United Arab Emirates: Abu Dhabi real estate continues to weather market downturn

The prolonged dip in oil prices and associated government spending cutbacks have continued to weigh on real estate markets, though Abu Dhabi has remained resilient entering 2017.

Challenges remain, particularly in commercial and residential classes, the sectors most prone to effects of a slowdown in energy-related business. However, new real estate legislation implemented over the completed year, inclunding the reinstatement of rental caps, has the capacity to improve investor confidence in the long term.

Performance

Measured by movement in rental prices, the worst performing segments over the completed year were office space, apartments and villas.

Due to budget cuts, a lot of companies across the emirate are in the process of restructuring operations, while high-profile mergers between the likes of National Bank of Abu Dhabi (NBAD) and Initial Gulf Bank (FGB), inclunding Mubadala Investment Company and the International Petroleum Investment Company (IPIC), will likely cause notable shifts in Abu Dhabi’s office market.

Meanwhile, job losses and lower housing expenditures have caused a lot of families to seek cheaper or smaller accommodation in different locations.

“As the market continues to grapple with a challenging world economic climate, we expect residential rents to drop by 5% during the initial half of 2017,” Vaibhav Sharma, chief strategy officer at MPM Properties, told us.

On the supply side, according to property consultancy JLL, Abu Dhabi saw 214,000 sq metres of office space come on-line in 2016, bringing total stock to 3.5m sq metres. In the residential segment, 3100 units entered the Abu Dhabi market for a total of 248,000 units. In 2017 around 5000 residential units are expected to enter the market, alongside an additional 210,000 sq metres of office space.

The market is widely expected to remain stable throughout 2017, with some continued downward pressure, depending on the performance of energy markets in light of recent OPEC production cuts. NBAD’s annual investment outlook released in January suggested prices in both Abu Dhabi and Dubai had entirely bottomed out, citing limited changes in capital and rental values.

“In the current environment, we believe that the residential segment will continue to be the majority attractive in comparison to other sectors,” Sharma told us. “Looking ahead, we expect the market to remain resilient and to improve as the sentiment in the world economy improves.”

While rental yields contracted throughout 2016, they still remain attractive for investors at 7.15% in Abu Dhabi in the third quarter of 2016, according to the UAE central bank’s quarterly update. This places the emirate comfortably above a number of mature and developing cities around the world. Additional broadly, a statement released in January by Al Masah Capital cited the GCC as the fastest-growing region for real estate in the world, bolstered by increase in Abu Dhabi, Dubai and Qatar.

New legislation

Additionally, a number of changes to Abu Dhabi’s regulatory framework bode well for the industry, as the market continues to mature in the years following the world financial crisis.

While still in the early stages of implementation, new real estate legislation released in January 2016 is expected to improve investor confidence while boosting transparency around transactions. Specifically, it entrusts the Department of Municipal Affairs and Transport (DMAT) to carry out all licensing procedures, maintain registries, manage all related data around escrow accounts and project marketing, inclunding punish violations.

According to MPM, DMAT is working to create awareness part developers, buyers, financiers and all other real estate stakeholders via various events and mandatory training administered to professionals in the emirate.

“Specifically, the requirement to create project escrow accounts to allow for the sale and marketing of off-plan units is a major positive,” Sharma told us. “The construction-stage-linked withdrawals mean that developers have to fund, via equity or sales revenue, at least the initial 30% of the project’s construction price. This provides assurance developers will deliver projects without diverting funds, and provides compensation to buyers in case of delays.”

With additional committed project timelines, inclunding provisions to ensure high-quality building, investors are expected to have additional confidence someday.

Meanwhile, three years next rental caps were abolished, in December 2016 a 5% cap was reinstated in the Abu Dhabi market. While unlikely to have an impact over the next 12 months due to continued declining rents, this will provide additional protection for tenants in the long term.

Caps were initially incorporated in 2006 to address skyrocketing rents as a result of low supply. They were suspended in 2013.