Abu Dhabi woes: realty slows down

Abu Dhabi property market continues to soften amid weakening economy of the capital whose GDP is primarily driven by the energy sector. The average rentals for houses and offices fell by 2 per cent and 3 per cent respectively in the second quarter of 2016, whereas residential sales prices decreased by 5 per cent during the same period, according to JLL's real estate overview of Abu Dhabi market.

''In Q2 2016, we have started to see the first signs of a downward trend as the decline in the oil sector and consequent reduction in government spending have started to impact performance,'' says David Dudley, International Director — JLL Mena.

''While supply remains stable, the reduction in demand has now started to push vacancy rates to nudge upwards, causing rents to decline for the first time in three years.''

The second quarter of 2016 saw a large change in the residential market as a number of job cuts were implemented by a range of companies related to the oil and gas sector. ''If residents are not already, they are likely to become more budget-conscious and downsize to smaller or more affordable units, which will likely put more pressure on larger units where rental rates could soften further,'' says John Stevens, Managing Director, Asteco.

Rental market

In its Q2 report, JLL states average annual prime rents for two-bedroom apartments decreased nominally by 2 per cent to reach Dh160,000 from Dh163,000 due to a slight increase in vacancy rates caused by job cuts and people choosing to downsize. The average prime sales prices, on the other hand, reached about Dh15,200 per sq m from Dh16,000 per sq m, registering a decline of 5 per cent.

Similarly, in the office sector, average Grade A rents decreased by 3 per cent to reach Dh1,795 per sq m from Dh1,850 per sq m. Whereas, average Grade B rents also saw a decline of 3 per cent to reach Dh1,086 per sq m from Dh1,120 per sq m.

''The market remains somewhat fragmented, for example, Grade A offices are performing notably better than the secondary office market, which has seen rates dip by around -2 per cent quarter-on-quarter and -10 per cent year-on-year, while prime rentals have remained broadly flat during the same period,'' says Matthew Green, Head of Research and Consulting, CBRE Middle East.

A similar story is apparent in the residential market, where mid-market products are generally outperforming the premium end, which reflects the more challenging conditions in the corporate leasing market.

Green says there has certainly been a realisation in the market that there is a lack of mid-market product available for rent and that has led to increasing rentals in locations such as Al Ghadeer and Al Reef Downtown over the past 12 months.

Limited supply

The performance of the realty sector was largely helped by developers quickly reacting to the decline in oil price by cutting new supply — with annual supply completions currently at a long term low. Only 400 units were delivered during Q2, bringing the total residential stock to about 246,400 units in Abu Dhabi. ''This has helped mitigate the extent of market decline, with a minor correction in rents and prices relative to the growth that occurred from 2013-14,'' says Dudley.

About 4,000 units are expected to enter the market by the end of 2016 mainly within Reem Island, Rawdhat and Saraya, although, based on past trends, a proportion of these could experience delays at handover.

Green agrees the performance of the market has been aided by the relative low levels of residential supply in the pipeline with around 14,500 new units expected to be completed by the end of 2018, depending on construction timings.

''This is down on the five- and ten-year averages, reflecting the relatively cautious approach of many developers over the past few years,'' he explains.

With more units expected to come on to the market, Stevens says, cash-rich investors should be in a strong position and units for midquality projects such as the Al Reef units are expected to remain stable.

However, transaction volumes have reduced significantly given the reduction in sentiment and current market dynamics.

''There are still buyers for residential and investment assets but they are increasingly selective in their choice of product and pricing,'' adds Dudley.

H2 outlook

With widespread cost optimisation and a relatively constrained economic growth outlook, experts say the second half of 2016 is likely to be a challenging period for Abu Dhabi's real estate market.

''The Abu Dhabi real estate sector is highly dependent on government initiatives and therefore if budget cuts continue as planned, vacancy rates are expected to increase leading to pressure on rental rates thereby negating potential sales prices/rent rises,'' says Declan Mc-Naughton, Managing Director UAE, Chestertons MENA.

The first half of 2016 saw prices and rental rates stabilise in the residential market. This is on the back of a shortage in supply of quality residential products.

With demand declining on the back of corporate restructuring and cutbacks in government spending, Dana Salbak, Associate Partner and Head of Research at Knight Frank, says, ''This is expected to weigh in on the market over the second half of the year. We are likely to see a more pronounced impact of this after the summer in September when families are back for school. Consequently, rental rates and sales prices are expected to decline.''

However, she says there may not be dramatic falls. ''Developers have reacted by slowing down their upcoming supply, with most of them launching projects in line with demand. This behaviour is likely to keep rents and sale prices relatively flat, with marginal declines, in the short-to-medium term.''

Dudley agrees that the impact of job cuts and reduced incomes will become more pronounced in the second half of the year, pushing vacancy rates up further and causing rents to decline, but relative to the overall size of the market along with limited supply, this is expected to be a soft correction rather than a sharp decline.

Good yields

Despite the slowdown in the market, property agency Chestertons in its latest residential market report says investors are still being rewarded with an average 5 per cent gross yield across the city, topping out at 8.8 per cent in some areas.

''Although the market has flattened further in Q2 and witnessed declines as sales and rental rates dip further, rental yields are still rewarding investors and proving that the capital is still the place to be,'' says Mc-Naughton.

Apartments in Al Reef Downtown, Al Ghadeer and Al Muneera all notched yields of 8.8 per cent, 7.7 per cent and 7.5 per cent respectively, states the property agency.

''The remainder of the year will see marginal declines, however solid yields will still prove popular with investors,'' adds Mc-Naughton.

Investment appetite has been far more muted due to the current economic environment, but Green agrees there is still demand for well-located and affordable products.

''We are particularly positive on the mid-market residential sector, which has further growth potential, while the Grade A office market is also expected to outperform the secondary office sector, due principally to the lower levels of available supply.''

Al Ain: An emerging retail destination

Al Ain, the second-largest city of Abu Dhabi, has emerged as one of the key growth markets for Aldar Properties, which is looking to expand its retail portfolio. The Garden City has some of the major projects of Aldar Properties that include Al Jimi Mall, Remal Mall, Shabhat Plaza, and its residential development — Oyoun Village. Al Ain's population is expected to witness a threefold increase over the next two decades with the city's retail sector also set for rapid growth in line with the Urban Planning Council's Plan Al Ain 2030. ''Al Ain's vibrant business landscape and cultural significance within the emirate of Abu Dhabi contributes to our view of Al Ain as a key market for our retail portfolio,'' says Mohammed Al Mubarak, CEO of Aldar Properties. The company is currently expanding Al Ain's first shopping centre, Al Jimi Mall, to bring the total leasable area to 75,000 sq m. The expansion project is set to be completed in 2018. Aldar Properties' other assets, Shabhat Plaza and Al Oyoun Village, are both community-based retail destinations.