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City&Country: Offshore-- Abu Dhabi seeks to regain place in sun

All that glitters in Abu Dhabi is not only the gold in its glitzy shopping malls, nor the sun beaming down on its sand dunes. Affordable mid-range property is also in high demand — if you can get it. The withdrawal of developers during the economic downturn has left an undersupply in some sectors while the top-end market remains flat.

In 2008, Abu Dhabi was one of the most talked about property markets in the world. Optimistic analysts believed the fledgling market would weather the downturn as it lacked the sales saturation of Dubai.

In that same year, residential values spiked by 89% — good news for some, but it also made real estate in the capital city the most expensive to either buy or rent in the United Arab Emirates, surpassing Dubai for the first time.

altFrom such a peak, there’s usually only one way down, and Abu Dhabi was hit by the global downturn and the sovereign debt crisis in Dubai. While property prices plunged by up to 25%, investors, who had benchmarked their upcoming projects against Dubai’s inflated property values, found buyers were no longer willing to pay their prices. Many withdrew and the scales began to tip on a market previously on track for a supply-demand balance.

Latest research shows recovery has not yet started. The Jones Lang LaSalle 2Q2010 report found market conditions in Dubai are continuing to have a negative impact on Abu Dhabi due to the complex relationship between the two emirates. In general, it found liquidity remained tight and many developers were experiencing cash-flow problems.

The data shows a mismatched market with an undersupply of affordable housing and oversupply at the top end, a decline in rental yields and few sales taking place.

But David Dudley, Jones Lang LaSalle’s regional director for Abu Dhabi and Qatar, says there is an upside. “The positive impact of the economic slowdown is that it forced developers to reassess their schemes, to scale back more ambitious projects, to seek alternative means of funding (rather than residential presales), and to plan products to be more aligned to the end-user. The market downturn has also allowed the government a pause for breath to put in place the required regulatory reforms to improve transparency and drive demand ahead of the economic upswing.”

In its half-year report, Asteco, the largest property services company in the UAE, found new supply was starting to pick up the slack. It described a market in transition, with 4,500 apartments already constructed and 8,000 more due for completion by the end of this year.

Paul Maisfield, Jones Lang LaSalle’s general manager and head of professional services for Abu Dhabi, says the fallout from the undersupply period, when landlords pushed rents up in the residential and commercial sectors, is still being felt. “Abu Dhabi became a very expensive place to live and do business. Furthermore, these high rents were often charged on poor quality buildings.”

He says Abu Dhabi continues to lose business to Dubai, particularly in the residential sector, as rents there have dropped dramatically in the past two years and the price differential between the two emirates is still significant. “As new supply is now being delivered in Abu Dhabi, rents have started to decline to more realistic levels, easing the financial burden on residents and businesses. This downward adjustment in rents is likely to continue due to the high quantities of new stock due to be completed over the next three to five years, which is likely to increase the city’s competitiveness and draw more business and people.”

The market has undoubtedly changed, Maisfield says. “For example, the speculative off-plan residential sales market ground to a complete halt and may never come back. However, one must consider that the Abu Dhabi market is far more tightly controlled than Dubai’s, with up to 90% of the new development being undertaken by government-run entities. Hence, supply can be controlled and we are unlikely to see the massive oversupply that is the case in Dubai.”

Maisfield concedes investors may need convincing. “It is no secret that investor confidence is low, compounded by the uncertainty over sovereign debt issues and a lack of market transparency. This has resulted in the altering of deal offerings from speculative ventures to low-risk, high-yield, long-term structured products for strong private or government entities with safe balance sheets.”

But the past six months have seen a surge in interest from regional and international investors, as the perception grows that the cycle has bottomed. Maisfield says: “This illustrates that there is an appetite and capability to deploy capital, but for specialised safe investments offering stable long-term cash flow.”

Dudley, though yet to see a market recovery, is equally optimistic. “We expect the slowdown to be relatively short. Markets such as Abu Dhabi tend to have short, sharp cycles and we believe that Abu Dhabi will bounce back quickly as investor confidence is restored,” he says. — SCMP

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 825, Sep 27-Oct 3, 2010


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