nonprime areas of the capital, says Green. ''This, in turn, has driven rental growth in more affordable locations. Residential properties situated on the outskirts of the city have continued to gain popularity, principally due to affordability reasons.''

Projects in the pipeline

The Construction Intelligence Centre released a report in December that ranked Abu Dhabi first among the world's ''construction mega cities''. Each city on the list has a project pipeline with an investment value above $40 billion (Dh146.92 billion). ''Abu Dhabi tops the list of these construction mega cities, with total project value close to $480 billion, just ahead of London in second place [$477 billion] and Dubai in third [$394 billion],'' Timetric, the technology firm behind the report, said in a statement.

The projects cited in the report, which include major infrastructure works, will ultimately have an impact on real estate prices.

Moreover, Abu Dhabi's construction pipeline also includes around 35,000 new residential units expected to be completed over the next three years, with a large portion from within master planned communities, according to CBRE.

Meanwhile, a Land Sterling report states that Abu Dhabi remains wary about initiating new developments that could affect the market's stability. ''Abu Dhabi was slow to join the off-plan bandwagon as the city was bogged down by varying degrees of oversupply conditions until 2013 in all sectors,'' the report says. Describing 2014 as a ''warm-up period'', the report notes that developers teased investors with a few off-plan projects last year to assess the market's appetite. The latent demand was proven when many projects were sold out or leased, prompting developers such as Aldar to announce new launches to be held in the next few months.

''The Abu Dhabi market still has a shortage, especially in the lower- and middle income bracket,'' says Godchaux. ''Many new projects have been announced in the past few years, however, a lot of this supply is either delayed or on hold due to tightening liquidity and a cautious mindset.''

He points out that during Aldar's recent off-plan launch of Al Hadeel at Al Raha Beach and Ansam on Yas Island, units were sold out within a few hours since prices were reasonable at around Dh1,350-Dh1,550 per square foot. ''However, other off-plan launches have not had the same fate,'' he says. ''Glory Group's residential tower was able to sell just a few units [at Dh3,200 per square foot]. This corroborates [the view] that [most of] the demand is for reasonably priced units.''

Dudley says, ''Over the past few years, residential stock completions have typically averaged 10,000 units a year [as projects commenced during the boom years reached completion]. From 2009-12 these came through at a time of weak demand, resulting in a decline in rents and prices. Since 2013, demand has increased quarter on-quarter, with new supply remaining at similar annual completion levels, leading to residential rental growth.''

However, over the next few years, while supply completions look to be relatively stable based on current construction activity, Dudley expects the level of annual completions of private housing to be lower than previous levels, as a higher proportion of upcoming housing projects are part of national housing programmes.

Sales sentiment

The sales market is more sensitive to market sentiment and thus easily impacted by events around the world. JLL says annual sales growth rates have been higher than rental growth rates over the past two years — 25 per cent annual price growth for prime, high-quality units compared with 11-17 per cent for prime residential rents.

Contrary to expectation, falling oil prices are not showing a long-term impact on the property market, primarily because the government has committed to economic development initiatives, including spending programmes on ports, airports, roads, rail and social development such as national housing projects.

''This is a major ongoing pipeline of projects, which ultimately flows through to property market demand across each sector,'' says Dudley. ''The government remains committed to the Abu Dhabi 2030 vision of establishing a world-class city and diversified economy, therefore underlying fundamentals remain strong.''

However, he adds, ''Following the recent decline in oil prices, we expect the rate of government investment to slow down in the short term and that some projects might be phased.''

JLL says that following quarter-on-quarter growth in 2013, average prime residential sales prices remained stable last year and are expected to remain so this year. ''Demand is generally stronger in investment areas [such as Saadiyat Island, Yas Island, Al Reem Island and Al Raha Beach] given that there is a wider pool of purchasers — with foreigners being granted enhanced property rights in investment areas,'' says Dudley. ''In addition, demand is generally stronger in high-quality master-development schemes offering good-quality accommodation and amenities.''

Godchaux says expatriates looking for high-end property are homing in on areas such as Al Reem Island and Al Raha Beach and those belonging to the middle-income group on Hydra Village and Reef Villas.

''The non-freehold areas on Abu Dhabi island, as well as those along the highway, have mixed demand with units close to Khalidiya and the Corniche demanding a premium, while those in and around Khalifa City A being more affordable.''

Meanwhile, Green predicts subdued sales this year. ''Sales rates have been relatively stable in recent months as local and global uncertainties have restrained investment activity, with a 2 per cent average price increase recorded quarter on-quarter,'' he says. ''With transaction volumes down and uncertainty prevailing, it is likely that the sales market will remain subdued in the coming quarters.''

Freehold in Abu Dhabi by Jobannie Tabada, Features Editor, Property Weekly

Non-GCC residents could soon get their hands on freehold property in Abu Dhabi as new regulations covering strata property are in the works.

The Abu Dhabi government announced in January that all foreigners would be able to own freehold property in designated investment zones, although no official guidelines have been released yet. The same month, Abu Dhabi Global Market (ADGM), the capital's new financial free zone on Al Maryah Island, released draft real property and strata title regulations, which are under review.

ADGM's proposed regulations include provisions for leases of up to 99 years, mortgage, statutory charges, escrow accounts and dispute resolution.

Abu Dhabi opened its property market to foreign investors in 2005 with the implementation of Law No. 3, which provided the regulatory guidelines for real property and established the emirate's Land Registration Department. However, only UAE citizens were allowed to own freehold property, while GCC citizens were allowed to purchase freehold property in investment zones. Non-GCC residents could only apply for leasehold arrangements of up 99 years.